Yesterday (November 29, 2021), the Australian Bureau of Statistics released the latest – Business Indicators – for the September-quarter 2021. This dataset provides quarterly estimates of private sector sales, wages, profits and inventories. It provides a means of viewing exactly what has gone wrong with the Australian economy over the last two decades as successive governments have failed to prioritise general well-being, and, have instead, acted as agents of capital. There is a massive imbalance in the capacity of workers and profit-recipients to access national income that is produced by the workers. Profits have been booming while wages growth has been low for a long time now. And if you thought the booming profits would be siphoned into productive investment to lift productivity and create the non-inflationary space for real wage increases, then you would be wrong. The massive lift in profits has gone into unjustifiable increases in executive pay, property booms and financial market speculation. None of the things that help lift national prosperity and well-being....Bill Mitchell – billy blog
Corporate profits boom in Australia undermines our capacity to national prosperity and well-being
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
http://bilbo.economicoutlook.net/blog/?p=48761
15 comments:
An alternative explanation for the decline in the labour share is the ‘superstar hypothesis’ (Autor et al 2017). This hypothesis states that lower labour shares within industries reflect the increasing dominance of a few large firms that produce a lot of output with relatively little labour. Any shift in economic activity towards these very productive firms could explain the observed decline in the share of income going to labour within industries.
Research using detailed firm-level data finds some evidence for higher business concentration in Australia (La Cava and Hambur 2018). Since the early 2000s, there has been a shift in economic activity towards large firms. This is true across a range of industries, but is most notable in the retail trade sector. The four largest retailers in Australia now account for around one-third of total industry sales. Statistical analysis suggests that higher business concentration across industries has lowered the aggregate labour share since the early 2000s.
source: Reserve Bank of Australia - The Labour and Capital Shares of Income in Australia
That used to be called 'oligopoly'.
Profit is supposed to compete towards zero.
"Profit is supposed to compete towards zero." Not when you can use the oligopic profits to buy government. There's the disconnect few see the logic in fixing.
Yo the big firms have to compete GLOBALLY … you guys are stuck on looking at this nationally…
@ Ahmed
Years ago, management guru Peter F. Drucker wrote on the future of corporations and management. Paraphrasing he predicted this would happen owing to advantages of size — capital intensity, economies of scale, technological innovation, and intellectual property rights, all of which create artificial scarcity that is built into contemporary markets, enabling rent extraction ("profits").
That RBA logic is faulty. And you don't need sophisticated math to see why. Elemental arithmetic works just fine.
Suppose an economy has ten workers.
Initially each worker works in a traditional occupation, earning the same wage. The combined payroll is, therefore, 10*Wage. To make the arithmetic easier, let's say Wage = $1. So original combined payroll is $10.
Facebook (or the Big 4 Banks, or whatever) appears and hires one of those workers. Being an extremely generous employer Facebook pays that guy, say, ten times as much as his old pay: $10. The combined payroll is now $19.
Payroll certainly increased (from $10 to $19), but that does not imply the share of labour increased.
Suppose the combined profits, because Facebook is so incredibly profitable, trebled. Profit originally was $5; now it's $15.
Original Share of Labour = $10/($10 + $5) = 0.67 (or 67%)
Original Share of Capital = 1 - Original Share of Labour = 0.33 (or 33%)
But New Share of Labour = $19/($19 + $15) = 56% and New Share of Profit = 44%.
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Noting that GDP = Wage + Profit, we can put all that another way.
Initially, GDP = $10 + $5 = $15. The new GDP is $34.
GDP, therefore, increased by 127% (=100*($34-$15)/$15). But Profit increased by 200%; while Wage increased by 90% only.
GDP growth is the weighted average of both rates of growth. If one (corresponding to Profit) is higher than the average, the other (corresponding to Wage) has to be lower. There is no way around.
And, if on top of a decreasing fraction of GDP, we have a skewed distribution of the wages, we find that 9 out of ten workers did not get a single cent more in their paychecks, while one lucky guy got a tenfold pay rise. :-)
I thought big firms were transnational?
Magpie,
I've been searching for the source of this quote, but this is the closest I've come, from this comment on Chris Dillow's blog:
Someone much wiser than me wrote that we need to kill the microeconomist that lives inside each of our heads.
The idea being that things that hold true at a micro level cannot hold true at the macro level, Keynes' Paradox of Thrift being an example of one. Bill Mitchell weighs in here:
The general reasoning failure that occurs when one tries to apply logic that might operate at a micro level to the macro level is called the fallacy of composition. In fact, it is what led to the establishment of macroeconomics as a separate discipline. As indicated, prior to the Great Depression, macroeconomics was thought of as an aggregation of microeconomics. The neo-classical economists (who are the precursors to the modern neo-liberals) didn’t understand the fallacy of composition trap and advocated spending cuts and wage cuts at the height of the Depression.
