Tuesday, 10 December 2013

I read it as far as the first glaring error. And then as far as the next one.

Some economics "professor" in City AM Forum:

MY NEXT Gresham professorial lecture has the provocative title "Was Karl Marx always wrong?", but those wanting a detailed dissection of Marxism should stay away.

Rather, I used this to highlight one of the important phenomena of our times – the falling share of labour incomes of GDP. The fall has meant a growing share of national income going to capital.

And the rising share going to capital, coupled with falling yields as the Chinese savings glut starts to hit the world economy, has underpinned the global bull market for equities that has lasted for nearly 50 years.


The returns to actual, real capital will always be competed away down to a low return of 5% or 10% or something, once you adjust for risk. If your competitor invests in actual, real capital and steals a march on you, he might initially have a much higher return, but you can play catch up by copying him.

And total business income is shared between the employer/business owner and labour in a fairly fixed ratio, probably about 20/80. As City AM explained yesterday, a large part of the reason for apparent falling wages is that wage overheads (Employer's NIC and pension contributions) are creeping up, which take the first slice of labour's share (and the threat of losing your job pushes wages down a bit more).

The 20/80 ratio is stable because if businesses became super-profitable and wages were depressed, more employees would resign and set up their own businesses.

The motivation for making that leap is the comparison between:
a) likelihood of making a profit multiplied by likely size of profit and
b) your current wages.

If a) goes up and b) goes down, more are motivated to resign their jobs, so employers have to bump up wages to retain staff etc, and it all levels out again.

So much to the free-market, base-case equilibrium scenario.

What the man is actually talking about is not "capital" at all but "monopoly". Unlike returns to capital invested or labour, monopoly income cannot be competed away. And it is monopoly's share of total income which is going up.

So businesses with a market dominant position with pockets deep enough to pay politicians and civil servants to erect barriers to entry, to abolish price controls, to reduce taxes on those businesses, or turn a blind eye to gaping loopholes in the tax legislation will get richer and richer. (Landownership is the extreme example of this type of business - rents as a % of GDP go up as GDP goes up, that is not "return to capital", that is monopoly income).

All this would be bad enough, but he compounds his error (conflating capital with monopoly) by then conflating share prices with capital or returns to capital.

Again, nope.

Actual returns to capital/monopoly have gone up, agreed, but share prices, as a multiple of earnings, have gone up as well. So tomorrow's shareholders are not getting much return - if they have to pay £30 for a share paying £1 dividends a year, they have effectively given the previous owner the next 30 year's worth of income, only after 30 years will tomorrow's shareholder break even.

So in effect, this is yet another layer of monopoly - today's shareholder holds the exclusive right to enjoy the underlying businesses capital/monopoly income, and charges tomorrow's shareholder a premium to be allowed to tap into that.

These gains in share prices are not real income or changes in wealth at all - wealth is created at business level, if it makes a good product and a good profit and pays good wages, that is clearly wealth being created.

What happens to share prices is more or less irrelevant because today's shareholder's gain is tomorrow's shareholder's loss (pretty much like changes in land prices, only not so highly leveraged).

Here endeth. The twat.


Lola said...

Bugger explaining it all, his three paras are just self evident bollocks. The bit about 'Chinese savings' is the dead giveaway.

DBC Reed said...

There's no denying that real wages are going down in the UK.Whether the surplus is going to capital is not entirely obvious; the land taxers argument is that its going into inflated land values.
The central Marxist tenet of surplus value, that there must be enough purchasing power in the general population to buy the products of the system working at full capacity, still applies surely.? Marx may have been wrong to say that surplus value was taken as commercial profit but lack of demand remains a problem because the overmortgaged masses are prepared to take wage stagnation in return for untaxed capital gains in the "value" of their houses. We have ended up with none of the benefits of capitalism or socialism.

Mark Wadsworth said...

L, that bit was meaningless so I ignored it.

DBC, yes, agreed to all that (landowner, monopolist, what's the difference?), problem is - we are not running at anywhere near full capacity, and we know whose fault that is.

Dinero said...

I thought the purpose of the current low interests rates was to reduce the cost of capital and therefore in turn the result would be to reduce the return to capital.

He presents what seems to be a contradiction within the space of one single sentence

which is quite an acheivment

- ..."the rising share going to capital, coupled with falling yields..."

Mark Wadsworth said...

Din, in the normal word, the return on capital = cost of capital, by definition. Mess with that equation at your peril - as you say, depressing interest rates leads to mal-investment (mainly in inflated land and share prices, but it could be anything, really).

In his strange world, that last sentence does make sense - because he is referring to shares (which are not capital) as capital. But well spotted.

Bayard said...

"We have ended up with none of the benefits of capitalism or socialism."

Which is the problem with politicians trying to impose any sort of political "system" on a country. It doesn't work for long, because it is controlled by politicians and you end up with the worst of both worlds, as we have. "Capitalism", for all its faults, has the great advantage of being what you get in the absence of a politically-imposed system and therefore is much less subject to the failings of politics.