Commentary on Political Economy

Thursday 30 June 2011

The Output Gap - Capital As A Barrier To Capital

Reportjoseph belbruno | May 9 5:33am | | Options"As we document in this paper, the close relationship between output growth as measured
by real GDP and employment generation that characterized the U.S. economy over the
two decades after World War II has been weakening since the mid 1980s."
I open the Basu-Foley paper linked above by Davies, and I find this "revelation" (what in reality ought to be an "open secret") right in the Introduction. In the conflict between two "laws" (that are not "laws" in any physical sense, but only observable statistical regularities in the capitalist economy), we witness a "loosening" of Okun's Law, particularly the "gap" between decline in employment and "potential output", whilst we see a greater "seizure" or "biting" of the Verdoorn-Kaldor Law tracking the stochastic link between productivity and output.

I say that this ought to be an "open secret" because what we are experiencing, in a nutshell, is consistent both with a "jobless recovery" and a "creditless recovery" - due to the fact that since the mid-1980s, under the massive weight of "globalisation", multinational corporations have been able to increase productivity and shed workers at a proportionately higher rate than small-to-medium enterprises (SMEs), whilst increasing their "degree of monopoly" in Western economies through self-financed mergers and acquisitions as soon as share prices showed signs of recovery from cyclical recessions.
So while unemployment remains stubbornly high in Western capitalist economies, profitability recovers much more rapidly. But here lies the problem or problems. First, the proportion of "transfer payments" in the US has "doubled" (!) since the 1970s. Worse still, that "profitability" is earned from production and sales that rely increasingly on "emerging markets" - that is, far from the capitalist "metropolitan centres" - and, within the "metropoles", with growing "tensions" between the "local" bourgeoisies, namely the US on one side and Germany and Japan on the other.

Here I wish to highlight (cryptically) two sources of "tension" for the wage relation (on which capitalism is founded): First, the "link" between what can be termed "productive" and "unproductive" labour and "profitability" is "slipping" or "loosening" because the "political" bond of the wage relation is also slipping. Second, this process is "exasperating" the very process of "globalisation", and particularly the ability of "multinationals" to protect and preserve the political stability of the wage relation in "emerging countries" that grow worryingly more "distant" in all senses from the "metropole"! (Cf this Ft story on multinational banks: ).         

I will seek to expand on this as we go. A rapid perusal of my posts on this Blog and at Economists' Forum and, earlier, at Martin Wolf's Forum will show that this has been a "pet" project of mine for some time.
Incidentally, Basu and Foley quite appropriately include the "Marxian" narrative in their study (replete with citations of Bob Rowthorn, my erstwhile supervisor). But it is these "categories" that we have in our sights....

I just wished to highlight a few themes or "threads" that ought to be woven together. The first is the relationship of Okun's Law and the Verdoorn-Kaldor Law that I commented upon (with appropriate links) in the previous Davies Blog. Very broadly, if we combine the two "laws" (in reality they are only stochastic regularities or relationships), we will see that whilst the relationship between employment and growth has "loosened" in the sense that more growth does not mean more employment ("jobless recovery"), also the increased "productivity" in certain sectors (manufacturing, selected services) has maintained profitability for enterprises overall while, at the same time, the swelling of the finance sector has compounded the skewed distribution of income and, at the same time, distorted the definition of "output" - meaning that capitalist firms have been paying themselves out of normally "unproductive labour" in financial services.

The upshot is that relatively lower employment levels have sustained higher profits and the skewed distribution of income toward multinational firms that have shed more workers "in the metropole" whilst benefiting from the financial crisis and the "creditless recovery" to expand their "degree of monopoly" - hence the references to the "kinked demand curve" of Hall & Hitch and Sweezy. It ought to be considered that the aim of capitalist enterprise was never "to maximise profits". Given that "profit" can be realised if and only if its monetary expression has any "political meaning" in terms of the wage relation, it is obvious that capitalist firms will seek "to control" or "captivate" the so-called "market", rather than pursue an abstract "maximisation of profit". When firms invest, "profit" is only one consideration: the "viability" in the long term of that "profit" is a far more important determinant. In other words, the question firms ask is: - what "degree of control or 'monopoly'" will a given pricing strategy give us in and over a certain "market" (remember that this notion of "market" is a fable worthy of Aesop - that of "competition" is more complex because there are definitely inter-capitalist rivalries that have to be considered within the overall need to maintain the wage relation).

There are then several important "developments" that arise from these studies over the growing "thin-ness" or "brittle-ness" of capitalist enterprise in Western nation-states. One is the progressive "distancing" of multinationals from their "metropoles" as they venture further afield into "emerging markets" that grow more dangerous each passing day both politically and financially. I mentioned this point in the previous Davies Blog and (would you believe?) the next day this article appeared in the FT discussing my very point

Next, there is the whole matter of "financial repression", something on which I have been insisting even on this Blog for a while (capitalists have "nowhere to go") - another problem afflicting multinationals in terms of where they can park liquidity (even if banks do it for them). Gillian Tett comments in today's FT on this theme and links a fresh study by Carmen Reinhart (prolific this lady!) on "The Liquidation of Government Debt" here ever there was a contra-diction, it is Reinhart arguing (with Rogoff) that "this time is NOT different", and then doing a study showing exactly how governments get out of the bind! Finally, (is this lightening speed or what?) there is the entire impact on global capitalism of how finance has got out of hand and now poses an evident threat to the "manageability" of the entire system (more work for Bernanke there). Here is the all-important paper discussing the issue by Schularik and Taylor are all matters that will occupy the last chapter or two of my work. Kindest regards to all.

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