Posts Tagged ‘profits’

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The Wall Street Journal is absolutely right: Pope Francis acknowledges the scientific consensus concerning the human/social origins of climate change and argues there is “an urgent need” for policies designed to cut carbon emissions and switch to renewable sources of energy.

But the pope goes further by weaving his signature theme of economic justice and his vehement criticism of capitalism throughout the encyclical.

What the pope does is build on the central economic themes of the apostolic exhortation Evangelii Gaudium, and then extend them to the issue of the natural environment, especially the causes and consequences of climate change. The result is a radical critique of contemporary capitalism.

There are many aspects of the 183-page Laudato Si’ I simply cannot discuss here.* What I want to do in this post is highlight some of the specifically economic themes of the papal encyclical that was officially released yesterday.

Many news stories have already highlighted the pope’s rejection of carbon emission trading as a solution to the problem of climate change:

The strategy of buying and selling “carbon credits” can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors. (126)

But there is a great deal more in the economics of Laudato Si’.

Throughout the encyclical, the pope highlights the relationship between climate change and the “economy of exclusion,” particularly the way the continued deterioration in the natural (and, he doesn’t overlook, social) environment affects the poorest, most vulnerable people on the planet.** Here are two examples:

Many of the poor live in areas particularly affected by phenomena related to warming, and their means of subsistence are largely dependent on natural reserves and eco-systemic services such as agriculture, fishing and forestry. They have no other financial activities or resources which can enable them to adapt to climate change or to face natural disasters, and their access to social services and protection is very limited. (20)

And

One particularly serious problem is the quality of water available to the poor. Every day, unsafe water results in many deaths and the spread of water-related diseases, including those caused by microorganisms and chemical substances. Dysentery and cholera, linked to inadequate hygiene and water supplies, are a significant cause of suffering and of infant mortality. (23)

Not surprisingly, this leads to his reiteration of the preferential option for the poor:

In the present condition of global society, where injustices abound and growing numbers of people are deprived of basic human rights and considered expendable, the principle of the common good immediately becomes, logically and inevitably, a summons to solidarity and a preferential option for the poorest of our brothers and sisters. . .We need only look around us to see that, today, this option is in fact an ethical imperative essential for effectively attaining the common good. (117)

And that’s the other side of the focus on the poor: the idea that the natural environment is part of the common good.

Human ecology is inseparable from the notion of the common good, a central and unifying principle of social ethics. The common good is “the sum of those conditions of social life which allow social groups and their individual members relatively thorough and ready access to their own fulfilment [sic]” (116).

So, if it is clear that climate change is a pressing issue, especially for the poor and most vulnerable, what stands in the way of effectively dealing with the problem? Here the pope extends his economic analysis to identify the interests and ideas that represent obstacles to both thinking about and finding appropriate solutions to climate change.

The pope, for example, cites those who stand in the way of making real change:

Many of those who possess more resources and economic or political power seem mostly to be concerned with masking the problems or concealing their symptoms, simply making efforts to reduce some of the negative impacts of climate change. (21)

In the meantime, economic powers continue to justify the current global system where priority tends to be given to speculation and the pursuit of financial gain, which fail to take the context into account, let alone the effects on human dignity and the natural environment. (41)

He also challenges responses that benefit only a tiny minority:

Even as the quality of available water is constantly diminishing, in some places there is a growing tendency, despite its scarcity, to privatize this resource, turning it into a commodity subject to the laws of the market. (23)

In some places, rural and urban alike, the privatization of certain spaces has restricted people’s access to places of particular beauty. . .Frequently, we find beautiful and carefully manicured green spaces in so-called “safer” areas of cities, but not in the more hidden areas where the disposable of society live. (31-32)

In the end, of course, the pope has to confront the problems of profits, markets, and private property.

