Posts Tagged ‘productivity’

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From the very beginning, one of the central claims on behalf of capitalism has been that it leads to increases in productivity—and, as a result, an increase in the wealth of nations. The idea is that, the more national wealth increases (the more commodities are produced per person hour worked), the higher living standards of ordinary people will be (i.e., real wages will increase).* We find that story in pretty much every text of mainstream economics, from Adam Smith to Deirdre McCloskey.

That’s why Karl Marx spent so much time (hundreds of pages, in fact) discussing productivity (along with machinery, mechanization, technical change, and so forth) in his critique of political economy. So, John Cassidy gets it wrong.

Marx (not to mention other nineteenth-century critics of capitalism) never denied that there was a connection between increases in productivity and a rise in workers’ wages. That would be silly, both theoretically and empirically. All he ever did was deny there’s an automatic or necessary relationship between them—and, perhaps more important, that increases in real wages didn’t mean workers weren’t being increasingly exploited.

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The first point (one even Cassidy, in a way, concedes) is easy to show: for a time (until 1973 or so, in the United States), workers’ real wages increased at roughly the same rate as productivity. Then (from 1973 onward), productivity continued to grow but workers’ wages stagnated.

One key question, for the pre-1973 period, is why productivity and workers’ real wages increased in tandem. Cassidy assumes that wages grew because of the increases in productivity. Nothing could be further from the truth. The explanation for the increases in productivity (having to do with the growth of manufacturing, capitalist competition, the role of U.S. corporations in the world economy, and so on) is separate from the change in wages (based on fast economic growth, unionization, a shortage of labor power, and so on). There’s simply no automatic relationship between increases in productivity and increases in real wages, which has been confirmed by their divergence after 1973.

The second point is, in my view, even more important. It’s possible for workers’ wages to increase (at or even above the rate of growth of productivity) and for capitalist exploitation to also be rising.

Let me explain. In Marxian theory, the rate of exploitation (s/v) is the ratio of surplus-value (s) to the value of labor power (v). The value of labor power is, in turn, equal to the exchange-value per unit use-value (e), or price, of the commodities in the wage bundle (q), or the real wage. So, we have v = e*q and, in terms of rates of change, Δv/v = Δe/e + Δq/q. Mathematically, exploitation can increase (Marx referred to it as relative surplus-value) if the value of labor power is decreasing (Δv/v is negative) even if real wages are going up (Δq/q is positive) as along as the change in the price of wage commodities is negative (Δe/e) and its absolute value is greater than the change in real wages (|Δe/e| > |Δq/q|).

For example, in terms of numbers: if real wages increase by 10 percent (workers are buying more things) but the prices of the items in the wage bundle (food, clothing, shelter) decrease by 20 percent, then the value of labor power (what capitalists have to pay to get access to the commodity labor power) will decrease by 10 percent. Voilà! Higher real wages can be (and, throughout much of the history of U.S. capitalism, have been) accompanied by rising exploitation.

And that’s precisely one of the effects of increasing productivity: it lowers the exchange-value per unit use-value of wage commodities.** Less labor is embodied in each unit of bread, shirts, and housing. The fact that workers are able to purchase more of those commodities (say, at the same rate as productivity is increasing) doesn’t mean exploitation is not also increasing.

That’s even more the case when real wages are stagnant (Δq/q is equal to zero). Then, the decline in the price of wage goods (again,  decreasing by 20 percent) is translated directly into an increase in exploitation (via a 20 percent decrease in v).

But what if rate of growth of domestic productivity begins to decline (as it did after 1973, and even more so in recent years)? Then, the domestic contribution to the decline in the price of wage commodities would fall (say, to 10 percent). But, at the same time, if jobs are offshored and cheaper wage goods are imported from abroad (think Walmart), that also leads to a decline in the price of wage goods (say, by another 10 percent). So, even with declining domestic productivity growth, the combination of domestic production and imported goods can lead to a decline in the price of wage goods (for a total, as before, of 20 percent) that, with constant real wages, decreases the value of labor power (by 20 percent) and increases the rate of exploitation.

So, while Cassidy and many others are worried about a slowdown in productivity growth (linking it to workers’ wages and living standards), workers know that increases in productivity don’t automatically lead to increases in real wages. And even if real wages do rise, it’s still likely they’ll be more exploited than before.

