Commentary on Political Economy

Friday 19 August 2011

From "Gap" To "Fracture" - Discussion of Okun's Law and Verdoorn-Kaldor Law

| 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....

Unfortunately the large work I am writing (called "Krisis", an exegesis of capitalism which covers both the economics as well as the philosophy of this mode of production) is taking a lot of my time now. 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, 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.
PS: Just one quick observation about that Schularick and Taylor paper (the last one I linked). The all-important graphs to look at there are Figures 2 and 4 - which will tell you that the proportion of loans to broad money has shot up to the sky in recent decades, and (Fig4) will tell you that banks hold a declining proportion of assets in government securities (which means that central banks have great difficulty in "overseeing" "private" credit).
Now, just read through this beauty from this article at pp. 16 and 17:

"Why are output losses so large today despite more activist policies? Some other forces
might be at work here. Governments have made more efforts since the 1930s to prevent negative
feedback loops in the economy and have sought to cushion the real and nominal impact of
financial crises through policy activism. But at the same time the financial sector has grown and
[17] increased leverage, expanding the size of the threat even as the policy defences have been
strengthened. As a result the shocks hitting the financial sector might now have a potentially
larger impact on the real economy, absent the policy response."

And if you join all these dots together, they tell one thing: the role of "finance" has expanded because the role of "government" has expanded - because capitalist governments need to "control growth" for political reasons . But as a result of the need for this greater "control of growth" we have seen capital seek to evade the corresponding government "growth of control" by means of greater financial autonomy (credit booms, and busts!). The result, as you can see, is much greater "financial fragility".

The upshot? The upshot is that the forces of reform are winning. The only solution is (by force of things - vi rerum)...greater participatory democracy. (Incidentally, Martin Wolf's Column today on EU sovereign debt illustrates this point beautifully - I link it for my own records ). Cheers to all!

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