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Accumulate, accumulate! Or not

November 23, 2015 Leave a comment Go to comments

from David Ruccio

Gruber-Kamin

What are U.S. corporations doing with all the surplus they’re managing to rake in? Well, they’re not investing it. Instead, they’re paying it out to shareholders and upper-management, buying back their stock and expanding their portfolios of financial assets, and hoarding the rest in cash. The net effect is to dampen the rate of economic growth and the creation of new jobs.

And that’s worrying mainstream economists and others who celebrate capitalists, since they appear to be failing in their “historical mission” to accumulate capital.

According to a recent paper by Joseph W. Gruber and Steven B. Kamin (pdf), of the Board of Governors of the Federal Reserve System, in the years since the Great Financial Crash, investment spending by non-financial corporations (the red line in the chart above) has been much lower than their “savings” (undistributed profits, the blue line), which has placed them in the position of being net lenders (the black bars at the bottom of the chart).

Their conclusion?

we find that the counterpart of declines in resources devoted to investment has been rises in payouts to investors in the form of dividends and equity buybacks (often to a greater extent than predicted by models estimated through earlier periods), and, to a lesser extent, heightened net accumulation of financial assets. The strength of investor payouts suggests that increased risk aversion and a precautionary demand for financial buffers has not been the primary reason firms have cut back investment. Rather, our results are consistent with views that, for any number of reasons, there has been a decline in what firms perceive to be the availability of profitable investment opportunities.

In other words, corporations have been distributing their profits for many uses other than real investment, a process that started before the crash and has quickened in the years since.

As it turns out, I’ve been teaching about Marx’s theory of the accumulation of capital this week, using the following equation:

ΔK = Δc + Δv = βDI = s – [(1-β)DI + DO + DM + DR]

The idea is that the accumulation of capital (ΔK = Δc + Δv) represents a distribution of the surplus to internal managers (βDI), which is equal to the difference between the total surplus (s) and all other distributions of the surplus—to internal managers other than for the purpose of accumulation ([1-β]DI), to owners (DO), to merchants (DM), and all others (DR ). Obviously, if the distributions of the surplus in the form of CEOs salaries, dividends, merchants, and all others (e.g., taxes to the state, rent to landowners, interest payments, and so on), plus cash holdings, increase, then less accumulation of capital—that is, investment—will take take place.

And that’s exactly what’s been going in recent years—thus undermining the legitimacy of both capitalists and of capitalism.

As Marx wrote (in chapter 24 of volume 1 of Capital), in one of the most quoted and yet misinterpreted passages:

Accumulate, accumulate! That is Moses and the prophets! “Industry furnishes the material which saving accumulates.” Therefore, save, save, i.e., reconvert the greatest possible portion of surplus-value, or surplus-product into capital! Accumulation for accumulation’s sake, production for production’s sake: by this formula classical economy expressed the historical mission of the bourgeoisie, and did not for a single instant deceive itself over the birth-throes of wealth. But what avails lamentation in the face of historical necessity? If to classical economy, the proletarian is but a machine for the production of surplus-value; on the other hand, the capitalist is in its eyes only a machine for the conversion of this surplus-value into additional capital. Political Economy takes the historical function of the capitalist in bitter earnest.

Bitter earnest, indeed—on the part of classical economists then and mainstream (neoclassical and Keynesian) economists today.

Thanks to Bruce Norton, we know that that passage is not Marx’s assertion that capitalists are driven to accumulate capital. Instead, it’s what mainstream economists (then as now) claim is the role capitalists can and should play. It’s one side, if you will, of our pact with the devil: the capitalists are the ones who get and decide on the distribution of the surplus, and then they’re supposed to use the surplus for investment, thereby creating economic growth and jobs.

When they fail to to fulfill that historical mission, and use the surplus to line their own pockets and to share it with their friends, they break the pact and lose their legitimacy in having sole control over the surplus.

Mainstream economists want to do everything possible to encourage the capitalists to accumulate capital. The rest of us recognize that the time has come to replace the capitalists and use the surplus to benefit the mass of people who, until now, created but have had no say in deciding what should be done with the surplus.

  1. Helge Nome
    November 23, 2015 at 8:55 pm
    Reply

    Part of the problem is confusion between real wealth (as in goods and services available for consumption) and virtual wealth (as in money available to exchange real wealth). In a healthy society real wealth and virtual wealth dance together in a dynamic way to produce societal well being. If virtual wealth is hoarded, as indicated by the author above, real wealth begins to atrophy for lack of stimulus to produce and exchange same.
    We are now facing a growing imbalance between the two, to the detriment of the population at large, in order to satisfy the egos of the few.