Their employers, not they, will be ones to benefit.

 

*It is merely presumed that the standard of living of those at the top, the capitalists and other members of the 1 percent, would be just fine.

**Another, separate issue is why productivity itself might increase. The Marxian argument is that, during the course of competing over “super-profits,” that is distributions of the surplus-value among and between capitalist enterprises, capitalists will engage in technical change, which in turn leads to increases in productivity and a decline in the value of the commodities they produce. An interesting question, then, is why productivity in the United States and other advanced countries has slowed down. One reason may be a decline in competitive pressures among enterprises that produce goods and services.

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The amount of time people work is not, of course, written in stone (or, for that matter, in law). And, in the United States, employees work much more than in most other rich countries. So, why not reduce it?

In the nineteenth century, the demand of the U.S. labor movement was 8 hours—8 hours work, 8 hours rest, and 8 hours recreation. The idea, when workers were routinely forced to have the freedom to work for 10, 12, 14 hours at a time, was to establish a maximum length of the workday.

The campaign didn’t work (the 8-hour day was never legislated in the United States) but the rising factory system, in which production could be organized around the clock, did bring with it three shifts of 8 hours each. And that eventually became the standard for factories and then offices—except that American workers routinely work more than 40 hours a week and often aren’t paid for overtime.

It makes sense, of course, to reduce the length of the workday and, as I wrote back in September, Sweden has begun doing exactly that—with a 6-hour day. According to the latest report, the results have been positive: less work, more time for rest and recreation, and, as it turns out, higher productivity.

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The result is not all that surprising. According to the Economist, there’s a negative relationship between hours worked and productivity: countries with fewer hours worked per year tend to have higher productivity. The United States, as we know, is at the other end: more hours worked and lower productivity.

So, the number of hours worked (whether daily, weekly, or annually) is not anything given or natural. And there are certainly benefits—for individual workers and society as a whole—in decreasing the length of the workday.

Who, then, is opposed to changing the length of the workday? The same ones who opposed the nineteenth-century movement to establish an 8-hour day.

Their fear, of course, is that, once we denaturalize the length of the workday, we might also be able to question and move beyond other givens—like the idea that most people are forced to have the freedom to sell their ability to work to a tiny group of employers, who profit from the labor of others.

Changing that arrangement would allow workers themselves to decide how to achieve a better balance of work, rest, and recreation.

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Special mention

Clay Bennett editorial cartoon 981193_1_cartoon160516-01_standard

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William D. Cohan’s broadside [ht: ja] against Bernie Sanders hinges on a simple, but fundamentally wrong, argument: we all benefit from the risks taken by Wall Street.

Simply put, Wall Street’s purpose is to re-allocate capital from people who have it (savers) to those who want it (borrowers) and then use it to grow businesses that employ billions of people around the globe and help give them a modicum of wealth that they did not have before. One man’s speculation, in other words, is another man’s risk-taking. Without people willing to take those risks, and having the chance to reap their reward, there wouldn’t be an Apple, a Google, a Facebook, or countless other large corporations. The billions of people around the world who are employed by thriving companies would lose their jobs.

Clearly, Cohan doesn’t understand Wall Street (or, for that matter, the rest of the financial sector). It doesn’t collect capital from one group of savers and allocate it to another group of borrowers, which then creates jobs. Rather, it recycles the surplus created by people who work in order to allow those who appropriate the surplus to collect even more. In other words, Wall Street manages the surplus on behalf of a small group of wealthy individuals and large corporations. And it grows its own profits not as a reward for taking risks but by taking a cut of each and every financial transaction.

As we know, Wall Street does in fact take risks, as it did in the lead-up to the crash of 2007-08. But the risks were borne not by Wall Street, but by the rest of us—in the form of massive layoffs and foreclosures.

What about the other part of the argument, that Wall Street helps businesses grow?

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As it turns out, Matthew C. Klein addressed this issue just about a year ago. His argument, in short, is that productivity growth in rich countries started slowing down around the same time that the financial sector’s share of economic activity started rising rapidly.

First, the high salaries commanded in the financial sector — much of which can be attributed to too-big-to-fail subsidies and other forms of rent extraction — make it harder for genuinely innovative firms to hire researchers and invest in new technologies.

Second, the growth of the financial sector has been concentrated in mortgage lending, which means that more lending usually just leads to more building. That’s a problem for aggregate productivity, since the construction industry is one of the few that has consistently gotten less productive over time.

