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Wages and productivity

from David Ruccio and issue 9 of RWER

Mainstream economists continue to insist that workers benefit from economic growth, because wages rise with productivity.

Here’s the argument as explained by Donald J. Boudreaux and Liya Palagashvili: 
Firms cannot afford a misalignment of their workers’ pay and productivity increases – the employees will move to other firms eager to hire these now more productive workers. Higher economy-wide productivity, after all, means that workers add more to the bottom lines of employers throughout the economy. To secure the services of these more-productive workers, firms bid up worker pay. This competition for labor services is what links pay to productivity.

Except, of course, the link between wages and productivity has been severed for decades now, going back to the late-1970s. Since then, as the research staff of the Economic Policy Institute have shown, productivity has increased by 70.3 percent but average worker’s wages have risen by only 11.1 percent.

Figure 5


So, no, there is no necessary or automatic link between productivity and wages within the U.S. economy. There may have been such a relationship after World War II, during the so- called Golden Age of American capitalism, but not in recent decades.2

A natural question that arises is just where did the excess productivity – the extra surplus U.S. employers appropriated from their workers – go? A significant proportion, as I showed last year, went to higher corporate profits. Another large portion went to those at the very top of the wage distribution.

As is clear in Figure 6, the top 1 percent of earners saw cumulative gains in annual wages of 157.3 percent between 1979 and 2017 – far in excess of economy-wide productivity growth and nearly four times faster than average wage growth (40.1 percent). Over the same period, top 0.1 percent earnings grew 343.2 percent, with the latest spike reflecting the sharp increase in executive compensation.

In other words, corporate executives – on both Main Street and Wall Street – have been able to share in the extra booty captured from American workers, who were forced to have the freedom to sell their ability to work for wages that have barely increased in recent decades.

It’s clear then that, for decades now, American workers have been falling further and further behind. And there’s simply no justification for this sorry state of affairs – nothing that can rationalize or excuse the growing gap between the majority of people who work for a living and the tiny group at the top.

But that doesn’t stop mainstream economists from trying.  read more

  1. Ikonoclast
    August 9, 2020 at 6:35 am

    From the graph (Figure 5) there seems to be an important inflection point (or rather inflection zone) from about 1972 to 1981. What happened at that time? Rather than looking for purely “economic causes” according to “economic laws” or even for causes exogenous to the political economy, I would look for institutional causes via institutional changes. Although, a full study looking at all potential causes would also be worthwhile.

    Economics (or political economy) is strongly institution-governed and institution-conditioned, in my opinion. The following would be my hypothesis. Institutional changes were made to “discipline” labor and these were effective as designed. The monetarist and then neolioberal ideology had a bias and blind-spot which decreed that profits (including what critics might term excess profits) were not the cause or a contributing cause of inflation. Only wages, by instituted definition, could cause inflation. The NAIRU (Non-Accelerating Inflation Rate of Unemployment) was theorized and instituted in praxis (embodied in institutions and labor-industrial law) and referred to the theoretical level of unemployment below which inflation would be expected to rise. Unemployment was used to discipline wages. The high taxes which had been used to discipline excess and windfall profits were regressively abandoned.

    A Non-Accelerating Inflation Rate of Profit was never theorized, at least not in conventional economics. Try searching for it. Yet why should it not be part of theory and praxis? Adam Smith did not simply argue that excess profits got competed away, though that is what his modern acolytes argue. As Adam Smith was well aware, being a moral philosopher and realist;

    “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

    Smith recognized the potential for what we would call guild or cartel behavior. Neoliberal apologists seek to reclaim this point from Smith as follows. “Smith’s point is that the only way businessmen can succeed in a ‘conspiracy against the public’ is if they are given protection by government regulation.” – Sam Bowman, Adam Smith Institute. To that, I would say “A Daniel! Yea, A Daniel!” meaning (ironically in this case) that a wise judge has spoken . (See “The Merchant of Venice.”) If businessmen as a class, using labor as a class, have succeeded in raising productivity by 246.6% while only raisin the hourly compensation of labor by 114.7% then surely the key hypothesis following Adam Smith’s own reasoning is that the businessmen indeed have been given protection and assistance by government regulation.