  2. John Hermann
    November 24, 2015 at 1:30 am
    Reply

    Although I agree with the thrust of this analysis, the overall picture is more complicated. For example, although it is undoubtedly true that “they’re paying it out to shareholders and upper-management”, the fact is that a large proportion of the shareholders in these private corporations are large institutional investors, including pension and superannuation funds and other mutual funds, Much of the money paid out to these bodies becomes part of the income of ordinary citizens, who spend it on goods and services.

  3. Ishi Crew
    November 24, 2015 at 8:49 am
    Reply

    This is to me a very interesting post (though alot of what i see as ‘macroeconomics’ is like going to a foreign country—only economics i ‘ve been reading recently is on reformulating the classical theory and its ‘heterodox’ variants in the language of nonequilibrium statistical mechanics).

    I would agree with John Hermann that some of that surplus is being distributed in part to ‘common people’ through pension funds, etc. (i know someone who worked as a private investment counselor/manager and apparently made alot of money off of, but he has 5 adult children some of whom have not done well financially—and some have kids themselves—so alot of his ‘surplus’ is used to help them out, and he also supports many ‘good social causes’ in environment, peace and social justice etc.)

    Also, everyday i hear of investments in many kinds of high tech ventures (solar power, ‘microhouses’ which are relativiely inexpensive and can be ‘offf the grid’—ie run on solar, since there is a huge affordable housing problem in this country) so some money—possibly that paid out to managers and shareholders —- is being invested. Its hard to know how much that represents—evidently both wealth and income distributions are highly skewed so some of this surplus is being accumuluted (which to me means ‘parked in the bank’ or stocks, perhaps land) and not invested.

    (To an extent, perhaps due to my physics mentality, I view money flows as like that of water—and there are huge theories of ‘turbulence’, ‘dissipative structures’, the formation and structure of river basins (Einstein even had one), which show these flows are not simple—rather extremely nonlinear and subject to many constraints, like money (‘interest rates’, ‘liquidity’, various frictions due to human psychology (risk aversion, maybe even biological effects like hormones and nutrition),etc.
    I dont know where the money is or where it goes.
    In my area I do see somewhat of a ‘bifurcation’ with a huge amount of upscale development (luxury condos, sports stadiums, travel) and also some fairly extreme poverty (though there is to an extent a private safety net in which many people volunteer or donate to share some of their wealth, plus some social services, from food stamps to public housing). There is also a large ‘middle class’ —people who are neither rich nor begging.

    The equation intrigued me. (I had to look it up—found it in a paper by Ioannides and Mavroudeas on Henrik Grossman —-all of whom wrote on Marxist crisis theory. I didnt know what the ‘v’ was ; change in capital K equals constant K minus variable K. )

    A local group (jacobin magazine affiliated) was reading Capital by marx recently (all the volumes, so i passed on that).

    The Marxism i read at all comes from R Goodwin’s ‘class struggle’ model adapted from mathematical biology. This was discussed by Yanis Varoufakis in his discussion of Piketty. That theory has essentially it seems 2 or 3 main equations as a first approximation.
    (If you try to make it more realistic it gets very complicated which is why nowadays the people i read use statistical economic techniques—and the same is true for biology. If you have an ecosystem with 100 or 10000 species you dont write an equation for each one, plus all the interactions they have with each other and the environment, but rather summarize the whole thing in a partition function, and hope for a miracle, that by maximizing the entropy you get a reasonable answer. If you don’t (almost always the case) the you start adding constraints (lagrangian multipliers or ‘temperatures’ or ‘chemical potentials’ ) until you get a better fit. (In economics, the multipliers would be things like prices, indices of consumer sentiment, frictions in supply chains, maybe global warming effects and all sorts of time lags such as ‘life expectancy’ etc.)

    So I was wondering how one might combine or reconcile these various approaches (and/or equations). (There also discussion of ‘capital’ from the perspective of power (BNarchives —which actually i think may be closest conceptually to to my own views) and ‘information’ . (There are actually, of course, many, more ‘flowers’ blooming in this desert).

    I think it can be done—the problem with the abstract approach i prefer is it is not really applicable at present except to generate styilized facts about income distribution. (These go back to the 30’s but are continually reinvented—and there is a whole theory of that. It may be like trying to start a fire in the rain—takes alot of matches.). Macro distributions (GDP, corporate income, the various M!s 2s 3s ..) are not even attempted.
    A big obstacle is formalism or notation—eg discrete versus differential equations, and rewriting various ‘classical’ identities or results in some sort of universal form. In a way this is like translating everything into english which may work for science (tho not for poetry or music, or maybe even philosophy).
    I was just reading some ‘behavioral economics’ about hyperbolic time discounting by someone from south africa who studied under R Herrnstein (who co-wrote the bell curve with charles murray —a libertarian who supports a guaranteed though low income, is at some right wing think tank (maybe cato) and about whom more could be said.) I found it interesting that ‘hyperbolic time discounting ‘ really just stands for a finite apprxomation to the exponential function. Why not just say that? I’ve spent alot of my life comparing the finite to the infinite case—though in the long run it may make no difference . One of his papers was on the economics of procrastination. I guess he comes to the same conclusion as me (as do many others—becker, caplan…). ‘If you can do it tomorrow why do it today?’

