I am going to quote a chunk of an FT article this morning and hope they'll forgive me for saying firstly go and read the whole thing and secondly because the issue is important. The article notes that:
According to GMO, the asset manager, profits and overall net investment in the US tracked each other closely until the late 1980s, with both about 9 per cent of gross domestic product. Then the relationship began to break down. After the recession, from 2009, it went haywire. Pre-tax corporate profits are now at record highs — more than 12 per cent of GDP — while net investment is barely 4 per cent of output. The pattern is similar, although less stark, when looking at corporate investment specifically.
This change is profoundly odd. Economic theory says investment is driven by profitable opportunities on one side and the cost of capital on the other. High profits suggest there are decent opportunities to make money; historic lows in interest rates and highs in the stock market mean that capital is dirt cheap. Yet investment does not follow.
“We have this strange thing that the return on capital really does seem to be high, the cost of equity capital is low, and yet we're getting a lot of share buybacks and not much investment,” says Ben Inker, co-head of asset allocation at GMO. “It just feels a bit weird.”
It's a trend that is repeated in the UK, where corporate dividend payouts have just reached an all time high in the last quarter and the UK has an investment to GDP ratio that ranks it 159th in the world. So it's not weird, it's a fact. And economic theory is (yet again) wrong.
So why is it wrong? For three reasons, at least. First because neoliberalism is about rent seeking, not profit making. Rent seeking is about making money off the back of others. So it emphasises cost cutting, tax saving, speculation, investment in secure income streams (such as rent...) and avoiding toil. It's about making money without effort. Profit making is about innovation, risk taking and new thinking. It's about hard work. They're polar opposites. And we now live in a rent seeking world.
Second, because this has now gone on for so long the habit of innovation has been lost. Innovation feeds itself. Major companies have not created significant new products for years (and even tablets and mobile phones are, candidly, incremental developments of existing products).
Third, the payback on innovation is going to be low. People have not got the money to spend on things they don't need - and most innovation creates what, by definition, are things people have lived without. So, the return on investment is actually low. The return on exploiting people who are hard up and have to, whatever happens, buy essentials, is high. So rents are, quite literally, good for yield but bad for society at large as a few exploit the many - which is what is happening.
And all of this I predicted in the Courageous State where I suggested that a fall in investment would be matched by a rise in demand for access to the biggest rental income stream available - which is a share of tax revenue. So we get a demand for education and health privatisation because these provide the greatest opportunity to exploit ordinary people by the rentier that is currently available.
None if this is a surprise then - except to economists without the eyes to see what is happening in society and who cannot differentiate profit and rent. And it's not profits that are rising. It's rents. And that will fuel yet more inequality in society and social stress.
You have been warned.
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It is obvious, and everyone knows it, Richard. The ECB knows it, as shown by their paper on “Country Adjustment in the Euro area”. But never let it be said that their conclusions are informed by their observations
http://thosebigwords.forumcommunity.net/?t=54379759#lastpost
You make a very valid point Fiona: as Galbraith has written, economists always seek obfuscation via neologisms, euphemisms, and periphrasis that hide the underlying reality that could describe things by their proper names.
The original Ben Inker article is available free on registration at the GMO Europe website
http://www.gmo.com/Europe/default.htm
Worth registering, because their papers are not unmanageably frequent and often sensible
“because neoliberalism is about rent seeking, not profit making. Rent seeking is about making money off the back of others. So it emphasises cost cutting, tax saving, speculation, investment in secure income streams (such as rent…) and avoiding toil.”
This makes no sense. Profit is the difference between revenue and costs. If I seek to maximise profits, I will be keen on cutting costs — including taxes, risk (which “secure income streams” reduce) and labour (or “toil”). So the phenomena you say are explained by the fact that “neoliberalism is about rent seeking, not profit making”, would persist even in a profit-seeking economy.
You are confusing accounting with economics
You are using accounting speak
I am speaking economics
As a chartered accountant who now works more often as an economist I’ll assure you they’re not the same thing
And no – the phenomena would not exist in a profit seeking economy – they realise there are externalities that are worth paying for
Sorry to reply so late but I just saw your reply. You are the one who used the word “profit”. What do you mean by profit if not revenue less cost? That is the standard meaning of the term. If you did not want people to understand you to mean revenue less cost, why did you use the word “profit”?
“If I seek to maximise profits, I will be keen on cutting costs – including taxes, risk (which “secure income streams” reduce) and labour (or “toil”).”
That’s strange, I thought free enterprise and entrepeneurialism, as its told to the rest of us by you right wingers, is all about being bold, innovative, taking risks, creating more jobs………etc. After all, isn’t that the justification given for the enormous salaries of business executives, bankers and so on?