    And that’s my hypothesis. Namely that the institutional assistance (the favoring of a certain class) is the causative element in the change. In turn, as the cause of that cause, what political and power changes permitted and facilitated these institutional changes and the consequential class-differential assistance? That is the next and deeper question to be answered in modern political economy. The answers likely will be found in the inherent tendencies within capitalism itself. Marxist theory will come to our aid in this analysis. The tendency to the oligopoly and monopoly accumulation of capital and the capturing of the propaganda arms (concentrated mass media) and governance arms (via representational and regulatory capture) will in turn, in all likelihood, explain.

    Bourgeois or orthodox economics does not have natural laws which can be described mathematico-deductively. It’s not a natural system with natural laws (like the climate system for example). It’s a politically generated power system and prescribed formal system. It has not natural laws but legal laws and capitalist accounting and capitalization rules backed by force (ultimately backed by the state’s monopoly of force). Wherever an economic monopoly is found, a sociopolitical monopoly of force, meaning legal, political, social and physical (kinetic) force will be found which underpins it and backs it.

    To quantitatively investigate the above assertion the relative masses of such forces would need to be aggregated. How many security force humans, batons, guns, bullets, rubber bullets and cylinders of tear gas are deployed on each side (capital and labor)? What are they deployed to attack and what are they deployed to protect? How many lawyers are deployed by each side? How many pages of legislation are deployed to protect the rights of capital and how many to protect the rights of labor? How much capital is deployed to fund pro-capitalist campaigns? How much is deployed to assist pro-labor campaigns?

    The development of relatively objective metrics would be difficult but not impossible. Such studies would struggle even for funding. The extant system invests largely in creating, perpetuating and legitimating itself; certainly not in critically examining itself. That has to come from outside the existing power systems and without compromising or treating with them. Compromise is accommodation. Accommodation is to be absorbed. catabolized and consumed by the system.

    • Yoshinori Shiozawa
      August 9, 2020 at 3:15 pm

      Iconoclast, you believe “Econom[y] (or political economy) is strongly institution-governed and institution-conditioned,” (I suppose you are talking of economy, not economics here.) It is a valid point of view and I am not opposed against it. But, as an explanation of structural change that happened in late 1970’s and that continues until today, your explanation is too weak. It is even insulting to working people, because it is equivalent to say that capitalists or oligarchy became suddenly wiser and stronger at that time and workers had nothing to do with this change for more than 45 years.

      • Ikonoclast
        August 10, 2020 at 1:13 am

        If I am insulting working people, then I am insulting myself. I was a worker during that period and indeed long after. It is interesting to compare one’s own lived life with official, unofficial and critical histories of the period.

        My overall viewpoint is that while capitalists strategized to shift the institutional and rewards balance to themselves (and had the capital to employ experts to assist them in this) workers like me strategized, as the situation fluidly evolved, to;

        (a) keep personal finances afloat under the pressure of high inflation;
        (b) find the next job as unemployment and lay-offs rose;
        (c) perform the tasks of reproduction of labor (have a family and raise it);
        (d) pay off a mortgage as interest rates rose to 18%; and
        (e) satisfy bosses and clients on a daily basis.

        The old saying is “Too busy fighting alligators to drain the swamp.” The workers were somewhat in that position in an era with a high rate of change. Later came computerization of the workplace and neoliberal changes meant to reduce real wages and conditions. Law changes made it more and more difficult to strike legally or use any other of the traditional union tactics. I was also a union representative for a while.

        What I am saying is that it was a form of asymmetrical (class) warfare and by the time I, as a representative individual, understood how I had lost Battles A to D, I was already in and losing Battles E to H. The strategies and tactics of capital had already moved on. I and my fellow workers were playing catch-up and failing, to some extent.

        To put it another way, it was a (serious) game, a “cooperative-competitive” game with complex ever-changing rules and workers were largely rule takers not rule makers. The dominant capitalist were the rule makers. They took the initiative and held it for decades. It wasn’t all “capitalist genius”. Developments, trends and rates of technological change assisted the fluid “rule capture” or legislative capture game of capitalists.

        The relative quiescence and acquiescence of workers had a number of causes. The industrial workforce was on the decline relatively and sometimes absolutely in some countries. These workers had traditionally been the most militant. Women became part a much greater part of the workforce and gender labor arbitrage effects came into play. Women were used to push down wages. Women were payed less up front for equal work (which still continues today to some extent) and men in clerical and women-majority workplaces had wages held down to (partly) meet women’s wages coming up. There are many other aspects to all of the above but this reply is already overlong.

