Welcome to Peak Capitalism

civpart payems

Figure 1: Labour Force Participation Rate and Non-farm Payrolls

Has the United States of America reached, and perhaps passed, “peak capitalism” – the point where the maximum number of people participate in capitalist relationships?

The argument could be made, at least on a relative basis, that it has indeed crested, and we are on the slow, inevitable march away.

Let’s back pause a minute to define what this means:  Capitalism is the system of relationships between the labour class and the capital class.

Individual relationships are really bilateral.  There are two channels:  the wage channel, whereby the capitalist negotiates with the worker for the highest output at the lowest salary, and the price channel, whereby capitalists compete with one another to provide the highest quality products and services for the worker at the lowest prices.

The capitalist does not do this at a loss.  She endeavors to maintain an advantage between her expenditures and sales – her profit.

This system provides a unique suite of incentives to each class which is responsible for providing the West a previously unimaginably high standard of living, even for the lower classes.  The worker is incentivised to produce more and higher quality goods, thereby increasing his advantage in competing with other labour for higher wages.  The capitalist is incentivised to produce higher quality goods at lower prices, thereby increasing her advantage in competing with other companies for sales, and ultimately the capital she can accumulate.

The worker seeks to consume the highest quality of goods at the lowest prices, and the capitalist seeks to accumulate more capital.

wascur gdp

Figure 2: Wages as fraction of nominal GDP

By looking at this (now well worn) chart of Wages as % of GDP (figure 2), it could be assumed that a net capital advantage has been accruing over time. There are other things that support this view.  I would prefer to use U.S. mean family net worth by percentile of net worth to really show how this capital accumulation has played out.

800px-MeanNetWorth2007

Figure 3: Mean family net worth by percentile of net worth

However, if you add Government Social Benefits to Wages as % of GDP to the former chart, the picture changes dramatically!  The present value, 58%, is dead from the 1959-present average.

wascur social beneifts gdp

Figure 4: Wages and Government Social Benefits as a fraction of nominal GDP

The character of change now represents a shift, not from labour to capital, but away from the classical capitalist bilateral relationship between the labour class and the capital class (through wages and prices) to a unilateral one (prices).

Thus we get to the fundamental reality:  capitalists have been compensated for serving the poor and the elderly.  The system has worked for everyone.  The government has brokered a deal whereby capitalists accumulate capital by providing the infirm and the retired working class sustenance.  Perhaps you would change the proportions of profit and transfer payments, but the basic system of transactions and incentives has been proved out.

The facilitating mechanism is the Federal government’s ability to add new financial assets (money and Treasuries) into the system.

Let’s apply the shift in bilateral capitalist relationships with a simple example: The legacy of the labourer’s work is not just the modest sum which he was able to accumulate, but also in the accumulated labour his employer captured as surplus value.  This accumulated labour is the combination of technology utilisation and process improvement which enabled his employer to produce more goods at the same cost – an improvement known as productivity.

When the worker retires, the government subsidises his means of sustenance by crediting new deposits to his bank account.  He uses these credits to purchase sustenance from the capitalist class.  The retired worker has already pre-paid for these newly government-created deposits with the massive productivity gains throughout his career.  As long as the retired worker, and the present labour force, are able to increase productivity at a rate faster than the retiree’s new deposits are created by the government, the capitalist gets paid, her worker is employed, and the retired worker is provided sustenance.

At the most basic level, the worker does not pre-pay his retirement through social security and pension fund contributions, but even more so by productivity.  He has pre-paid in through continually improving his employer’s capital and use of capital to expand output at the same cost throughout his career so the government can print money to deposit in his account after retirement without causing inflation.

The inevitable decline in per-capita working-aged people mean that the nature of capitalism fundamentally shifts away from the bilateral capital-labour transactions to a more complex set of transactions, introducing a third party – the public sector – to broker the deal.

The enemy of both capital and labour in the system of capitalism is running out of new markets.  Wages are not paid out of the current production of employees, but from past production by capitalists with the expectation that they will produce a surplus of value over what they are paid (for why else would the capitalist make this transaction?).

Do the rich save more

Figure 5: Change in savings rate with more wealth and income

Were it to stop here, the amount of money and income circulating through the economy would contract.  Capitalist income has long since maximised consumption, and is now focused on maximising capital accumulation.

At this point, this capitalist has free cashflow.  There are two actions she can do with it:  she can keep the cash, or re-invest it into more production.

Since capitalist’s goal is to accumulate more capital, she is going to re-invest when she sees opportunity, and this free cash-flow is exchanged with new labour for more future production.

But what happens when the capitalist sees her opportunity set decline?  Her expectation that the payment she makes to the new workers she’d hire would materialise into higher revenue later diminishes, and she decides to book her profit as cash.

