Profit Share

Two Marxian economists look at rate of profit and profit share in the current context.

Stumbling and Mumbling
What's behind the rising US profit share
Chris Dillow | Investors Chronicle

Michael Roberts Blog
Trump’s profits bonanza
Michael Roberts

ProMarket — The Rise of Market Power and the Decline of Labor’s Share

The two standard explanations for why labor’s share of output has fallen by 10 percent over the past 30 years are globalization (American workers are losing out to their counterparts in places like China and India) and automation (American workers are losing out to robots). Last year, however, a highly-cited Stigler Center paper by Simcha Barkai offered another explanation: an increase in markups. The capital share of GDP, which includes what companies spend on equipment like robots, is also declining, he found. What has gone up, significantly, is the profit share, with profits rising more than sixfold: from 2.2 percent of GDP in 1984 to 15.7 percent in 2014. This, Barkai argued, is the result of higher markups, with the trend being more pronounced in industries that experienced large increases in concentration.

A new paper by Jan De Loecker (of KU Leuven and Princeton University) and Jan Eeckhout (of the Barcelona Graduate School of Economics UPF and University College London) echoes these results, arguing that the decline of both the labor and capital shares, as well as the decline in low-skilled wages and other economic trends, have been aided by a significant increase in markups and market power....

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
The Rise of Market Power and the Decline of Labor’s Share
Asher Schechter

Luigi Zingales — Who Is Responsible for a Declining Labor Share of Output?

Most researchers assume that the share of total output lost by labor went to the owners of capital. However, a new working paper shows that the capital share has also declined, while the profit share has gone up. Could this be related to an increase in firms’ market power?

Profit = surplus value = economic rent. Economic rent arises from market power.

My hypothesis is that markups have increased because firms became better at creating product differentiation and erecting barriers to entry. In 1980 Michael Porter wrote Competitive Strategy, the ninth most influential book of the 20th century according to the Academy of Management. In this book, Porter explained how firms can create barriers to entry and obstacles to competition to increase their pricing power. The book became the primary textbook of all of the strategy courses taught in business schools and the gospel of the leading consulting firms. It captured also Warren Buffet’s investment rule. As he famously stated: “In business, I look for economic castles protected by unbreachable ‘moats’.” Should we then be surprised if firms finally learned how to apply it?
If this were the case, Barkai’s model clearly shows that the outcome is inefficient: economic output and welfare could be greater if there were more competition. But how to promote it? The traditional antitrust method, which looks predominantly at mergers and market shares, could be insufficient. If Barkai’s conclusions prove to be robust, we may need to start thinking about new policies to promote competition.

The standard (neoclassical) economic model is based on no asymmetry including perfect competition.

The entrepreneurial and market share business models are based on monopoly power.

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
Who Is Responsible for a Declining Labor Share of Output?
Luigi Zingales —Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance, and Charles M. Harper Faculty Fellow

James Petras — Pillage and Class Polarization: The Rise of “Criminal Capitalism”

Is criminal capitalism a step up or a step down from crony capitalism. Obviously, for these people it's been a step up.

With the longest work day, US workers score lower on the ‘living well’ scale than most western European workers. Moreover, despite those long workdays US employees receive the shortest paid holidays or vacation time (one to two weeks compared to the average of five weeks in Western Europe). US employees pay for the costliest health plans and their children face the highest university fees among the 34 countries in the Organization for Economic Cooperation and Development (OECD).

In class terms, US employees face the greatest jump in income inequalities over the past decade, the longest period of wage and salary decline or stagnation (1970 to 2014) and the greatest collapse of private sector union membership, from 30% in 1950 down to 8% in 2014.

On the other hand, profits, as a percentage of national income, have increased significantly. The share of income and profits going to the financial sector, especially the banks and investment houses, has increased at a faster rate than any other sector of the US economy.

There are two polar opposite trends: Employees working longer hours, with costlier services and declining living standards while finance capitalists enjoy rapidly rising profits and incomes.

Paradoxically, these trends are not directly based on greater ‘workplace exploitation’ in the US.

The historic employee-finance capitalist polarization is the direct result of the grand success of the trillion dollar financial swindles, the tax payer-funded trillion dollar Federal bailouts of the crooked bankers, and the illegal bank manipulation of interest rates. These uncorrected and unpunished crimes have driven up the costs of living and producing for employees and their employers.

Financial ‘rents’ (the bankers and brokers are ‘rentiers’ in this economy) drive up the costs of production for non-financial capital (manufacturing). Non-financial capitalists resort to reducing wages, cutting benefits and extending working hours for their employees, in order to maintain their own profits.

