As Professor Ruccio observes, investment is responsive to the profit rate. It seems to me that it's not so much that capital is "on strike" as much as the profit rate has fallen because of an economic contraction resulting from the financial crisis and debt overhang, along with firms attempting to increase their profit rate, e.g., by downsizing and offshoring.
New money enters the economy in only two ways — either non-government borrows creating deposits (M1) or government spends, creating deposits (M1). Credits to M1 deposit accounts are saving created by money creation that becomes available for spending on either new investment or consumption to the degree it is not saved, including financial investment, or used to retire outstanding debt.
BTW, the amount credited to deposit accounts is saved within the banking system as a whole or as cash in circulation until the bank loan that created the deposit is repayed or the tax credit created by government spending is destroyed through being used to meet a tax obligation.
The problem is effective demand. The capacity to supply exceeds the appetite to buy based on income as the ability to repay debts incurred that create new money. The options are then either drawing down savings or selling assets.
Fiscal austerity has exacerbated the problem since when non-government is reluctant to borrow, if government does not make up the difference between output capacity and purchase of output, then either unplanned inventory will build up, which cannot go on for long, or firms will idle capacity, the economy as whole will underperform, firms will not invest in hiring, inventory, or new capital goods.
Reducing wages to spur investment is a fool's errand since this just reduces purchasing power of consumers, and the US economy, for example is made up of about 70% consumption and 30% investment.
The solution? Government putting purchasing power in the pockets of those most likely to consume promptly rather than to save, including paying down outstanding debt. This means providing enough stimulus to reduce the debt backlog sufficiently to stimulate new spending.
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David F. Ruccio | Professor of Economics, University of Notre Dame
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New money enters the economy in only two ways — either non-government borrows creating deposits (M1) or government spends, creating deposits (M1). Credits to M1 deposit accounts are saving created by money creation that becomes available for spending on either new investment or consumption to the degree it is not saved, including financial investment, or used to retire outstanding debt.
BTW, the amount credited to deposit accounts is saved within the banking system as a whole or as cash in circulation until the bank loan that created the deposit is repayed or the tax credit created by government spending is destroyed through being used to meet a tax obligation.
The problem is effective demand. The capacity to supply exceeds the appetite to buy based on income as the ability to repay debts incurred that create new money. The options are then either drawing down savings or selling assets.
Fiscal austerity has exacerbated the problem since when non-government is reluctant to borrow, if government does not make up the difference between output capacity and purchase of output, then either unplanned inventory will build up, which cannot go on for long, or firms will idle capacity, the economy as whole will underperform, firms will not invest in hiring, inventory, or new capital goods.
Reducing wages to spur investment is a fool's errand since this just reduces purchasing power of consumers, and the US economy, for example is made up of about 70% consumption and 30% investment.
The solution? Government putting purchasing power in the pockets of those most likely to consume promptly rather than to save, including paying down outstanding debt. This means providing enough stimulus to reduce the debt backlog sufficiently to stimulate new spending. ??
Your words Tom? Well said!
Not one mention of reserves since the real economy can't use them. It's all about deposits as is said.
It's all about deposits as is said. aa
And physical fiat, aka "cash."
My words.
As Trump would say, I have lots of words. :)
You have the best words.... Other people's words are a disaster....
"Reducing wages to spur investment is a fool's errand since this just reduces purchasing power of consumers, and the US economy, for example is made up of about 70% consumption and 30% investment."
No, it is not a fool's errand. It has worked for the last 60-50 years in the US, under Democratic and Republican governments, under Keynesianism and under Monetarism and under neoliberalism:
https://fred.stlouisfed.org/series/W270RE1A156NBEA
No, it does not necessarily reduce purchasing power of consumers: it only reduces purchasing power of workers. Malthus -- one of the only intellectual influences The Lord acknowledged -- knew that well.
Memory is fickle, it seems. It wasn't that long ago that everybody was talking about Citigroup's plutonomy reports (particularly one appropriately entitled “Plutonomy: Buying Luxury, Explaining Global Imbalance”). Completely forgotten.
Here is from Edward Fullbrook:
" The World is dividing into two blocs – the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies – economies powered by the wealthy. Continental Europe (ex-Italy) and Japan are in the egalitarian bloc.
" Equity risk premium embedded in 'global imbalances' are unwarranted. In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc. This imbalance in inequality expresses itself in the standard scary 'global imbalances'. We worry less.
" There is no 'average consumer' in a Plutonomy. Consensus analyses focusing on the 'average' consumer are flawed from the start."
https://rwer.wordpress.com/2010/11/11/citigroup-attempts-to-disappear-its-plutonomy-report-2/
In a different variant, it works now in Germany and China: exports-led growth.