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In other words, as illustrated in the chart above, the growth rate in productivity was systematically faster when the finance sector was relatively smaller (from 1948 to 1975), and then when the finance sector got bigger, productivity growth got smaller (from 1976 to 2014).

The ultimate irony is that Cohan actually makes Sanders’s case for breaking up Too Big to Fail banks and reigning in Wall Street:

Sanders is right that Wall Street still needs reform. The Dodd-Frank regulations fail to measure up; Wall Street lobbyists and $1000-an-hour attorneys work away each day to gut the meager reforms signed into law by President Barack Obama in July 2010. It is also unconscionable that Wall Street’s compensation system continues to reward bankers, traders, and executives to take big risks with other people’s money in hopes of getting big year-end bonuses. Thanks to this system, which has been prevalent since the 1970s, when Wall Street transformed itself from a bunch of undercapitalized private partnerships (where those partners had serious capital at risk every day) to a group of behemoth public companies (where the risk is borne by creditors and shareholders while the rewards go to the employees), Wall Street has become ground zero for one financial crisis after another.

Neither Sanders nor I could have said it better.

A commonly heard argument these days, especially in and around the Federal Reserve, is that workers’ wages are not going up because productivity growth is very slow.

Here’s the version of the argument by Jeffrey M. Lacker (pdf), President of the Federal Reserve Bank of Richmond:

Some argue there must be excessive slack in labor markets if wage rates are not accelerating. But real wages are tied to productivity growth, and productivity growth has been slow for several years now. Wage growth in real terms has at least kept pace with productivity increases over that time period, which is perfectly consistent with an economy from which labor market slack has largely dissipated.

But, as I showed the other day, there’s been a growing gap between productivity and wages since the mid-1970s. Thus, for example, between 1973 and 2014, gross productivity increased by 1.52 percent a year. During that same period, the median hourly wage grew by only .09 percent a year and median hourly compensation (including both wages and benefits) increased by only .20 percent a year.

So, no, real wages in the United States are not tied to productivity growth—and haven’t been for more than four decades.

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That’s why the wage share of national income has been falling and, since the late-1980s, the profit share has been rising.

Or, as Fed-watcher Tim Duy explains,

Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over that time. Yet the instant that there is even a glimmer of hope that labor might get an upper hand, the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed’s top priority is making sure the cards remain stacked against wage and salary earners.

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All eyes these days seem to be on the instability of the U.S. and world economies. That’s in part because of the extreme gyrations in the U.S. stock market (as measured, in the chart above, by the Dow Jones Industrial Average).

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It’s also because of the instability in the Chinese economy, especially the external sector (as depicted in the chart above, by China’s Balance of Payments).

But, in all honesty, there’s nothing new here. Capitalism is always unstable, and has been from the very beginning. The current instability—within and across countries—is merely one more example of capitalism’s inherent instability.

What I find particularly interesting is the combination of instability and, at the same time, stability.

But to see that instability we have to look elsewhere—beyond the fluctuations in stock markets and balance of payments to the underlying pattern of productivity and wages. And there, at least for the United States, there’s been a remarkable stability over the course of the past four decades, which continues to the present.

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As a new report from the Economic Policy Institute (pdf) demonstrates, the growth in the gap between productivity and workers’ wages has remained remarkably stable since the mid-1970s. Productivity continues to increase while workers’ wages have been stagnant. Thus, for example, while productivity grew a bit above 72 percent between 1973 and 2014, the average (median) workers’ hourly compensation increased by about 9 percent.*

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And that gap has continued to grow during the current so-called recovery, as real wages (from 2009 to 2014) for all groups of workers, especially those at the bottom, have actually declined.

That, on this Labor Day weekend, is the fundamental stability underlying the apparent instability of contemporary capitalism.

*Here’s even more detail: between 1973 and 2014, gross productivity increased by 1.52 percent a year. During that same period, the median hourly wage grew by only .09 percent a year and median hourly compensation (both wages and benefits) increased by only .20 percent a year.

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In the end, it all comes down to the theory of value.

That’s what’s at stake in the ongoing debate about the growing gap between productivity and wages in the U.S. economy. Robert Lawrence tries to define it away (by redefining both output and compensation so that the growth rates coincide). Robert Solow, on the other hand, takes the gap seriously and then looks to rent as the key explanatory factor.

