The trouble with capitalism

Are the faults of capitalism curable, or are they instead symptoms of a chronic disease? This is the question posed by Martin Wolf:

What we increasingly seem to have…is an unstable rentier capitalism, weakened competition, feeble productivity growth, high inequality and, not coincidentally, an increasingly degraded democracy.

There is much to admire in this piece. But I fear it understates the problem with capitalism.

The Bank of England has given us a big clue here. It points out that the rising profit share (a strong sign of increased monopoly) is largely confined to the US. In the UK, the share of profits in GDP has flatlined in recent years. Few, however, would argue that UK capitalism is less dysfunctional than its US counterpart. Which suggests that the problem with capitalism is not increased monopoly.

So what is it? Here, I commend some brilliant work by Michael Roberts. Many of the faults Martin discusses have their origin in a declining rate of profit (pdf) – a decline which became acute in the 1970s but which was never wholly reversed.

The causes of this decline are many and debated: an over-accumulation of capital in the 1960s and again in the tech bubble; increased worker militancy in the 60s and 70s; greater competition both from overseas and internally (see for example William Nordhaus’s work); a slower rate of innovation in many sectors; an inability of shareholder-owned firms to exploit potential profit opportunities; weak aggregate demand; and so on.

Granted, actually measuring the rate of profit is fraught with difficulty, due to myriad problems in measuring the capital stock. But the fact that capital spending has been weak for many years (before Brexit) suggests that incentives to invest are weak – one plausible reason for which is low profitability.

The financial crisis was a symptom of this. Imagine there had been an abundance of profitable investment projects in the real economy in the early 00s. The savings glut and fall in bond yields would then have financed these so we’d have seen a boom in investment, jobs and incomes. But there was no such abundance, so the savings glut instead financed a bubble in housing and credit derivatives which ended in crisis.

Many of the things social democrats like Martin deplore about capitalism are in fact responses since the late 70s to this crisis of profitability. The assertion of management power – a symptom of which is high CEO salaries (pdf) – is a (successful) suppression of worker militancy.  Privatizations are an attempt to expand the realm in which capitalists can make profits. Financialization is the result of a shift away from low-profit activities in the real economy. And rent-seeking and cronyism reflect attempts to sustain profits in the face of competition and crisis.

Stagnant productivity tells us that these measures have not wholly worked, in part perhaps because the same inequality* they have generated tends to depress productivity growth.

If all this is true, or roughly so, then the problems Martin describes are not so easily cured. When Martin says that “fixing this is a challenge for us all” he is understating the case.

But is it true? The way to find out is to see if attempts to reform capitalism actually succeed. Mirabile dictu, there are even some proposals here that do not come from the left. Sadly, though, one effect of capitalism’s crisis has been, as Martin says, to so degrade democracy as to take intelligent economic policy off the agenda.

* Yes, UK inequality stopped rising a few years ago. But the damage it does is still with us. If a man has been hit by a bus, you do not restore him to health merely by stopping the bus. 

Comments

[qwertboi]

"There is much to admire in this piece. But I fear it understates the problem with capitalism."

Martin Wolf as an investigative economics analyst is impressively incisive and creative, but he is also an employee of the world's most indurated advocate of free markets and resolute supporter of globalisation and globalist policies. Perhaps, therefore, he has to moderate his message for the audience of his medium.

I am delighted though when a (formerly?) convinced centrist like Martin Wolf manages to produce a critique of capitalism with so little understatement.

[Polltroll]

qwertboi: perhaps it is the fact that Martin Wolf is such an "advocate of free markets" that he is so upset with monopolies and rent-seeking (as Adam Smith was...)

If you think that free marketers think the economy is in a good place, then you probably don't listen to them, only to the caricature drawn by their opponents.

[Luis Enrique]

I still find the whole concept of financialisation confusing. There is a familiar idea that we can't all get rich by cutting each other's hair. I don't see how in aggregate people can make money by taking bets against each other. Take a secondary market for e.g. antiques. If prices rise, owners can get rich but the money they can extract from selling has to equal the money others put in from buying. In finance, the industry as a whole can get rich from fees, some actors can get rich at the expense of other actors. There's something about the idea that we have abandoned the real economy in favour of financialisation that doesn't add up to me. Although I recognise I need to go away and read up on it properly.

[Luis Enrique]

sorry, where above I wrote "in finance as a whole ..." I should have caveated "unless your returns come from the real economy ..."

[Luis Enrique]

I went to read that Roberts piece. As always I am stumped as to why anyone thinks this idea of exploitation is useful.

rK=Y+wL

that just says if you take revenues and subtract the wage bill (ignoring intermediate goods) then what's left over can be split between capitalists of various sorts (equity and debt).

Where does taking this definition of profit and calling it exploitation get us? The idea that capitalists earn their money by combining capital with labour and keeping what's left over after paying the workers looks like a statement of the bleeding obvious to me.

The idea Roberts dislikes - rents - looks more useful to me. Some level of rK is OK, above that not OK. If you like, you could say capitalist exploit workers when they make rents by exploiting workers' weak bargaining positions. Don't make rents when workers are able to bargain for higher wL and keep rK down to a minimum.

[Luis Enrique]

but my earlier comments above about financialization I think resemble Robert's doubts about the idea "financial profits are not a subdivision of surplus-value".

(I guess profiting from lending to finance consumption might be considered not subdivision of surplus value?)

[Luis Enrique]

[I apologise for live blogging Luis reads a blog here]

The difference between the financialisation idea Roberts dislikes, and this idea he likes:

" “Faced with falling profitability in the productive sphere, capital shifts from low profitability in the productive sectors to high profitability in the financial (i.e., unproductive) sectors. But profits in these sectors are fictitious; they exist only on the accounting books. They become real profits only when cashed in."

is not obvious.

Chris could you write something about how the idea that profits from the productive sectors has been falling can be reconciles with the idea that:

"non-financial corporations like General Motors, Caterpillar, Amazon, Google, Microsoft, big tobacco and big pharma and so on still make their profits from selling commodities in the usual way. "

and seem to be making out like bandits?

[Scratch]

"There's something about the idea that we have abandoned the real economy in favour of financialisation that doesn't add up to me."

I sometimes wonder if our betters are gradually retreating into feudalism once more, after all the obvious, foolproof solution to economic stagnation is simply to redistribute wealth more widely.

If you've sufficient fixed assets there's no real point in growing the economy that other people might consume - this might explain the more uh, neo-eugenecistic subtexts in modern bourgeois discourse.

[Egmont Kakarot-Handtke]

ICYMI

The real trouble with Capitalism: stupid/corrupt economists
Comment on Chris Dillow on ‘The trouble with capitalism’

For the full text (4950 characters) see here
https://axecorg.blogspot.com/2019/09/the-real-trouble-with-capitalism.html

Egmont Kakarot-Handtke