Posts Tagged ‘mainstream economics’

Everyone knows that inflation in the United States is increasing. Anyone who has read the news, or for that matter has gone shopping lately. Prices are rising at the fastest rate in decades. The Consumer Price Index rose 8.6 percent in March, which is the highest rate of increase since December 1981 (when it was 8.9 percent).

Clearly, inflation is hurting lots of people—especially the elderly living on fixed incomes and workers whose wages aren’t keeping up the price increases. No mystery there.

The only real mystery is, what’s causing the current inflation? That’s where things gets interesting.

To listen to or read mainstream economists the answer to the whodunnit is workers’ wages. They’re going up too fast, because the level of unemployment is too low and their employers are forced to pay them higher wages. As a result, corporations are compelled to raise their prices. Therefore, something has to be done (like increasing interest rates) to slow down the economy and force more workers into the Reserve Army of the Underemployed and Unemployed.*

That’s exactly how Paul Krugman sees things:

The U.S. economy still looks overheated. Rising wages are a good thing, but right now they’re rising at an unsustainable pace. . .

This excess wage growth probably won’t recede until the demand for workers falls back into line with the available supply, which probably — I hate to say this — means that we need to see unemployment tick up at least a bit.

The amazing thing about Krugman’s story, and that of most mainstream economists, is there’s not a single word about profits. Corporate profits are entirely missing from their story. Inflation is only caused by workers’ wages, not the surplus raked in by U.S. corporations. Which is pretty amazing, given the numbers.

A quick look at the chart at the top of the post shows what’s been going on in the U.S. economy. Workers’ wages (the red line in the chart, the hourly wages of production and nonsupervisory workers) rose during 2021 at an annual average rate of less than 5 percent (ranging from 2.8 percent in the second quarter to 6.4 percent in the final quarter).

And profits? Well, they’ve been growing at astounding rates, magnitudes more than wages. Corporate profits (the light green line) rose during 2021 at an average rate of 40 percent, and the profits of nonfinancial corporations (the dark green line) expanded by even more: 69 percent!

Hmmm. . .

The fact that profits are entirely missing from the mainstream story about inflation reveals a fundamental problem within mainstream economic theories. On one hand, in their macroeconomics, wages and not profits are always the culprit. That’s because they only have a labor market, and not a capital market (much less a profit rate or, for that matter, a rate of surplus-value), when they analyze fluctuations in prices and output. It’s as if corporate profits are only a residual—what is left over in the difference between wages and wage-driven prices. On the other hand, in their microeconomics, profits represent the return to capital, and thus a key component of commodity prices as well as the driver of economic growth.

Such “capital fetishism” means that profits as the return to a thing, capital, play an important role in the mainstream theory of value but then disappear entirely in the macroeconomic story about inflation.

It’s therefore a problem in the basic theories of mainstream economics. And it’s a problem when it comes to their economic policies: anything and everything must be done to keep workers’ wages in check, and (without ever mentioning them) to safeguard corporate profits.

The fact is, once we solve the mystery of the missing profits we can actually tackle the problem of inflation. But neither mainstream economists nor the leaders of corporate America are going to like what we come up with.

___

*The Federal Reserve is suggesting that it can raise interest rates to get prices down “without causing a recession.” In fact, according to research from the investment bank Piper Sandler, the Fed raised rates to combat inflation nine different times during the past 60 years, and on eight of those occasions a recession occurred not long after.

A funny thing happened on the way to the recovery from the Pandemic Depression: class conflict is back at the core of economics.

At least, that’s what Martin Sandau (ht: bn) thinks. I beg to differ. But more on that anon. First, let us give Sandau his due. His argument is that the current labor shortages have shifted the balance of power toward workers (an issue I discussed a couple of weeks ago). As a result, economic analysis is starting to change:

What this looks like is the return of something that was exiled from centrist policy debate and mainstream economic analysis for decades: class conflict and its economic consequences. To be precise, we may be witnessing the manifestation of two outmoded ideas: that the relative power of economic classes alters macroeconomic outcomes; and that macroeconomic policy tilts that relative power.

For Sandau, that means a return to the work of Michal Kalecki, especially his theory of the “political aspects of full employment.” Kalecki was a contemporary of John Maynard Keynes but, in contrast to Keynes, Kalecki was well versed in Marxian theory and spent considerable time investigating the relationship between macroeconomics and class conflict. As I explained back in 2010, Kalecki developed a cogent analysis of business opposition to measures designed to achieve full employment:

The reasons for the opposition of the ‘industrial leaders’ to full employment achieved by government spending may be subdivided into three categories: (i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment. . .

Under a regime of permanent full employment, the ‘sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the ‘normal’ capitalist system.

As readers can clearly see, not much has changed since Kalecki published that analysis back in 1943. Employers and their financial backers are still adamantly opposed to government measures designed to move capitalist economies toward full employment.