Malthus -- one of the only intellectual influences The Lord acknowledged -- knew that well. Magpie
Huh? Chapter and verse, please.
"Huh? Chapter and verse, please."
Fair enough. We'll do a quid pro quo.
To show my good will, I'll begin.
I take for granted you are familiar with the General Theory, so I'll leave it out from this discussion.
All quotes here are from "Robert Malthus (1766-1835): the first of the Cambridge economists" (in "Essays in Biography", by John Maynard Keynes, new edition with three additional essays, edited by Geoffrey Keynes. W.W. Norton & Company, Inc. New York).
I picked a long quote out of several, because it is explicit and clear and enthusiastic (if you wish, I'll be happy to produce others) and I reproduce it in its entirety, so as to give its proper context.
Here's your wish. Keynes on Malthus:
"Malthus's Essay [on the Principle of Population, 1798, published anonymously] is a work of youthful genius. The author was fully conscious of the significance of the ideas he was expressing. He believed that he had found the clue to human misery. The importance of the Essay consisted not in the novelty of his facts but in the smashIng emphasis he placed on a simple generalisation arising out of them. Indeed his leading idea had been
largely anticipated in a clumsier way by other eighteenth-century writers without attracting attention.
"The book can claim a place amongst those which have had great influence on the progress of thought. It is profoundly in the English tradition ofhumane science in that tradition of Scotch and English thought, in which there has been, I think, an extraordinary continuity of'feeling, if I may so express It, from the eighteenth century to the present time the tradition which is suggested by the names of Locke, Hume, Adam Smith, Paley, Bentham, Darwin, and Mill, a tradition marked by a love of truth and a most noble lucidity, by a prosaic sanity free from sentiment or metaphysic, and by an immense disinterestedness and public spirit." (pages 100-101)
(TO BE CONTINUED)
The Lord, too, was "fully conscious of the significance of the ideas he was expressing". A little later, commenting briefly on the second edition (much modified) of Malthus' Essay, Keynes writes:
"I cannot forbear to follow on with that famous passage from the second edition (p. 571), in which a partly similar idea (similar to effective demand) is introduced, more magnificently clothed, in a different context (in criticism of Paine's Rights of Man): (page 106)
So, what were those magnificently clothed ideas Keynes was fully conscious of and could not forbear to follow on?
Here they are, from Malthus as quoted by Keynes himself:
"A man who is born into a world already possessed, if he cannot get subsistence from his parents on whom he has a just demand, and if the society do not want his labour, has no claim of right to the smallest portion of food, and, in fact, has no business to be where he is. At nature's mighty feast there is no vacant cover for him. She tells him to be gone, and will quickly execute her own orders, if he do not work upon the compassion of some of her guests. If these guests get up and make room for him, other intruders immediately appear demanding the same favour. The report of a provision for all that come, fills the hall with numerous claimants. The order and harmony of the feast is disturbed, the plenty that before reigned is changed into scarcity; and the happiness ofthe guests is destroyed by the spectacle of misery and dependence in every part of the hall, and by the clamorous importunity of those, who are justly enraged at not finding the provision which they had been taught to expect. The guests learn too late their error, in counteracting those strict orders to all intruders, issued by the great mistress of the feast, who, wishing that all her guests should have plenty, and knowing that she could not provide for unlimited numbers, humanely refused to admit fresh comers when her table was already full." (also p. 106)
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Now, it's my turn, Anderson. Quid pro quo.
Open the link to the FRED chart. Observe it. Answer the two multiple choice questions below (one of the options is right, the other is wrong). Select the right option.
Question 1
[A] Only during recessions does the share of wages on GDP fall.
[B] The share of wages on GDP falls both during recessions and during booms.
Question 2
[A] Only during Monetarism/neoliberalism does the share of wages on GDP fall.
[B] The share of wages on GDP falls both during and after the Keynesian period.
Oh, my mistake. I forgot that Keynes was made Lord* Keynes. I thought you meant THE LORD, as in God.
Well, your comments look interesting anyway.
*Being an American since we have a certain antipathy toward titles of nobility.
But as for Malthus, history has continually disproved predictions of doom based on population growth versus resource limitations - as if THE LORD wished (and wishes) to make it clear that our problems are moral and ethical, not lack of resources or population growth.
As for your questions, the answers appear from the chart to be:
Question 1: B obviously
Question 2: A but less obviously since there were declines during the Keynesian period too.
No, it is not a fool's errand. It has worked for the last 60-50 years in the US, under Democratic and Republican governments, under Keynesianism and under Monetarism and under neoliberalism: Magpie
Well, it's foolish in that no one should bet on injustice.