In other words, pervasive, enduring and systematic large-scale financial criminality is a major reason why US employees are working longer and receiving less– the ‘trickle down’ effect of mega-swindles committed by finance capital....

Sounds like Michael Hudson.

James Petras Website
Pillage and Class Polarization: The Rise of “Criminal Capitalism”
James Petras | Professor (Emeritus) of Sociology at Binghamton University in Binghamton, New York and adjunct professor at Saint Mary's University, Halifax, Nova Scotia

Henry Blodget — Sorry, but it's not a 'law of capitalism' that you pay people as little as possible — it's an excuse

It is not a law that they pay their employees as little as possible. 

It's a choice.

It's a choice made by senior managers and owners who want to keep the highest possible percentage of a company's wealth for themselves.

It's a choice that reveals that, regardless of what they say about how much they value their employees, regardless of what euphemism they use to describe their employees ("associate," "partner," "representative," "team-member"), they, in fact, don't really care.

These senior managers and owners, after all, are taking home record profits and earnings while choosing to pay their employees so little in many cases that the employees have to live in poverty.

It is no mystery why America's senior managers and owners describe the decision to pay employees as little as possible as a "law of capitalism." Because this masks the fact that they are making a selfish choice.

But that's exactly what they're doing.

If we want to get our economy humming again, we need to remember that the economy is an ecosystem and that healthy ecosystems are balanced. We need to encourage our companies to maximize value, not profit. And we need to encourage great companies and managers to serve three important constituencies — customers, owners, and employees — instead of just one.

Sorry, but you are wrong about this. Capitalism is based on competition and the way that competition works is that efficiency prevails.

The only way to correct excessive efficiency that harms effectiveness is through public action that forces all firms to observe certain standards. It's what commercial law is about for instance. Some Libertarians that laws are unnecessary unless aggression against person or property is involved, arguing that the market is the ultimate corrective. That's just nonsense, as everyone with any experience knows. Markets don't automatically correct.

Competition based on efficiency results in a race to the bottom. This is supposedly beneficial economically in that everyone gets the lowest price and firms eventually compete profit away. There is no evidence for that being true in a modern monetary economy.

Evidence shows that firms will cut the wage bill as much as possible to compete against other firms. It's not a matter of sharing profit or anything of that sort. The market works to ensure that all firms act efficiently and those that don't eventually fail.

Without minimum wage laws and increasing the bargaining power of labor through collective bargaining, enforcing standards for imported goods, and the like, then firms will not do this on their own because competition.

That's the beauty of the market and why markets don't work, too, unless they are managed by voluntary association or by government. While there has been a certain amount of voluntary standard setting in industries, unless there are some enforcement of standards a few firms can free ride and some will. This is why law and regulation are needed to correct the insufficiency of markets.

Business Insider
Sorry, but it's not a 'law of capitalism' that you pay people as little as possible — it's an excuse

Henry Blodget

Mark Thoma — Full Employment Alone Won’t Solve Problem of Stagnating Wages

I fear this trust that market forces will eventually raise wages will lead to disappointment. Inequality has been increasing for over three decades, and during that time we have been at or near full employment many times. Yet, wages over this time period have been flat. As noted by the Economic Policy Institute, “Since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth.” The idea that market forces alone will increase wages sufficiently to offset increasing inequality is not supported by the evidence from these years. There’s more to the story than market forces.…

Until workers recover the bargaining power they lost with the decline of unions and the rise of globalization, it’s hard to imagine a reversal of the forces pushing us toward stagnating wages and ever higher inequality. It’s not market forces alone that are determining the split of income between those at the top of the income distribution and those below, it’s also the institutions that determine who holds the cards in negotiations over wages. Presently workers are not faring well.

To me, what we are seeing is reminiscent of the “Just Price Doctrine” popularized by St. Thomas Aquinas in the Middle Ages. According to this view, “The just wage meant that rate of remuneration which was required to enable the worker to live decently in the station of life in which he was placed; and thus, if one may so express it, such a wage, representing reasonable decency, was made a first charge on industry.”…

Solving the problem of lack of bargaining power that puts workers at the mercy of the “decency” of those they negotiate with is not easy. The ability of traditional unions to negotiate over wages has been undercut by globalization, technology, and the threat of offshoring, though unions – to the extent they still exist – do retain some value as a source of political power.

But one thing is clear. So long as we continue to believe that market forces and the attainment of full employment will solve the problem of stagnating wages and rising inequality, so long as we fail to recognize that workers need a level playing field when bargaining over wages, inequality will continue to be a problem.

