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Stumbling and Mumbling

Summary:
Has British capitalism become more dependent upon the state in recent years? I ask because of a curious development in how profits are made.First, let’s remind ourselves of a basic fact – that UK capitalism has evolved in a very different way to the US recently. Whereas the share of profits in US GDP has risen markedly since the 1990s, the UK profit share has fallen since then. Yes, the share soared in the 70s and 80s – from what was an unsustainably low point in the mid-70s. But that rise ended 20 years ago. The profit share now isn’t much above what it was in the 50s and 60s. Richard is right to say that labour’s share of GDP has fallen since then, but this is due more to rising taxes on production and to rising rents eating into wages and profits, rather than to a higher profit share.

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Has British capitalism become more dependent upon the state in recent years? I ask because of a curious development in how profits are made.

First, let’s remind ourselves of a basic fact – that UK capitalism has evolved in a very different way to the US recently. Whereas the share of profits in US GDP has risen markedly since the 1990s, the UK profit share has fallen since then. Yes, the share soared in the 70s and 80s – from what was an unsustainably low point in the mid-70s. But that rise ended 20 years ago. The profit share now isn’t much above what it was in the 50s and 60s. Richard is right to say that labour’s share of GDP has fallen since then, but this is due more to rising taxes on production and to rising rents eating into wages and profits, rather than to a higher profit share. Profshare

Although the profit share hasn’t changed much except for the slump in the early 70s and subsequent recovery, the components of it have done so.

To see this, we need to manipulate the national accounts a little. GDP is equal to the sum of consumer spending (C), investment (I), government spending (G) and net exports (NX). It’s also equal to wages (W), plus profits (P), plus taxes on production (T), plus other incomes such as rent and those of the self-employed (O). Rearranging these gives us four components of profits:

P = (C – W) + (I – O) + (G – T) + NX.

This equation is intuitive if you think of the circular flow of income. Profits are high (other things equal) if consumption is high relative to wages – that is, if workers return their wages to capitalists in the form of consumer spending. They will also be high if capital spending is high relative to other incomes: this is because one firm’s investment is another’s orders. They’ll also be high if government spending is high and taxes low, and if net exports are high – that is, if foreign demand for UK goods and services is strong.

My chart plots these four components as a share of GDP since the ONS’s quarterly data began in 1955: they are simply a rearrangement of the data in tables C1 and D of the quarterly national accounts. If we add the four lines together, we’d get my first chart.

And here’s the strange thing. Except for net exports, which have been small and quite stable, these components have changed quite a lot. Profcomp

Take first the consumption-wage element. In the 50s and 60s this typically represented around one-third of the profit share. It fell in the mid-70s, largely because the savings ratio rose; in effect, workers no longer gave capitalists back so much of their wages in the form of consumer spending. This, along with the fall in net exports as a result of higher oil prices, was the main reason for the profit squeeze then.

Since the mid-70s, however, consumption minus wages has risen markedly, so it is now by far the biggest component of the profit share. In part, this reflects a fall in the savings ratio. One reason for this is that the fall in inflation after the mid-70s reduced uncertainty. Another is that credit liberalization in the early 80s allowed workers to spend more, relative to their wages, than they did before. Also, of course, non-workers spend money as well as workers. Increased pensioner incomes since the 70s – the near-elimination of pensioner poverty – has raised consumption relative to wages, as more recently did the introduction of tax credits.

That said, C – W has declined since the mid-90s because the employment rate has risen. Ceteris paribus, this tends to squeeze the profit share simply because capitalists now have to pay more of their consumers – although of course they get a share of a bigger pie. Even after this decline, however, C – W is much higher than it was in the 50s and 60s.

Turn now to our second element, G – T. This is government consumption plus subsidies minus taxes on production. This tends to be counter-cyclical, supporting profits in bad times such as the mid-70s and 2008-09 but giving less support in good. Even now, however – after years of austerity – it is much the same size as it was in the 60s. This is because government consumption, in current price terms, is a slightly bigger share of GDP which offsets higher taxes on production.

Now, here’s the big thing. Look at I – O.  It varied between 5% and 10% of GDP in the 60s, slumped in the 70s and has been around zero ever since except during the Lawson boom.

This has tended to squeeze profits partly because more revenues are going to landlords: Ricardo had a point when he predicted that rising rents would tend to squeeze profits. It’s also because investment has fallen as a share of GDP: this hit 20% in the late 60s but has been 16-17% lately. This squeezes profits simply because one firm’s capital spending is another’s order book. As Kalecki said, capitalists get what they spend.

If we put these trends together, the conclusion is that capitalism is less self-sustaining that it used to be. Profits are more dependent upon state intervention – not just government consumption but also policies to ensure that consumption stays high relative to wages such as payments to pensioners and tax credits. Meanwhile, the private sector is doing less to support profits; investment is lower and rents higher.

Put this another way. We can imagine a healthy, vibrant capitalism in which investment is high and profits high as a result and so the system in not so dependent upon state help. And we have to imagine such a system because it is a long way from the one we actually have.

This is not to say that the state has become more interventionist despite the pretence that neoliberalism is a free market ideology. It’s just that the nature of intervention has changed. During the golden age of capitalism, the implicit assurance that the state would ensure full employment and high demand encouraged firms to invest heavily.

Perhaps instead the point is that capitalism has almost always been dependent upon the state: as William Ashworth’s new book describes, the industrial revolution was the result of an activist government. Free market capitalism is a myth now, and usually has been.  

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