Figure 6: Investment/Savings Ratio bears a strong relationship to the unemployment rate

Who could blame her?  She isn’t going to operate at an anticipated loss.

Let’s analyse why our capitalist would view her re-investment returns pessimistically: The first is the shift in near-term investment expectations.  Assuming new markets will always become available, the only reason to withhold investment is the worry that the market value of your capital will decline in the short-term.  The investment time horizon moves from “what is the total return on this piece of capital until it is consumed?” to “will I be able to get the same price for this piece of capital tomorrow that I can get today?“.

We have previously observed that these variations in investment horizon — and consequently rate of investment — are responsible for most of the economic cyclical variations.

The second is a glut of capital relative to the population.  There appear to be two chief reasons for this:  a rapid expansion in technology-driven productivity and demographically-driven declining final sales growth.

Let’s analyse what the capitalist does when there is a glut of capital:  Returns on capital are too low to create new real capital, so the capitalist’s objective turns from accumulating more capital to collecting and retaining economic rent by exploiting the monopoly she has on existing capital.  Our capitalist has now turned into a rentier.

Collecting economic rents siphons income from the rest of the economy, reducing the amount of income available to labour to purchase its own output.  As is, the rentier now has lower final sales, thereby reducing her perception of future returns on invested capital.  Her marginal proclivity shifts further into fiscal retrenchment. Unchecked, this scenario is not good for any of our three classes:  the labourer is out of work or has less income, the capitalist sees her sales (and utilisation of her existing capital) decline, and the retiree still requires sustenance.

Rentierism does have a derogative connotation.  Capitalists get paid to take investment risk while expanding capital stock, and labours get paid for their time.  Rentiers profit simply by having a monopoly on existing capital.  But if we examine their incentives, can we blame the capitalist for shifting to a rentier?  She certainly has the right to try to avoid losses.

The way to mitigate the transition pain from capitalism to rentierism is to have the government pay retired workers for years of uncompensated productivity gains.

We can see a prior example of of a rapidly increasing dependency ratio and glut of capital in the past 20 years of Japanese economic history.  Germany is not far behind.

Consider life in these two high dependency ratio countries:  They have very low unemployment rates and low inflation rates.

Dependency Ratio

Figure 7: Old-aged dependency ratios for the United States, Japan and Germany

The principal political driving force away from bilateral capitalism to trilateral government-brokered rentierism will, perhaps ironically, be the same force that is trying desperately (and likely with futility) to hang on to more capitalist relationships:  baby boomers.  But even the conservative baby boomers will move to ensure their entitlements are maintained, for they will need more than they anticipated as a result of the 2008 crisis.

We have been shifting at the margins away from bilateral capitalist relationships for decades.  What replaced it has successfully navigated the needs and demands of each class – accumulation to capital for enterprise value, sustenance to workers for labour and sustenance to the retiree for decades of productivity growth.

The key will be formalising how this already works so we can adjust policy within the framework for the betterment of every American.

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20 Responses to Welcome to Peak Capitalism

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  2. George Robertson says:

    Brilliant. Methodical and logical. Two thoughts : dont know if I believe there is a distinct rentier class – “rentierism” – nor do I think there is a bright line between capitalist and labor, but of course there are those solely and always in one or other as an indentifier. Also I dont think you accomodate fluidity – for example when a union, say CALPERS, owns a corporarion. Who is who? And along with fluidity an dmulti identities it doesnt allow for “power” as a factor. But there is enough distinction to allow your discussion to have great power in illumination. This is of the ilk of best commercial grade analysis I have read. As I said, brilliant.

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  5. hb says:

    Social Security is the biggest ‘entitlement’ program, and it’s funded by workers, not capital, and not government.

    Medicare is the second biggest, and a big chunk of it is also funded by workers.

    “However, if you add Government Social Benefits to Wages as % of GDP to the former chart, the picture changes dramatically! The present value, 58%, is dead from the 1959-present average.”

    There’s an issue of double-counting here, where the $$ taken out of wages to fund these benefits is counted as ‘wages’ in one column and ‘government social benefits’ in the other.

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  8. zoniedude says:

    You state that the capitalist decides to forego investment in capital and instead “decides to book her profit in cash.” Which is one reason I argue for higher income tax rates on the rich. If there is a penalty for taking profits in cash, the capitalist will invest instead. And one of the reasons there is a surplus of capital is the tax treatment that encourages investments in capital over investments in labor. Thus getting rid of those would also improve the economic situation.

  9. hamptonus says:

    Excellent work. However, I remain unconvinced. Governments need to fund themselves. I don’t judge that governments are self funding unless they radically alter the status of their central banks. Right now I subscribe to the Kyle Bass / ZH / tinfoil hat predictions. Time will tell.