Especially when one of the chief "contradiction of capitalism" is asymmetry of capital/profit share and labor/wage share. See Michal Kalecki, "Political Aspects of Full Employment".

"The rent is too damn high."

Distributional issues will be difficult if not impossible to address effectively without reference to economic rent and rent-seeking, and how the ability to extract rent arises from power and class. This undercuts the mainstream rationale of distribution based on marginal productivity and just deserts, which is why it is marginalized as "Marxist" and off the table for discussion in mainstream economics. So far heterodox economists other than Marxists and Marxians have been reticent to pick it up. However, it is a principle reason behind market "imperfection" being endemic and market failure being recurrent, something that mainstream economists have not be able to address successfully without taking rent into account.

The Fiscal Times
Full Employment Alone Won’t Solve Problem of Stagnating Wages
Mark Thoma | Professor of Economics, University of Oregon

Henry Blodget — Sorry, But There's No 'Law Of Capitalism' That You Have To Pay Employees As Little As Possible

Sorry, Mr. Blodget, but it is a law of capitalism. It is the fatal flaw of capitalism along with the tendency of capital, both real and financial, to concentrate. It's called market efficiency. This is the way markets work left to themselves. This is what happens when economists ignore the effects of power, as Marx observed. 

Competition results in Pareto optimality, where no one can be made better off without making someone else worse off. Redistribution makes a few less well off in order to make everyone else better off, and that's why plutocratic oligarchy uses its power to prevent this from happening institutionally. 

Business Insider

Sorry, But There's No 'Law Of Capitalism' That You Have To Pay Employees As Little As Possible

Henry Blodget

Mark Buchanan — A picture makes it clear: the recession IS over

But — Not that many people will know it for quite some time.

Inequality.

The Physics of Finance

A picture makes it clear: the recession IS over

Mark Buchanan

Brian Romanchuk — Inequality In Savings Drives Wealth Inequality

Paul Krugman discusses the dynamics of wealth inequality in a recent blog: Notes on Piketty (Wonkish).... In it, he uses the standard Solow model to explain rising inequality. Although I do not have a formal model, my reading of a stock-flow consistent models implies that his analysis is not quite correct. The driving force behind wealth inequality is the differential in savings amongst households, and with a second order effect being that larger portfolios may have greater returns on their assets.

Bond Economics
Inequality In Savings Drives Wealth Inequality
Brian Romanchuk

It's the distribution.

Henry Blodget — Why The Economy Sucks: Because American Companies And Their Owners Are Greedier Now Than At Any Time In History

If corporations and shareholders are making such gargantuan piles of money, why is the economy so crappy?

The answer is that one company's employees are other company's customers. Americans save almost nothing, so every dollar your employees earn in wages gets spent on other companies' products and services (including, in some cases, yours). The less American companies pay their workers, the less American consumers have to spend. And the less American consumers have to spend, the worse the economy is.

This isn't a complex concept. We're all in this together.
There's also no "law of capitalism" that says that companies have to pay their employees as little as possible or "maximize profits" to please their owners. That's just a story that the owners made up to justify taking as much of the company's wealth as possible for themselves.

And the longer American corporations and shareholders insist on taking an ever-greater share of the country's wealth for themselves, instead of sharing it with the people who create it (employees), the longer our economy will suffer....

In short, the main reason our economy is still weak is that our obsession with "maximizing profits" is creating a country of a few million overlords and 300+ million serfs.

Business Insider

Why The Economy Sucks: Because American Companies And Their Owners Are Greedier Now Than At Any Time In History

Henry Blodget

Yep, neoliberalism sucks.

Sorry, Neoliberals: Inequality Is Driven by Greed, Not Technology

A new study shows low wages are really caused by low minimum wage, weakened unions and the effects of globalization....

As Eugene Debs said, “the class which has the power to rob upon a large scale has also the power to control the government and legalize their robbery.” 

AlterNet

Sorry, Neoliberals: Inequality Is Driven by Greed, Not Technology
Sean McElwee | Salon

Chris Dillow — The Wage Problem

My chart shows wage and profit shares since quarterly data began in 1955.It shows that the wage share - the proportion of national income going to the many - is now around its post-2000 average. Polly's right to say that the wage share fell "long before the crash". But it did so between 1975 and 1997. It's the profit share that is unusually low by recent standards, not the wage share [in the UK]....