Sandau is correct in arguing that “conventional economic thinking has little room” for the possibilities outlined by Kalecki. Mainstream economists assume that, when the labor market is in equilibrium (at A), workers are paid a wage (W) equal to their contribution to production. If workers manage to receive wages higher than the equilibrium rate, the result will be unemployment—that is, the improvement in the situation of some workers will come at the expense of other workers. So, there can’t be class conflict within conventional economic thinking.

And there isn’t any class conflict in Sandau’s analysis. That’s because, if workers’ wages rise, capital can respond by raising productivity. Therefore, in his view, “productivity incentives from greater worker power can boost profits as well.”

Problem solved! Except. . .

What Sandau fails to see is that, as productivity increases, the prices of wage goods fall, and capital therefore needs to advance less money to purchase workers’ ability to labor. Capitalist profits rise precisely because the value of labor power falls. Within the confines of capitalism, that’s precisely the option capitalists have, to extract more surplus-value from the workers they employ.

That’s the class conflict that remains missing in Sandau’s analysis as in the rest of conventional economics.

NYT-economists-and-recession-cartoon

Right now, mainstream economists are both congratulating themselves and bemoaning their fate.

Mainstream economists (such as Justin Wolfers and Paul Krugman) are congratulating themselves for having achieved a virtual consensus on the positive effects of fiscal stimulus. But they’re also complaining about the fact that the rest of the world (such as politicians, central bankers, and others) doesn’t seem to be listening to their expert advice.

Just two quick comments on this approach to consensual economics:

First, of course there’s a consensus among mainstream economics! That’s what their theories and models are supposed to do: produce and reproduce a consensus in terms of the basic analysis of macroeconomic events (although, of course, there can still be disagreements about particular aspects, such as the exact size of the fiscal multiplier and so on). And anyone who doesn’t use those models, and therefore reaches a different set of conclusions, is declared to be outside the mainstream, and therefore not worth reading or being listened to.

Second, how is it possible to declare—in the midst of the Second Great Depression—that mainstream economics has been an unqualified success? To arrive at such a conclusion would mean to overlook, at a minimum, the role that mainstream economics played in creating the conditions for the crash of 2007-08, in failing to include even the possibility of such a crash in their models, and in confining themselves to a package of monetary and fiscal policy measures—and not to even consider the possibility of larger, structural changes—as tens of millions of people lost their jobs, were stripped of their wealth, and were pushed further and further down the economic ladder.

Those engaged in consensual economics are, it seems, too busy congratulating themselves and bemoaning their fate to want to recognize the gorilla in the room.

iwdrm_modern_times_1935

One way of dealing with the problem of growing inequality is to establish a maximum wage. That’s what Franklin Delano Roosevelt proposed back in the early 1940s—a 100 percent marginal tax rate on incomes over$25,000 a year (roughly $350,000 in today’s dollars)—in order to “provide for greater equality in contributing to the war effort.”

Infuriated conservatives saw red, literally. The “only logical stopping place for this movement,” fumed Princeton economist Harley Lutz, would be “a completely communistic equalization of incomes.”

Simon Wren-Lewis reports his own recent suggestion for a maximum wage was greeted in much the same manner.

Well, if mainstream economists are going to howl about tinkering with tax rates, why not make them howl about a real change in the system whereby incomes are distributed? Like Filip Spagnoli’s suggestion to get rid of wage-labor entirely.

Spagnoli’s proposal is to combine a universal basic income (“to cover the costs of the necessities of life”) with an outright prohibition on wage-labor (in order to promote more cooperative, democratic forms of economic organization).

Would a UBI not be sufficient to allow people to pursue their goals? Why also prohibit wage labor? A UBI indeed loosens us from the system of wage labor – it provides a financial cushion that removes the risks inherent in abandoning a job and pursuing our “true destiny” – but it doesn’t go far enough. It gives us the freedom to turn down unattractive work but the pursuit of life’s goals often requires cooperation. Only the prohibition on wage labor makes cooperative ventures more common. A UBI by itself only pushes us towards more satisfying jobs and leaves some of the drawbacks of wage labor intact.

Makes sense to me. Guarantee a basic income for everyone and then, on top of that, encourage the formation of new kinds of enterprises, based on the idea that those who work in the enterprises decide how they should be organized (including, of course, how much they should be paid, what should be done with the surplus, and so on).

One of Spagnoli’s concerns is, “If people can’t work for a wage, many of the ‘dirty jobs’ may not get done anymore.” The fact is, we already have Cooperative Home Care Associates in New York City, which is the largest worker-owned cooperative in the country. It’s relatively easy then to imagine a system of such cooperatives, in which democratically organized workers do everything from toilet cleaning, waste disposal, and mining to teaching, healthcare, and software design.

The time is ripe to open up the debate about proposals like establishing a maximum wage, guaranteeing a basic income, and prohibiting any and all forms of wage-labor. The only price of admission is to listen to the howling of mainstream economists.