The nature of modern capitalism


Surprisingly, at least for textbook economists, it turns out that during times when companies invested a lot, the valuation of companies on the capital market fell. By contrast, when they invested little, the value of the companies rose.

The same surprising result was reached by three U.S. economists who investigated the factors that drove up the stock market value of U.S. public companies in the three decades before and after 1988. In the earlier period, high rates of output growth contrasted with low increases in stock values. In the second period, output expanded much less, but corporate stock market values soared.(…)

The three economists find that more than half of the value growth in the more recent period has been “created” through redistribution: consumers have to finance higher corporate profit margins, and workers receive a smaller share of value added than before.

These findings fit with a number of recent studies documenting a sharp increase in profit margins for large corporations, primarily in the U.S. but also in Europe.

Two other US economists have shown that the main drivers of this development are the largest corporations. Their profits have risen partly because of falling tax burdens, declining interest spending and a falling wage share. Since capital income is much more concentrated than labor income and the savings rate of the rich is high, it is not surprising that household demand has been rather tepid, they say. When demand is low, investment is typically low as well.

One can also say it more simply: To capture monopoly profits, you have to limit production and raise prices. The result is what appears in the statistics as weak sales.(…)

Capital becomes a major obstacle to production by incentivizing company managers to produce less than would be technically optimal and cost-covering in order to maximize profits. This is why there are almost no engineers left in top positions, but only financial experts, i.e. experts in squeezing companies for the benefit of capital.

We have become so accustomed to the view of the capital markets that corporations should always generate high profits and hand them over to shareholders that we consider it a failure if they do not succeed or even fail to do so on purpose. Then the media pour out criticism and malice on management for not doing its job well. Cue the analysts, the paid applauders of capital.

Capital has managed to confuse us deeply. Socially damaging behavior in favor of the owners of capital is now considered the norm. Anyone who deviates from it is accused of sinning against helpless investors. But wouldn’t the ideal situation be for a company that makes, say, the most popular smartphones and apps to sell the top-of-the-line models not at $1,200 but for $700 apiece, and a simpler version for, say, $100?

If the company sold twice as many phones, continued to pay its employees well, service its debt, invest in innovation and production expansion, but didn’t make exorbitant profits beyond that, wouldn’t that be perfect? Or if the leading software supplier of schools, administrations, companies and private customers only collected half as many billions in revenue from them and made correspondingly less profit? Software-products can be increased in quantity practically for free. Without the capital of Microsoft or its owners, much more software would be produced and used, because thanks to lower prices, many more people and companies could afford the software packages. Or they would have money left over for other purchases.(…)

Capital, Labor and Unemployment

The unemployment rate is a fairly good, if increasingly understated, measure of production limitation to increase profits. On the one hand, production is restricted in order to be able to charge more for the products. On the other hand, the constraint helps to pay workers less because there is less of them to recruit and because unions tend to be more restrained in their wage demands when unemployment is high.

The prevailing neoclassical economic models obscure this mechanism because they assume perfect competition in goods and labor markets. Capital makes no profit here, except that which has been declared to be the remuneration for capital’s alleged contribution to production and redefined as costs (more on this below).

According to this model, unemployment is either voluntary, because some people prefer to lie on their lazy skin with social welfare, or the consequence of excessive wages, which the trade unions have enforced.

This view ignores the fact of life that in the free labor market, employers are in a much better position. This is because most employees have much less choice than employers because of commuting and relocation costs, family ties and lack of information about available jobs, and they need the work contract much more urgently than the other party. Laws, which have cut wage replacement and welfare benefits or made them subject to strict conditions and tightened the compulsion to accept any job offers, have greatly increased the power differential.

In the U.S., the unemployment rate has averaged about seven percent since 1890. In Western Germany, the unemployment rate in the decade before reunification averaged around 7.5 percent, while in Eastern Germany it was close to zero. After reunification, it was around ten percent in Germany as a whole until 2006.

Then labor market reforms began to take effect, and a large low-wage sector emerged. The share of workers receiving less than two-thirds of the median hourly wage rose from 17 percent in 1998 to a peak of just over 24 percent in 2011 and has since fallen slightly to 22 percent. The threat of being sent into unemployment if the demands of the capitalist labor market are not met has been partially replaced by the threat of having to take a low-paying, unattractive job.Thus, it was possible for the unemployment rate to fall to five percent by 2019, without a squeeze on corporate proftis.

Anglo-Saxon economists like to refer to unemployment of this magnitude, in nicest Orwellian newspeak, as “natural unemployment” or even, without irony or quotation marks, “full employment unemployment rate.”

A more honest term is NAIRU, the non-accelerating inflation rate of unemployment, i.e. the unemployment rate which is just high enough that inflation does not increase. Since the effect of unemployment on inflation takes place mostly via wage increases, the EU Commission instead uses the remarkably honest term NAWRU, the non-accelerating wage rate of unemployment.

The technical terms NAIRU and NAWRU contain the admission that modern central bank inflation-control policy is all about helping corporations in the power struggle against higher wages. The European Central Bank itself would hardly ever admit this so openly because it wants to preserve the illusion that it is an apolitical institution that can be left to do its good work without political oversight.


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