Profits from Production, Paper Profits, and Instability<\/p>\n
There has been a long running debate over \u201cproductive\u201d versus \u201cunproductive\u201d spending, which has been renewed in a recent concern with the transformation of the US economy to a \u201ccasino\u201d society in which speculative behavior has replaced \u201cproductive\u201d investment\u2026<\/p>\n
As Keynes argued, the sole goal of capitalist production from the perspective of capitalists is \u201cto end up with more money than it started with\u201d. When there are alternatives to production for earning profit, capitalists need not engage in production. Profits can be generated by capitalist purchases of producibles or nonproducibles\u2014capitalist spending on anything other than the wage bill in the consumption goods sector necessarily returns to capitalists as profit. {note this follows from the Kalecki equation\u2014I won\u2019t go into that in detail here.} Capitalist purchases of Rembrandts, real estate, or paper must also generate gross profits, and if these purchases represent net deficit spending they will increase aggregate profits. I will call profits resulting from purchases of nonproducibles \u201cpaper profits\u201d.<\/p>\n
Net deficits used to finance purchases of nonproducibles will lead to growth of capitalist income. There is nothing within the workings of the capitalist system that guarantees that credit is created only to finance production\u2026.[F]inancial innovations have continually expanded the types of activity that are deemed acceptable. Thus, in the current period, credit is freely extended to finance speculative booms in the prices of everything from real estate to stocks to foreign exchange futures.<\/p>\n
Credit created to finance purchases of nonproducibles can lead to a speculative boom of the prices of such assets. As long as new flows of spending are continuously entering the market for paper, prices of assets will continue to rise and reward speculation. As long as the boom continues, speculation generates income. However given that the boom can continue only as long as new spending on nonproducibles generates new income (rewarding the speculation by creating paper profit), it will come to an end as soon as spending stops rising. Every speculative boom will end, although the timing of the end is unpredictable. As soon as spending falls, prices and income fall.<\/p>\n
Although there are no automatic mechanisms to ensure that capitalist activity is directed toward production, the inherent instability of speculation drives capitalists back to the productive sphere in search of profits. The productive sphere is made more stable by the spending habits of workers. Workers must spend most of their income to acquire the necessities of life\u2014through the purchase, primarily, of producibles. Advertising and the propensities of conspicuous consumption and pecuniary emulation help to ensure that even if wages are in excess of the income required to satisfy biological necessities, workers still spend most wages on producibles. It is this consumption behavior of workers that \u201cgrounds\u201d capitalist economies by imparting stability to the production of consumer goods\u2026<\/p><\/blockquote>\n
Note here that as the wage share of national income has fallen on trend since the 1970s, the stabilizing force of worker consumption has been diminished. Indeed, workers had to make up for stagnant wages by borrowing, which added another dimension to the instability. All this is now well known, and is part of the secular stagnation argument recently brought into the limelight by Summers.<\/p>\n
Joan Robinson once asked what would happen if robots replaced labor. When the wage bill falls to zero, all capitalist spending will represent profit since costs of production will fall to zero. {Note here that this is because robots don\u2019t earn wages.} Capitalist spending on consumer goods would represent the only spending on consumption, and would generate an equivalent amount of profit income. Additional profit income would be generated by capitalist purchases of investment goods and by capitalist purchases of nonproducibles. Given the small scale of production of consumption goods, profits from capitalist consumption and capitalist purchases of investment goods would have to be small. Thus most profits would come from nonproducibles, and would fluctuate widely as a result of speculative activity. Without the stabilizing influence of worker consumption, this society would cycle between boom and bust due to \u201cwhirlwinds of optimism and pessimism\u201d. There is no reason to believe that capitalists would be better off if the wage bill could be reduced to zero, for their profits would have to come largely from speculation in a \u201ccasino\u201d society.<\/p><\/blockquote>\n
Well, there you go. This was 1991, folks. In the paper I go on to talk about the real world events of the 1980s that created our casino society, in which \u201csaving and speculation became the favored activities, while productive activity was scorned,\u201d where even \u201cretirees became adept players in financial markets, shifting their liquid wealth in search of the highest possible returns\u201d and \u201cprofessional money managers took control of pension funds, and computer-program-generated decisions could instantly cause a boom or bust in the price of an asset.\u201d<\/p>\n
Of course, all of this is related to our most recent Global Financial Collapse and as well to the newly-found recognition by Very Important People such as Summers and Krugman that we are in a phase of secular stagnation.<\/p>\n
Back in the early 1990s I used to joke that the solution to our problems would be to encourage speculation in Martian Ocean-front Condo Futures. We could bubble-up condo prices on Mars without screwing up our own economy.<\/p>\n
In hindsight, that looks like it would have been a far better policy than that pursued by Larry Summers\u2014which bubbled up our food and home prices, with the disastrous results we are still living through.<\/p>\n
But is there a better solution? Certainly!<\/p>\n
I\u2019ll be brief. We need to recognize that our workers of the future will be in the service sector, with far less than 1 percent of the workforce in manufacturing and perhaps a few percent in construction. Agricultural employment will remain low, although it could rise a little if the \u201cslow food\u201d movement continues to gain speed (so to speak). The rest must be in the service sector. Many of those will be in personal care: care of the young, the aged, and the sick. The entertainment sector will be much bigger\u2014we\u2019ll need a lot more clowns. I am hopeful that we\u2019ll downsize the FIRE sector, but who knows. Life-long education will preserve jobs in the education sector, even though the internet and teaching robots will take a lot of jobs.<\/p>\n
I also used to joke that all the jobs of the future will be in the three \u201cP\u201d sectors: Professorial, Prostitution, and Politics. Some might object that that is really only one or at most two distinct sectors.<\/p>\n
To ensure full employment we\u2019ll need the Job Guarantee. To ensure decent wages and sufficient demand for consumer goods produced by robots we\u2019ll need a generous wage and benefit package in the JG program (which of course forces all other employers to be generous, too).<\/p>\n
We\u2019ll need to reduce the work week. That brings on lots of problems\u2014how will we keep people occupied in their non-work, non-sleep hours? If we are to have anything approaching a good, democratic society, we cannot let them spend the extra hours in front of the TV, which has made today\u2019s generations far too stupid, selfish, and reactionary to self-govern.<\/p>\n
All of this was foreseen by John Maynard Keynes, of course, in his ruminations on the economic possibilities for his grandkids. He thought we would have reached that point long before 2013, but he was ahead of his time.<\/p>\n
There is still a sliver of hope that he will be proven correct. For more on that future, read How Much is Enough? Money and the Good Life<\/a><\/em> by Robert and Edward Skidelsky.<\/p>\n","protected":false},"excerpt":{"rendered":"Amazon\u2019s Jeff Bezos is all over the news with his statement that drones will sooner or later be delivering packages to your home. Predictably, this has generated two types of buzz: what about the inevitable mishaps, and what about the poor displaced UPS workers? For me, the first is a wee bit scary. Of course, […]<\/p>\n","protected":false},"author":208,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[817,819,341,239,818],"class_list":["post-10071","post","type-post","status-publish","format-standard","hentry","category-employment","tag-automation","tag-drones","tag-joan-robinson","tag-job-guarantee","tag-secular-stagnation"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10071","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/users\/208"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/comments?post=10071"}],"version-history":[{"count":5,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10071\/revisions"}],"predecessor-version":[{"id":10116,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/posts\/10071\/revisions\/10116"}],"wp:attachment":[{"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/media?parent=10071"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/categories?post=10071"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.bard.edu\/multiplier-effect\/wp-json\/wp\/v2\/tags?post=10071"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}