    • Ed Zimmer
      August 9, 2020 at 3:49 pm

      Ikonoclast,

      Matt Stoller did an excellent (IMO) summary of the forces at work in the US economy from the 1960s through today in the Spring 2020 issue of American Affairs that might help answer some of your questions – The War within Corporate America.

  2. Robert Locke
    August 9, 2020 at 10:13 am

    It seems that the invisible hand of market forces did not push wages higher with productivity increases, because the visible hand of corporate governance made decisions about the distribution of emoluments that rewarded the rich with the surplus employees created. What to do, give the employees a voice in the distribution of emoluments. Its a no brain er, never discussed here because the proprietary concept of the firm is sacrosanct. I’ve been discussing this for years in my work, because I came to this blog via a study of the German system of co-determination post WWII and earlier.

    • Yoshinori Shiozawa
      August 9, 2020 at 2:51 pm

      Robert, your institutional prescription may be right. But you are not explaining what happened in late 1970’s. Of course, one most conspicuous fact in this half decade is oil crises in two stages. Behind these years some enduring relations must have emerged. How do historians explain this long-enduring change deep under the surface?

      • Robert Locke
        August 9, 2020 at 4:23 pm

        The era of the development of the visible hand of management, I point out in “Financialization,Income Distribution, and Social Justice” RWER #74, 21.08.2014, pp. 74-89.went through two phase. I wrote in that article:

        ‘Although many economists and business writers have discussed increased financialization
        since the1970s, they have paid scant attention to the impact this change may have had on
        the distribution of incomes in Western economies.

        This paper compares and contrasts in this
        respect American financialization with German over the past half-century. According to Petra
        Dünhaupt, finanzialization in the two countries differed: “In the US, the important shift towards
        financialization occurred in the early 1980s, …in Germany the process of financialization
        started much later – in the beginning of the 1990s – and followed a much more gradual
        transition.” (Dünhaupt, 2012, 1)

        The analysis is pursued historically, on the grounds that an
        understanding of the financialization of the German economy requires an investigation of
        intergenerational institutional legacies.

        The financialization referred to here can be described as the transition from management
        capitalism to finance capitalism. More specifically, it is the change from viewing a business as
        a vehicle for earning “returns on investment . . . based on the value created by productive
        enterprise” to viewing a business “as assets to be bought and sold for maximizing profits
        through financial strategies.” (Ball & Appelbaum, 2)

        Large-scale industrial organizations in
        which the internal “visible hand” of management orchestrated productive activities formerly
        coordinated through the external “invisible hand” of market transactions first emerged in the
        United States in the 19th century. By the 1920s, many of these organizations, as famously
        described by Alfred D. Chandler, Jr. in his path-breaking book The Visible Hand ,1977, (Locke
        & Spender, 2011) had evolved into complex multi-divisional enterprises that arguably
        represent the pinnacle of management capitalism’s development. Indeed, large managed
        enterprises have flourished in the global economy from the early 20th century to today.

        But
        changes in financial markets, financial institutions, and management compensation after the
        1960s increasingly shifted the attention of managers from producing and selling products and
        non-financial services to seeking returns from financial activities. These changes from
        management capitalism to finance capitalism had profound consequences for the distribution
        of incomes. However, the fairness of that distribution varied greatly from nation to nation,
        depending on their institutional and governance forms and how democratically members of
        each society could alter those forms. Here we particularly examine how institutional and
        governance differences shaped outcomes in Germany and the United States.

        Financialization and executive compensation
        Epstein defines “financialization” as the “increasing importance of financial markets, financial
        motives, and financial institutions, and financial elites in the operation of the economy and its

        governing institutions, both at the national and international level” (Epstein 2005, 1).

        Dünhaupt posits five ways that financialization has affected the compensation of executives:
        1. It shifted the basis of enterprise finance from banks to capital markets;
        2. It reinvigorated the “rentier” class that had been on the decline by creating
        institutional investors (e.g., pension funds) that base investment decisions solely on
        stock prices and short-term return on investment;
        3. It linked financial trading to new financial institutions (e.g., investment banks, hedge
        funds, and private equity firms) and new financial instruments (e.g., derivatives, stock
        options, and credit swaps);
        4. It stressed profit-making through financial activities instead of through real productive
        activity;
        5. Under the guise of increasing share-holder value in a firm, it subordinated the
        interests of stockholders as governing agents of nonfinancial firms to those of
        directors (and, implicitly, those of Wall Street analysts, investment bankers, and large
        investors). In effect, this made directors, not stockholders, the chief beneficiaries of
        financialization (Dünhaupt, 2011, 10; Locke, 2012; Ball & Appelbaum, 3).