The most obvious solution is the wage crisis isn't to shift the share of incomes - I share Hopi's scepticism about micro-interventions - but simply to increase the demand for labour through macroeconomic policy. Sadly, though, with monetary policy of dubious efficacy, looser fiscal policy ruled out - because it just is, all right? - and jobs guarantees used to harass the jobless rather than to provide an employer of last resort, such policies probably won't be equal to the scale of the task.

Stumbling and Mumbling
The Wage Problem

Chris Dillow | Investors Chronicle (UK)

Richard Wolff — Nothing’s changed: Both political parties aim to protect and reinforce the capitalist system

The economic aim of both major US political parties is, in the end, the same: to protect and reinforce the capitalist system.

The Republican party does so chiefly by means of a systematic, unremitting demonization of the government. They blame it for whatever ails the capitalist economy. If unemployment grows, they point to government policies and actions, and attack particular politicians for what they did or did not do to stimulate the economy, directing criticism away from the employers who actually deprive workers of their jobs.

Republican solutions for capitalism’s ills always involve reducing the government’s demands on private capitalists – lower their taxes, deregulate their activities, and privatize government production of goods and services. Their program for the future is always: free the private capitalist system from government intervention, and you will get “prosperity” and growth.

The Democrats protect and reproduce the system by assigning to the government the task of minimizing the problems that beset capitalism. So, for example, they want the business cycles that are an inherent affliction of capitalism to be foreseen, planned for, minimized and overcome by government intervention. This is the underlying purpose of Keynesian economics and the monetary and fiscal policies it generates.

Beyond cycles, capitalism’s more long-term problems, such as tendencies to produce greatinequalities of income and accumulated wealth, lead Democrats to propose very modest government redistribution programs. Minimum wages, progressive tax structures, food, housing and other subsidies, and freely-distributed public services exemplify Democrats’ Bandaids meant to protect capitalism from its own potentially self-destructive tendencies...

The Raw Story
Nothing’s changed: Both political parties aim to protect and reinforce the capitalist system
Richard Wolff, The Guardian

When capital is institutionally favored over other key factors, labor and the environment, then a power structure and a privileged class results whose objective is not efficiency of capital but rather expansion of class privilege evinced as power and wealth. This results in social, political and economic distortion and systemic dysfunction at the expense of the other factors, labor and the environment.

Chris Dillow — The Capitalist State

In bemoaning the coalition's lack of evidence-based policy, Simon Wren-Lewis inadvertently draws our attention to a difference between centrists and Marxists.

We Marxists are not surprised that policy-making should be uninformed by reason, simply because the function of the state is not so much to act as a Platonic philosopher-king disinterestedly aiming to maximize a social welfare function, but rather to advance the interests of capital.....

In these senses, it could be that this government is - in effect - unThatcherite, insofar as it is not promoting the interests of the rich as well as she did.

Herein, though, lies a rather embarrassing question for us Marxists. If we concede that this is the case, what does it tell us? Does it tell us the coalition is so stupid that it's not acting even in capitalists' interests, let alone the public's? Or does it instead tell us that the (cruder) Marxian conceptions of the state are mistaken, and that the state doesn't always promote capitalists' interests? I walk away muttering about the relative autonomy of the state.

Stumbling and Mumbling
The Capitalist State
Chris Dillow | Investors Chronicle (UK)

I think the answer lies in austerity being a long-term strategy, as is liquidation of malinvestment. Yes, the wealthy lose for a time, but imposition of austerity as economic policy shakes out weaker hands and consolidates capital in strong hands for future expansion. The longer it lasts the greater the consolidation upward and the more inequality rises.

Dirk Ehnts — If wages are falling, who buys the products?

From the perspective of a single business it makes perfect sense to lower wages to zero if it can be done keeping all things constant. However, there will be less demand from workers and maybe more demand from capital owners and entrepreneurs. Since they save a large share of their income the net effect is very likely a fall in income and this means that the whole idea of lowering the labour share is pretty much self-defeating. If it only were so easy.

econoblog101
If wages are falling, who buys the products?
Dirk Ehnts | Berlin School for Economics and Law

C.P. Chandrasekhar and Jayati Ghosh — Do wage shares have to fall with globalisation?

So the conclusion must be that — while globalisation certainly unleashes forces that reduce labour’s relative power and tends to reduce labour shares of national income — this outcome is not inevitable. It can be countered by progressive economic policies that work actively to shift both the growth strategy and current public fiscal policies in favour of workers (including both wage workers and the self-employed). In a world in which economic inequalities are becoming a matter of increasing political concern, this lesson is absolutely critical.