Yet now you say business is all about reducing risk and cutting jobs. Congratulations, you’ve just proved Richard to be entirely correct about neoliberalism and modern right wing politics.
Lovely to see yet another economic theory being blown out of the water by reality (i.e. what humans actually do over time given certain contextual conditions), Richard. And yes, your prediction and that of the likes of Steve Keen have been proven correct.
To those with their eyes open this has been evident for some while, and indeed in the UK is evidenced by almost every privatisation (two classic current examples being the probation and the coastguard services). But, as Fiona points out, the most shocking thing is that even though a widely observable and documented phenonmenon, the neo-liberal writ runs so large that nothing gets done to stop this nonsense. And so we spiral into an ever more unequal, neo-feudal, society.
Rentier UK – the home of neo-feudalism
Now there’s a book title…..
Agree, Richard, though I think I’d probably go for something more dramatic like: ‘The Fall and Rise of Rentier UK: exploitation, inequality and the birth of neo-feudalism’
Possible collaboration? How busy are you this winter 🙂
Interesting idea
If a Nuffield grant comes through in the next week though I’m sold to my limit….
Let’s see Ivan
All the innovation has gone into financialisation. Robert Peston’s article on Wonga is an interesting read. I think this was referred to in an earlier blog and I hope he’ll forgive me for highlighting one paragraph.
“In many ways Wonga.com is an impressive, even admirable business (and please resist your temptation to send me hate mail – I am feeling delicate).
It is, for example, funded exclusively with equity capital, or £100m genuinely at risk of being lost if things go wrong.
So, unlike a bank, it has no depositors or creditors who can pull their money out in a panic and bankrupt it.
If all lenders were financed in this way, we wouldn’t have had the banking crisis of 2007-8.
Also its technology, unlike our banks, is world class.
Wonga has written algorithms, computer programs, which determine whether you deserve to be given a loan in seconds, from looking at details about you and your behaviour, such as what email service provider you use and whether you have bothered to look at the company’s terms and conditions.”
The innovation is there, but it is being applied in the wrong direction, into “rent seeking”. Classical economists would advocate that the tax burden was shifted on to this activity in order to incentivise investment in the productive side of the economy ie profits derived from “labour”.
computerising loan sharking is at best a refinement, not an innovation. I wonder what the rates of repayment within the initial loan period. I would suspect they are comfortably low (for Wonga).
Peston is a great messenger boy for the new economy, not much more.
It will be interesting to see how much more of this rentier economy dominated by, as one commentator on the FT article put it, ‘Big Slug Behemoths.’ Judging by the 11 pages Tuesday’s Times devoted to the royal baby the public are still largely in a narcoleptic state. The rentier, money-laundering, wash trading, price fixing world is rising high. Looks like the police might need the proposed water cannons in a few years after the next few housing bubbles and yet lower wages have even waken up even those in thrall to the media.
As far as the predators classes are concerned, we exist to be milked, and increasingly they don’t care who knows. I agree there may well be the wish to riot but people have to gather to riot and gatherings of all kinds are being outlawed by the new police powers I’ve spoken of in another thread. Big protest meetings in town happen beause people gather in other parts of the country and are bussed into the protest area. These new powers will prevent them from travelling as they’ll be picked up before they get the chance to travel. So far as I know the new powers will be available to the police themselves and to the Yellowjackets or Blunkett’s Bobbies, the Specials or whatever you want to call them. It doesn’t take a great stretch of the imagination to see these powers granted to G4S and other private security firms. Mind, I’d like to see some G4S muppet (like the idiot who had a go at me when we had the Olympic cycling here in Molesey) try to arrest a posse of would-be protestors 🙂 They’d need to be armed at least and, on a more sombre note, I expect that’s coming too…
Bill- if G4S are on the job expect something like the keystone Cops!
Bill, you are right to draw attention to these powers. I recently had a session swotting up on them. Pretty shocking to be honest,and yet another policy that’s largely been implemented under the radar, as it were.
It made me laugh in a very wry kind of way when I read recently of the powers Putin has put in place in Russia and which have effectively put paid to any protest movement. We are not at all that far behind. And of course, in this country the predator classes (as you rightly call them) can rely on the additional benefit of extensive and pervasive hegemonic power.
A dispiriting example of this is the fate of the electronic cigarette, a genuinely new product with a diverse range of innovative suppliers(ie a proper market) with the potential to save millions of lives is being fast tracked into a moribund duopoly at the eu level.
Thus a new industry is being handed over through regulation to the two behemoths (Tobacco & Pharma), the former having perpetuated the problem and the latter who has singularly failed to address it.
Detailed discussion here by Clive Bates (ex ASH director).
Disclosure: I used these to pack in the coffin nails 18 months ago and haven’t looked back.