From: glevy@PRATT.EDU
Date: Fri Feb 11 2005 - 08:35:14 EST
----------------------- Original Message ---------------------------- Subject: [OPE-L] profits From: "Jurriaan Bendien" <andromeda246@hetnet.nl> Date: Fri, February 11, 2005 6:47 am --------------------------------------------------------------------- It's probably true that the profit-share in national income is rising in the G7 (an increase in S/V), but one ought to inquire how "national income" is defined in the calculation. A much more significant trend is the increase in income from property, as against income from labor. GDP, GNI and personal income measures typically exclude capital gains (capitalisation on property ownership) as well as some net interest and profit receipts, in the case of GDP & GNI precisely because those receipts fall outside the defined sphere of "production" (i.e. are not regarded conceptually as "factor income"). As I noted in previous posts, capital gains are very substantial, and underestimated in tax data, because these data measure only capital gains actually realised from asset sales, and identified for tax purposes. As yet unrealised capital gains (in particular, residential assets), and capital transferred to avoid tax, are left out of account. Moreover if we examine which sectors account for most the the increase in the total profit volume, they are basically the FIRE sector (finance & banking, insurance, business & management services, real estate) while the industrial profit rates have not increased significantly, given structural excess capacity and stagnating consumer demand. Obviously if the profits/wages ratio increases to the advantage of profits while real net output stays basically the same, final consumption demand will stagnate. A much more interesting question I think concerns the reinvestment of realised profits which Kalecki refers to - what proportion is reinvested, and in what sectors? In this regard, it is worthwhile to look at non-residential gross fixed capital formation (net additions to non-residential fixed assets, unadjusted for depreciation). And basically investment in industrial structures, plant & equipment is also stagnating or falling, important exceptions being computer equipment, mining and electricity generation (see e.g. NIPA tables section 5). If we look at the composition of the total realised surplus-value, an increasing component consists of interest receipts, rentier profits and profit on asset sales. In 2001 US IRS data, if you sum together the pre-tax corporate profits of finance & insurance corporations, real estate/rental/leasing corporations, and so-called "holding companies", you can conclude that these corporations appropriated nearly 60% of all pre-tax corporate profits declared for IRS purposes. After 2000, the volume of capital gains was basically halved, and from 2004 economic data show a small lift in real fixed investment. However this increase in real fixed investment is not proportional to the corresponding profit volumes. From the beginning of the long recession, workers were told they must be content with low or zero wage increases and longer hours, so that new investments would become possible, that would create more jobs. But if we look at the actual pattern of the reinvestment of realised profit income, this argument is simply not credible. It is therefore unsurprising that the rhetoric shifts to the idea that low wages are necessary to stay in business, and beat the competition. But what is this competition really about? In most economic sectors nowadays, a few giant corporations dominate production and markets. If anything, the "competition" is for a stagnating mass consumption demand. Thereby the argument, as true Keynesians would be quick to point out, culminates in absurdity - because falling disposable labor income reduces effective demand for industrial output, labor income must fall further, to offset this fall. The basic problem for Keynesian theory though is that you cannot force private investors to invest where they don't want to invest, nor, ultimately, prevent them from investing where they do want to invest. There is a carrot maybe, but no stick. Total investment is not simply investment in inventories and productive fixed assets; it also includes financial assets and non-productive fixed assets. If ordinary consumer demand stagnates, investment will re-orient to speculation, luxury durables and property, military expenditure and foreign placements. Additionally, Keynesian policy was based on a national framework where state intervention aimed to stimulate job-creating investment. But in a deregulated economy, creating a good "investment climate" is no longer necessarily compatible with what is good for the national economy; the international investor looks at comparative costs and financial benefits internationally. Therefore, the competition to reduce labor-costs also plays itself out internationally. The only thing that can slow this process is protectionism and increasing the bargaining power of labor. All the trends visible today were also visible in the run-up to the Great Depression of the 1930s. But a big difference today is that at least in the USA, Europe, Japan and Australasia, the average asset holding per head of population is vastly larger, the proportion of income from property as against income from labor is vastly larger, and the ability to obtain credit is much greater. Simply put, there is far more asset wealth that can be distributed and redistributed, and that asset wealth also attracts a greater flow of income from the periphery. Consequently, excess capacity and stagnating fixed investment in production have less immediate and severe consequences than they had 80 years ago. Even so, a sudden fall in the value of strategic financial assets could cause a chain reaction of business failures, resulting in negative real growth and accelerating unemployment. Jurriaan
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