The Hindu — Business Line
Do wage shares have to fall with globalisation?
C.P. Chandrasekhar, Professor of Economics, Jawaharlal Nehru University, New Delhi and Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi
(h/t Yves Smith at Naked Captialism)

See also
Naked Capitalism
C.P. Chandrasekhar and Jayati Ghosh: The Great Jobs Disaster
C.P. Chandrasekhar, Professor of Economics, Jawaharlal Nehru University, New Delhi and Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi

David Beckworth — A Paradox of Flexibility or Central Bank Incompetence?

Of course, Professor Beckworth, being an obedient neoliberal, doesn't meet the Keynesian objection concerning where the effective demand is going to come from either to purchase increasing supply or to send a signal to suppliers to produce more, and he doesn't give any indication that he is even familiar with the Keynesian argument, not realizing that New Keynesians are not actual Keynesians at all, but neoclassical economists at bottom, just as Samuelson was.

Beckworth is just "monetary policy, monetary policy, monetary policy." How is that monetary policy working for you these days? Oh right, the Fed is not targeting NGDP.

Market monetarists like Beckworth don't understand money, the relevance of accounting and finance to economics, or stock-flow consistency macro modeling. Have they even perused Godley and Lavoie, for example?

The kicker, however, is that real wages have been falling over the last couple of years, not rising. Oh right, they are not falling fast enough. I see. How about wage stagnation over the last thirty years and an inverse relationship between labor share and profit share. Oh right, not enough, even though inequality of income and wealth and the Gini coefficient of the US the highest of developed countries.

Oh, and did I mention that corporate profits have been rising since the Great Recession? Yeah, those corporations are really being squeezed by wage rigidity, it seems. NOT.

What neoclassical economists dont' see is that there is a tradeoff between wage flexibility and unemployment. Employers generally use both. They cull their work force and also do their best to reduce wages to control costs. But their best strategy is let the least productive workers go and continue to pay productive workers well so that they don't lose them to higher competitive bids, so that their workforce decline competitively.

Economists should be required to work in business for a few years before going to grad school to learn how business actually operates. Sorry, guys, it's more nuanced than you think.

Did I forget anything? After all I am not an economist.

Macro and Other Musings
A Paradox of Flexibility or Central Bank Incompetence?

David Beckworth | Assistant Professor of Economics at Texas State University in San Marcos, Texas

Robert Oak — Productivity & Costs for Q1 2013 Shows Biggest Wage Decline on Record

The Q1 2013 Productivity & Costs revision shows labor productivity increased an annualized 0.5%. Output increased 2.1% and hours worked increased 1.6%. Hourly compensation dropped -3.8% in Q1 2013. This is the largest quarterly decline for wages in history. Between the numbers lies even more bad news for workers. Labor is simply getting squeezed to death as workers created more while being paid less.

The Economic Populist
Productivity & Costs for Q1 2013 Shows Biggest Wage Decline on Record
Robert Oak

Mark Gongloff — U.S. Suffers Biggest Pay Drop On Record, As Workers Squeezed Tighter

The economic "recovery" just keeps getting worse for the average worker: U.S. employers squeezed their employees even harder than usual in the first quarter, leading to the biggest drop in hourly pay on record

Hourly pay for nonfarm workers fell at a 3.8 percent annualized rate in the first quarter, the Bureau of Labor Statistics reported on Wednesday. This was the biggest quarterly decline since the BLS started keeping track in 1947. Some of the drop was payback for a 9.9 percent surge in hourly pay in the fourth quarter of 2012, as employers shoveled money out the door to avoid tax changes they expected to take place in 2013.

But there have been plenty of such quarterly pay increases in the past. Many were even bigger. Some went on for several quarters at a time. And never has there been such a steep pay drop in response as there was in the first quarter of this year.
Smoothing out the quarterly ups and downs doesn't make the picture look any better....

The Huffington Post
U.S. Suffers Biggest Pay Drop On Record, As Workers Squeezed Tighter
Mark Gongloff

Interesting article on Costco in this regard. They are bucking the trend. Why? For one thing, the CEO is willing to tell Wall Street to take a hike.

Bloomberg Businessweek
Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World
Brad Stone

Timothy Taylor — Labor's Falling Share, Everywhere

Labor's falling share means that the "job creators" share has been increasing, as the record of rising inequality shows. So where are the jobs, "job creators"?

Neoliberalism at work, undercutting bargaining power of labor, coupled with the failure to understand Keynesian economics — "It's the demand, stupid."

Conversable Economist
Labor's Falling Share, Everywhere
Timothy Taylor | Managing editor of the Journal of Economic Perspective