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  11. Patrick Haughey says:

    Very lucid and rational, which makes it unfortunately, useless. This assumes that all capitalists, laborers, and rentiers are the same rational actors operating under ideal conditions and that individuals are fixed in their market roles over time. It also assumes that rules governing such actors apply equally to everyone. None of the above assumptions are true. History reveals that fraud, cronyism, and laws that do not apply equally to everyone are operative in the market system, disengaging idealist capital systems for a negligent and abusive yet self-perpetuating incentive system involving the mis-allocation of capital to rig the political economy of production and allocation. Individuals are rarely rational, and history proves that capitalists and rentiers especially rarely make beneficial decisions on deployment of cash or capital–over time or in society’s or even their own interests. This model only works in a vacuum, or in Chicago School textbooks and does not take into account costs imposed on others (externalities) without recourse for compensation or critical prevention.

  12. Augusto Carreira says:

    Capitalism is NOT the system of relations between labor and capital. Capitalism is the space of solutions to reproduce existing non-consumed, recyclable MONEY. Many times this reproduction of money takes the form of investments in projects that require other people (labor). Many times the reproduction is merely financial (albeit trusted against some physical reality). So, labor is a collateral effect of capitalism. Not an intrinsic element. All the rest are ways societies come up with to keep social calm and the acceptable environment for the ruling and influent people to carry on with their way of living and of being wealthy and keep a high status (some scholars say this is fundamental for survival during catastrophes). Of course this also has provided the lower classes with a better income and possibilities to become affluent (not a just by means of capitalism but also due to to freedom and democracy: authoritarian, nepotist countries are capitalists too but unable to extend the benefits to all, even when the beneficiaries are a lot, like in China). Because of its nature, there are things capitalism can never achieve and in fact can turn it into an obstacle to societal development including the usage and spread of produced wealth. In modern societies capitalism is a great instrument to obtain and keep status, which is intrinsically hierarchical, and only a few can be at the top. And, once there, they will make everything possible to stay there and prevent others from achieving such a status level.

    • James C. says:

      Hello,

      Can we have a link to the scholars about survival during catastrophe, please?

      Geoffrey Hodgson (http://www.geoffrey-hodgson.info/p21.htm) agrees with the top author, that wage labour is close to the core of capitalism. I think that this is the way that Marx defined it. It might well have changed since then.

      I think it’s worth noting that some societies have had a change of elite (eg Denmark from nobility to petit-bourgeosie + farmers) through which most people survived, and after which many people prospered.

  13. Mike Beckerle says:

    Justifying payments to workers as something to which they are entitled due to their increasing productivity is assigning that value to the wrong party. I’m not saying we don’t need to find some justification, but this is not it. If person A’s productivity increases working for B, but that gain is due to some innovation created by C, purchased/financed using B’s capital, in what sense is A entitled to that value?

  14. this disproportion obtains much more for the last period, when a positive decrease of the agricultural population went hand in hand with increase of the area under cultivation, with more intensive cultivation, unheard-of accumulation of the capital incorporated with the soil, and devoted to its working, an augmentation in the products of the soil without parallel in the history of English agriculture, plethoric rent-rolls of landlords, and growing wealth of the capitalist farmers. If we take this, together with the swift, unbroken extension of the markets, viz., the towns, and the reign of Free Trade, then the agricultural labourer was at last, post tot discrimina rerum, placed in circumstances that ought, secundum ariem, to have made him drunk with happiness.

  15. To make the worker feel his extra time and labour is well spent, the capitalist employs the trick of “overtime”.

  16. To make the worker feel his extra time and labour is well spent, the capitalist employs the trick of “overtime”.

  17. Gold Price says:

    Thus the small capitalist has the choice: (1) either to consume his capital, since he can no longer live on the interest – and thus cease to be a capitalist; or (2) to set up a business himself, sell his commodity cheaper, buy dearer than the wealthier capitalist, and pay higher wages – thus ruining himself, the market price being already very low as a result of the intense competition presupposed. If, however, the big capitalist wants to squeeze out the smaller capitalist, he has all the advantages over him which the capitalist has as a capitalist over the worker. The larger size of his capital compensates him for the smaller profits, and he can even bear temporary losses until the smaller capitalist is ruined and he finds himself freed from this competition. In this way, he accumulates the small capitalist’s profits.

  18. vznvzn says:

    followed this link from techcrunch analyzing the effect of tech on the economy/labor class.
    this is quite brilliant for its 3way analysis between govt,labor,capital, which is rare. [and shows a key missing element of marxism]. however, its very hard to get through the technicality and the graphs are not well documented [hey we’re not all experts in obscure economic terms]. could you come up with a precis/summary/cliffs notes version? it seems like a brilliant reformulation of theory, a sort of paradigm shift, it really cries out for better articulation to the masses…. is there a book that documents this worldview?
    also it would be helpful to try to analyze why investment opportunities are in some kind of decline or plateau. is it temporary or permanent? how did this happen? etc.

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