The problem is that our system has the appearance of justice while systematically looting workers and the general population via the money and credit system. Workers, for example, have been disemployed via automation financed with what is, in essence, their own legally stolen purchasing power.
"Workers, for example, have been disemployed via automation financed with what is, in essence, their own legally stolen purchasing power."
I am very pleased to agree. I actually agree 110%.
The point of my objection to Hickey's comment is that many people seem to have the illusion that in a capitalist economy it is possible to find a sweet spot where the interests of capitalists and workers can both be served at the same time. The old story of we're all in this together.
That's behind the myth that capitalists cannot squeeze wages, because if they did, then a recession ensues and punishes the capitalists. It's a very comforting myth, but a myth just the same. They can and do squeeze wages, and no recession happens.
"Well, it's foolish in that no one should bet on injustice."
Capitalists care about their bottom line, only. There is no place for justice, maybe, at best, legality.
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The only thing I quibble is with this:
"Question 2: A but less obviously since there were declines during the Keynesian period too."
Which means that the right answer is B: "The share of wages on GDP falls both during and after the Keynesian period" :)
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As a side note: Malthus wrote his Essay as a polemic against William Godwin (a kind of proto-Anarchist and father of Mary Shelley, of Frankenstein fame). Godwin was asking for improvements in the workers' (and poor in general) living conditions. In the first version of the Essay (the one Keynes called "a work of youthful genius"), Malthus opposed Godwin on an a priori basis: improvements in the living conditions of the poor/workers would bring about a demographic explosion (there would be plagues, crime, violence, war). Therefore, the poor had to be left in squalor, for their own good (wink, wink).
Just like Hickey now, the objection then was that if the poor had no purchasing power, well, who would buy all the stuff? This was the time of the Industrial Revolution and output was pouring out of factories like crazy. There would be no demand for the goodies; the capitalists selling them would go broke.
Malthus replied that it doesn't really matter; even if the poor cannot contribute to effective demand, the extremely rich landowners of his time can. Just let them be. They buy and the capitalists don't lose. That's the basic point of the plutonomy thesis.
Keynes was aware of that (it was the whole point of Bernard de Mandeville's "Fable of the Bees", a favorite of Keynes), even if he, for political reasons, did not recommend it then (the Russian Revolution and all the failed revolutions in Europe after WWI were fresh in his memory). But the possibility is there, whether Keynesians like it or not. And there have been no recent Russian revolutions.
Malthus replied that it doesn't really matter; even if the poor cannot contribute to effective demand, the extremely rich landowners of his time can. Just let them be. They buy and the capitalists don't lose. That's the basic point of the plutonomy thesis.
Keynes was aware of that (it was the whole point of Bernard de Mandeville's "Fable of the Bees", a favorite of Keynes), even if he, for political reasons, did not recommend it then (the Russian Revolution and all the failed revolutions in Europe after WWI were fresh in his memory). But the possibility is there, whether Keynesians like it or not. And there have been no recent Russian revolutions.
The nature of capitalism involves a constant struggle between capital and labor over capital share versus labor share. Since the capitalist class more powerful than the working class given the way the system is configured in capitalism, which is why it is called capitalism, labor is at a disadvantage in this struggle.
However, there are limits to capital exerting dominance that result in either social unrest or repression. Capitalists use two strategies as the limit is approach. The first is distraction and, if need be, cooptation. The second is forceful repression either by directly ( Pinkerton) or through the agency of state security. Presently state security is as tight in capitalist countires as in the most repressive governments of the past, conveniently because "terrorism."
This the history of capitalism.
There are two ways to change this. One way is sudden revolution and termination of the capitalist class, and the other is gradual development, e.g., transitioning through a mixed system to one the places the economy at the service of the people rather than at the service of the capitalists, which would be some from of "socialism."
History shows that revolutions are messy and the outcome uncertain, and also that social, political and economic change only occurs slowly and non-linearly.
Different parties advocating change along one or the other of these lines.
The path the future will bring remains to be determined. Presently, while capitalism is dominant and entrenched, change is fomenting and elites in capitalist countries are digging in and doubling down. The concerning thing at this point is that under duress elites resort to war to change the subject. War clouds are gathering and there are already several hot wars under way, although "minor" other than for the people involved directly.
"History shows that revolutions are messy and the outcome uncertain, and also that social, political and economic change only occurs slowly and non-linearly.
True. But history also shows that the "gradual development" thing doesn't work, either.
That's why we are in the situation we are: labour rights gained over hundreds of years of struggle, lost; welfare state, all but gone; civil rights, bye bye.
Even the fabled Democratic New Deal is now rejected, by... Democrats, of all people.
Every single gain, partial, half-assed, timid, squalid as they were, gone.
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