This is what he writes about profits:

The economy accepts every advance in technology with a view to profit, without concern for its potentially negative impact on human beings. Finance overwhelms the real economy. The lessons of the global financial crisis have not been assimilated, and we are learning all too slowly the lessons of environmental deterioration. (81)

Here he is on markets:

Once more, we need to reject a magical conception of the market, which would suggest that problems can be solved simply by an increase in the profits of companies or individuals. Is it realistic to hope that those who are obsessed with maximizing profits will stop to reflect on the environmental damage which they will leave behind for future generations? Where profits alone count, there can be no thinking about the rhythms of na- ture, its phases of decay and regeneration, or the complexity of ecosystems which may be gravely upset by human intervention. Moreover, biodiversity is considered at most a deposit of economic resources available for exploitation, with no serious thought for the real value of things, their significance for persons and cultures, or the concerns and needs of the poor. (139)

And then on private property:

The principle of the subordination of private property to the universal destination of goods, and thus the right of everyone to their use, is a golden rule of social conduct and “the first principle of the whole ethical and social order”. The Christian tradition has never recognized the right to private property as absolute or inviolable, and has stressed the social purpose of all forms of private property. (69)

Finally, it has been noted that the pope doesn’t offer much in the way of concrete proposals to solve the problem of climate change. But he does mention a number of times the positive effects of a particularly noncapitalist form of economic organization: cooperatives.

Liberation from the dominant technocratic paradigm does in fact happen sometimes, for example, when cooperatives of small producers adopt less polluting means of production, and opt for a non-consumerist model of life, recreation and community. (84)

And

In some places, cooperatives are being developed to exploit renewable sources of energy which ensure local self-sufficiency and even the sale of surplus energy. This simple example shows that, while the existing world order proves powerless to assume its responsibilities, local individuals and groups can make a real difference. (131)

Throughout the encyclical, the pope could not have stated things more clearly: the “maximization of profits” is destroying the natural environment, the “poor, the weak, and the vulnerable” are most at risk of pollution and climate change, and “halfway measures” simply won’t work.

No wonder the Wall Street Journal is concerned about the pope’s “vehement criticism of capitalism throughout the encyclical.” Many more people might actually come to believe him.

 

*What I found particularly interesting, in addition to the themes I write about here, are the pope’s criticisms of modern (scientistic) epistemology and the hyper-individualist (neoliberal) subject.

**To be clear, the pope is not just referring to the people in rich and poor countries: “There are not just winners and losers among countries, but within poorer countries themselves” (129). And, he might have added, within rich countries.

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Thomas Palley does an admirable job summarizing and discussing the implications of four different stories about the relationship between inequality and the financial crash of 2007-08. The only problem is, he completely overlooks a fifth story about that relationship, one that hinges on the existence and use of the surplus.

According to Palley, there are four major stories of the financial crisis and the role they attribute to income inequality. They are identified with (1) Raghuram Rajan (according to whom inequality has not really been a problem per se but the government responded to populist pressures to do something about growing inequality by extending home mortgages to unwarranted buyers), (2) Michael Kumhoff and Romain Rancière (who developed a model in which worsening income distribution, caused by declining union bargaining power, led to a persistent surge in borrowing as workers tried to maintain their living standards, which rendered the economy fragile to a financial sector shock), (3) Gauti B. Eggertsson and Paul Krugman (who leave out inequality entirely and focus instead on the idea that a financial bubble drove excessive borrowing and leverage in the US economy—which, when the bubble burst in 2007-08, led to a financial crisis and a deep recession, which in turn prompted a wave of deleveraging as borrowers shifted to rebuilding their balance sheets and excess saving that reduced aggregate demand), and (4) Palley himself (who , in his “structural Keynesian” account, focuses on the shift from wage-led growth to neoliberal financialization).

Thus, according to Palley,

Income inequality did not cause the financial crisis. The crisis was caused by the implosion of the asset price and credit bubbles which had been off-setting and obscuring the impact of inequality. However, once the financial bubble burst and financial markets ceased filling the demand gap created by income inequality, the demand effects of inequality came to the fore.