  4. Egmont Kakarot-Handtke
    November 25, 2015 at 11:28 am
    Reply

    Profit and the collective failure of economists
    Comment on ‘Accumulate, accumulate! Or not’

    Economists do not understand how the economy works. The deeper reason is that neither the Walrasian, nor the Keynesian, nor the Marxian, nor the Austrian sect understands what profit is. What the general public can see and touch and smell is that the representative economist does not understand the pivotal phenomenon of his subject matter. Economists are like astronomers before gravity was properly understood.

    Marx was, like the classicals, a political economist and mainly concerned with society and the underlying laws/trends of societal evolution. As a matter of fact, he was rather good at descriptive sociology but completely failed as an economist. Like Smith, Ricardo and other classical economists he got the profit theory wrong (2014a). And this fate Marxism shares with the other sects until this very day: “A satisfactory theory of profits is still elusive.” (Desai, 2008, p. 10)

    Because of this, the formula that David Ruccio presents as Marx’s theory of accumulation is simply false, while his observations about declining capital investment in the USA are spot on. As with most heterodox economists, the sociology is better than economics proper.

    The correct Profit Law reads: Qm =Yd+I-Sm (2014b, p. 8, eq. (18))*
    Legend: Qm: monetary profit, Yd distributed profit, Sm: monetary saving, I investment expenditure

    The Profit Law gets a bit more complex when foreign trade and government is included. By summing up investment expenditures over time and taking depreciation into account the equation ultimately yields the profit rate (2011, Sec. 6.2). These details are not needed at the moment.

    The Profit Law says (for the world economy as a whole):

    (i) strong growth = high investment I = accumulation is good for the overall monetary profit of the business sector as a whole,

    (ii) strong consumption expenditures = low saving S or even dissaving -S = growing consumer debt is good for profit,

    (iii) by implication high government deficit spending = growing public debt is good for profit,

    (iv) high profit distribution Yd is good for profit.

    Profit and profit distribution constitute a self-reinforcing feedback loop. The same holds for profit and investment. These built-in positive feedback loops explode the notion of equilibrium once and for all. The market economy is not a self-optimizing equilibrium system.

    Note, that overall profit has nothing to do with productivity or low wages. These and other factors affect only the distribution of overall profit between firms or countries.

    Note also, that the Profit Law holds for the USA, Russia, China, the EU and all other countries, that is, it does not matter at all whether one has a market economy or private property or free enterprise or other of the alleged characteristics of capitalism. The Profit Law holds for every national monetary economy and for the world economy as a whole.

    In the last decades overall (= world) profit has been driven by the growth in Asia (= high I), by dissaving, i.e. the growth of private debt mainly in the USA, by the growth of public debt worldwide, and by high profit distribution mainly in the USA. Overall profit has been distributed between the countries via export surpluses/deficits.

    Roughly speaking, as accumulation (= I) slows down in China/Asia and the developing regions overall world-profit goes down, then overall profit distribution goes down, then again profit goes down, then investment goes down and so on. Rising unemployment and falling wages accelerate the downward spiral (2015).

    So Marx got the life formula — accumulate, accumulate! — of the monetary economy almost right. He had in any case a better grasp of economic dynamics than standard equilibrium theory. Independently of all these differences between the major sects of economics the greatest collective scientific embarrassment of all times is: the profit theory is false since Adam Smith.

    Egmont Kakarot-Handtke

    References
    Desai, M. (2008). Profit and Profit Theory. In S. N. Durlauf, and L. E. Blume (Eds.), The New Palgrave Dictionary of Economics Online, pages 1–11. Palgrave Macmillan, 2nd edition. URL
    http://www.dictionaryofeconomics.com/article?id=pde2008_P000213.
    Kakarot-Handtke, E. (2011). Squaring the Investment Cycle. SSRN Working Paper Series, 1911796: 1–25. URL http://ssrn.com/abstract=1911796.
    Kakarot-Handtke, E. (2014a). Profit for Marxists. SSRN Working Paper Series,
    2414301: 1–25. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2414301.
    Kakarot-Handtke, E. (2014b). The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment. SSRN Working Paper Series, 2489792: 1–13. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792
    Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working
    Paper Series, 2624350: 1–40. URL
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624350

    * https://commons.wikimedia.org/wiki/File:AXEC09.png or https://commons.
    wikimedia.org/wiki/File:AXEC08.png or https://commons.wikimedia.org/wiki/File:
    AXEC42.png

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