If we start with the income-expenditure identity:
National Income = National Expenditure
Profit + Wages = Investment + Consumption
If we assume Wages equal to Consumption for simplicity, we are left with Profit equal to Investment. That means that if someone tells you that Profits are up while Investment is down, then you have to ask how this can happen, because then you're arguing against an accounting identity.
Now, profits can also come from government deficit spending or private sector borrowing, but neither of these is sustainable in the long term. In the case of government, you end up with debt trap dynamics, and in the case of the private sector, there is a limit to which people can borrow or run down their savings.
That means that in the long run, Profit equals Investment, and has nothing to do with how the economic pie is sliced up. It's simply not possible for it to be otherwise.
re: a critique of Marxian economics
Marx said that surplus value, and by extension worker exploitation, occurred when the wage component of costs was the highest. Also, he was analyzing a monetary economy using M-C-M in his analysis.
If we again state the above equation:
Profit + Wages = Investment + Consumption
Then given an economy with workers at subsistence level, i.e., Consumption equal to Wages, and assuming an economy with no capital, and by extension no Investment, then Profit is equal to zero, this at the point where Marx said that profit would be the highest.
Incidentally, this is the Kalecki-Levy way of thinking of things, i.e., in the aggregate, companies cannot earn more than the wage bill they paid to their employees.
@Ahmed Fares (December 1, 2021 at 7:55 PM ),
Frankly, I couldn't find the relevance of your first comment (if someone else did, by all means, let me know).
Yes, there is microeconomics and then there is macro. Yes, there is the fallacy of composition. Yes, Keynes said many things. All of that is true.
But what is the relevance of that? Whatever else it might be, my tiny model is macro. Period. Full stop.
@Ahmed Fares (December 1, 2021 at 8:09 PM),
Marx said that surplus value, and by extension worker exploitation, occurred when the wage component of costs was the highest.
May I make a suggestion? You are fond of posting quotes with links. You, for example, did that just above on November 29, 2021 at 11:51 PM. Would you post a quote, with link, to where Marx said what you say he said?
Then given an economy with workers at subsistence level, i.e., Consumption equal to Wages, and assuming an economy with no capital, and by extension no Investment, then Profit is equal to zero, this at the point where Marx said that profit would be the highest.
Tell me, why on earth would I assume that in a capitalist economy there is no capital? Would I assume that guadrupeds have no legs, or have 6.854 legs, or whatever?
In Spain they have a saying. Translated into English it goes roughly like this: If we assume my grandmother had two wheels, then she would be a bicycle. I don't want to assume that. You, of course, are entirely free.
@Ahmed Fares,
After posting those two comments I realised I made a big, big mistake. It's time to eat humble pie and not compound the mistake. Instead of both of us arguing, you must argue with Bill Mitchell himself.
I am sure he will appreciate the invaluable insight the RBA paper provides. Moreover, you can explain to him that the assumption of a capitalist economy without capital follows the "Kalecki-Levy way of thinking of things". :-)
Magpie,
Whatever else it might be, my tiny model is macro. Period. Full stop.
In your simple economy with ten workers, the wage bill was $10. Suddenly, Facebook appears and pays one of those workers $10.
Question: Where did Facebook get that $10 to pay that worker?
Magpie,
Tell me, why on earth would I assume that in a capitalist economy there is no capital?
It's a simplifying assumption. If it bothers you, you can leave $1 of capital in the economy, so it's still a capitalist economy.
Magpie,
Marx said that surplus value, and by extension worker exploitation, occurred when the wage component of costs was the highest.
From Wikipedia:
The tendency of the rate of profit to fall (TRPF) is a theory in the crisis theory of political economy, according to which the rate of profit—the ratio of the profit to the amount of invested capital—decreases over time.
Geoffrey Hodgson stated that the theory of the TRPF "has been regarded, by most Marxists, as the backbone of revolutionary Marxism.
Now if, as suggested by Marxists and others, that the addition of more capital relative to labor causes the rate of profit to fall, then it stands to reason that less capital relative to labor would cause the rate of profit to rise.
But what happens is exactly the opposite of that.
There is no profit in a pure consumption economy. Start adding investment and profit begins to rise. The more investment, the more profit, as the accounting identity I quoted in an earlier comment shows. This is exactly the opposite of what Marxist argue with their falling rate of profit.
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