The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” It is not a return earned by capital or labor, but rather a return to the special position of the firm. It may come from traditional monopoly power, being the only producer of something, but there are other ways in which firms are at least partly protected from competition. Anything that hampers competition, sometimes even regulation itself, is a source of rent. We carelessly think of it as “belonging” to the capital side of the ledger, but that is arbitrary. The division of rent among the stakeholders of a firm is something to be bargained over, formally or informally.

This is a tricky matter because there is no direct measurement of rent in this sense. You will not find a line called “monopoly rent” in any firm’s income statement or in the national accounts. It has to be estimated indirectly, if at all. There have been attempts to do this, by one ingenious method or another. The results are not quite “all over the place” but they differ. It is enough if the rent component lies between, say, 10 and 30 percent of GDP, where most of the estimates fall. This is what has to be divided between the claimants—labor and capital and perhaps others. It is essential to understand that what we measure as wages and profits both contain an element of rent.

Until recently, when discussing the distribution of income, mainstream economists’ focus was on profit and wages. Now, however, I’m noticing more and more references to rent.

What’s going on? My sense is, mainstream economists, both liberal and conservative, were content with the idea of “just deserts”—the idea that different “factors of production” were paid what they were “worth” according to marginal productivity theory. And, for the most part, that meant labor and capital, and thus wages and profits. The presumption was that labor was able to capture its “just” share of productivity growth, and labor and capital shares were assumed to be pretty stable (as long as both shares grew at the same rate). Moreover, the idea of rent, which had figured prominently in the theories of the classical economists (like Smith and Ricardo), had mostly dropped out of the equation, given the declining significance of agriculture in the United States and their lack of interest in other forms of land rent (such as the private ownership of land, including the resources under the surface, and buildings).

Well, all that broke down in the wake of the crash of 2007-08. Of course, marginal productivity theory was always on shaky ground. And the gap between wages and productivity had been growing since the mid-1970s. But it was only with the popular reaction to the problem of the “1 percent” and, then, during the unequal recovery, when the tendency for the gap between a tiny minority at the top and everyone else to increase was quickly restored (after a brief hiatus in 2009), that some mainstream economists took notice of the cracks in their theoretical edifice. It became increasingly difficult for them (or at least some of them) to continue to invoke the “just deserts” of marginal productivity theory.

The problem, of course, is mainstream economists still needed a theory of income distribution grounded in a theory of value, and rejecting marginal productivity theory would mean adopting another approach. And the main contender is Marx’s theory, the theory of class exploitation. According to the Marxian theory of value, workers create a surplus that is appropriated not by them but by a small group of capitalists even when productivity and wages were growing at the same rate (such as during the 1948-1973 period). And workers were even more exploited when productivity continued to grow but wages were stagnant (from 1973 onward).

That’s one theory of the growing gap between productivity and wages. But if mainstream economists were not going to follow that path, they needed an alternative. That’s where rent enters the story. It’s something “extra,” something can’t be attributed to either capital or labor, a flow of value that is associated more with an “owning” than a “doing” (because the mainstream assumption is that both capital and labor “do” something, for which they receive their appropriate or just compensation).

According to Solow, capital and labor battle over receiving portions of that rent.

The suggestion I want to make is that one important reason for the failure of real wages to keep up with productivity is that the division of rent in industry has been shifting against the labor side for several decades. This is a hard hypothesis to test in the absence of direct measurement. But the decay of unions and collective bargaining, the explicit hardening of business attitudes, the popularity of right-to-work laws, and the fact that the wage lag seems to have begun at about the same time as the Reagan presidency all point in the same direction: the share of wages in national value added may have fallen because the social bargaining power of labor has diminished.

The problem, as I see it, is that Solow, like all other mainstream economists, is assuming that profits, wages, and rents are independent sources of income. The only difference between his view and that of the classicals is that Solow sees rents going not to an independent class of landlords, but as being “shared” by capital and labor—with labor sometimes getting a larger share and other times a smaller share, depending on the amount of power it is able to wield.

We’re back, then, to something akin to the Trinity Formula. And, as the Old Moor once wrote,

the alleged sources of the annually available wealth belong to widely dissimilar spheres and are not at all analogous with one another. They have about the same relation to each other as lawyer’s fees, red beets and music.