Viewed in that light, stagnation is the joint-product of the long-running credit bubble, the financial crisis and income inequality. The credit bubble left behind a large debt over-hang; the financial crisis destroyed the credit-worthiness of millions; and income inequality has created a “structural” demand shortage.

Palley then proceeds to discuss the implications, for economic policy, of each one of these four stories.

The entire essay is worth a good, careful read. But let me focus here just on the causal stories, and leave for another post the implications of the stories for policy.

While I am sympathetic to Palley’s critique of the other three stories, what’s missing from his own account is the role inequality played in the financial crisis itself.

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Consider, for example, what happened to profits and wages in the long run-up to the crash of 2007-08. What we can see, from 1970 onward, is a steady decline in the wage share of national income and an initially halting and then uneven increase in corporate profits (measured here in terms of “net operating surplus”).* The argument is that the decline in the wage share led to increased profits both directly and indirectly: directly, as wage costs for producing enterprises declined; and indirectly, as some of those corporate profits were recycled through financial enterprises to lend to workers, thereby further boosting the profit share of national income. That combination fueled the housing and asset bubbles that eventually burst in 2007-08.

So, on my account—on my structural class account—inequality played an important role in creating the conditions for the most recent financial crash. And now, during the Second Great Depression, the class inequality that was such an important factor before is on the rise again.

Now, I understand, that’s not a complete story about the relationship between inequality and the crash of 2007-08. But it’s a start. It shows that such a story is possible. And, as I will explain in another post, it has implications for economic policy very different from the other four stories out there.

*My chart doesn’t show all of what I consider to be the economic (class) surplus. To get there, we’d have to transfer some of what is included in wages and salaries (e.g., the salaries of CEOs, which put them in the top 1 percent) to “net operating surplus.” I’m still searching for a good way to do that.

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Paul Krugman is right: there is no clear or unambiguous relationship between inequality and capitalist economic growth.

If there were such a relationship, liberal thinkers could make their case that less inequality would promote more growth and everyone would benefit.

The fact is, however, there are more unequal and less unequal forms and periods of capitalist growth. As a result, there’s no general correlation between inequality and growth within capitalism.

The chart above depicts both inequality (the profit-wage ratio, in blue on the left) and economic growth (nominal GDP growth, in red on the right) for the United States. We can clearly see periods of relatively high economic growth accompanied by growing inequality (e.g., in the late 1970s) and periods of very slow economic growth also accompanied by growing inequality (e.g., since 2009). The converse is also true: high economic growth with falling inequality (in the early 1950s) and slow economic growth with falling inequality (e.g., late 1980s).

What this means, at least for me, is we need to pay attention to the particular conditions for economic growth during each period or phase of capitalist development. In general, capitalism can grow (or not) under both more unequal and less unequal conditions.

That’s not to say, however, that within any given period (more or less) growth and (more or less) inequality are not connected. A plausible story can be told that growing inequality during the 2000s fueled the financial bubble that eventually burst in 2007-08.

We also need to reverse the relationship and look at the relationship from growth to inequality. It’s pretty clear that the nature of the growth that has occurred since 2009 has created more inequality, that is, the particular form of the recovery that has been enacted since the crash of 2007-08 has enhanced corporate profits (and incomes at the very top) and made everyone else (who receive wages to get by) pay the costs.

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Finally, while we’re on the topic, there is one general tendency of capitalist growth we need to point out: the role of profitability. In the end, profitability is what makes capitalism work (or not). As we can see from the chart above (which includes just the corporate profit share and growth), each period of a declining profit share is followed by a recession, after which the profit share rises (at least for a time).

So, to paraphrase the Rolling Stones: capitalists can’t always get what they want. When they don’t (leading up to the most recent financial crash), neither will anyone else. And, even when they do (as they have since 2009), there’s no guarantee anyone else will.

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