        The fifth point raises an interesting issue. The financialization of firm governance is often
        equated with stockholder primacy because decision-making still resides in the CEO and the
        board of directors. Thus, because the stockholders choose the CEO and board it suggests
        that they remain in charge. This, however, is not exactly what happened in large US firms.
        Through control of the proxy process, incumbent CEOs have come to nominate their own
        candidates for board memberships, thereby making the boards director-selected instead of
        shareholder-selected entities. According to Stephen Bainbridge “director primacy” has placed
        “power and the right to exercise decision- making neither in shareholders nor the managers,
        but in the Board of Directors,” who have claimed the right to assure the “efficient maximization
        of shareholders’ residual claims,” without the shareholders in effect being able to control the
        board (Bainbridge, 2006, 1).
        I

      • Yoshinori Shiozawa
        August 10, 2020 at 3:28 am

        Thank you, Robert, for this long explanation. Surely, financialization must be a key concept that explains one of major aspects of recent (since 1970’s or 1990’s) global economy including the USA and Europe.

        I wonder how many working person (in percentage) the finance sector can support. Would someone teach me percentage of employed person in finance industry among all working persons for major countries? In my impression (if I remember correctly the numbers when I investigated these numbers about 10 years ago), the USA can support around 10% of finance people (because it is engaged in world-wide financing) but other countries can employ for example around 5% of working forces.

        I am also wondering what the mechanism of financialization is: How it occurs? How it proceeds? and What limits the financialization? Can someone give me hints for these questions. It is almost sure that financialization is occurring but
        we know very little about this process.

        In Japan in 2000’s (2000-2009) shareholders capitalism seemed to have become very strong, but after the financial crises of 2008-2009, it seems that it became much
        repressed. Am i wrong? How about in other countries?

      • August 10, 2020 at 8:43 am

        Yoshinori, I cannot help you with reliable statistics, but I can share the impression that while in Japan the management is largely Japanese, Britain has invited in foreign investment which is more interested in its own profits than the condition of the British working people. As side effects, media spokesfolk are now often irritatingly foreign, such production as remains is largely for export, the only indigenous businesses flourishing are charity shops, and financialisation is creeping even into workaday life in a proliferation of gambling games, payday loans and recycled entertainment.

    • Ikonoclast
      August 10, 2020 at 1:27 am

      I agree with your initial post. (This despite our obvious disagreements in other areas.) I haven’t read your long post yet.

      “It seems that the invisible hand of market forces did not push wages higher with productivity increases, because the visible hand of corporate governance made decisions about the distribution of emoluments that rewarded the rich with the surplus employees created.”

      How do we explain the differences between the USA and Germany on this matter? The US capitalists had the power and will to do what they did. They “captured” political governance to an extent sufficient to do it. And labor power was concomitantly weakened and ineffective in some manner.

      Was government stronger in Germany? Were unions stronger in Germany? Were German capitalists weaker or were they more enlightened in the sense of possessing a more enlightened self-interest for the long term? Why did such management theory take hold better in Germany? Was it from ordoliberal traditions? Was it from a sense of capitalist-worker solidarity to some extent? Due perhaps to the discipline of re-building post-war and facing the entire Soviet bloc “over the urban back garden wall”, namely the Berlin Wall?

      These are interesting questions I think.

      • Robert Locke
        August 10, 2020 at 8:33 am

        I explain the heritage differences between Germany and the USA in my chapter, “German obstinacy,” The Collapse of the American Management Mystique, pp 55-103, Oxford University Press, 1996, and I compare the differences between academic business education in the two countries in the chapter, “Why not business schools,” the part covering Germany pp. 159-76, Management and Higher Education Since 1940, Cambridge University Press, 1989.

      • Robert Locke
        August 10, 2020 at 7:02 pm

        The areas I discuss in my chapter on German Obstinacy are The Battle over co-determination, postwar encounters with American managerialism, German leadership traditions, management education without business schools, leadership without management, the emergence of the German Management alternative.

    • Yoshinori Shiozawa
      August 17, 2020 at 5:06 am

      I have posed questions on how to understand kinks of real wage curves in Richard Koo’s Exhibits 4 and 6 and David Ruccio’s Figure 5, I got answers by Ikonoclast which seems to me insufficient as analyses of long continued phenomena and vaguer one from Robert. I am not saying that these answers are wrong, but in my opinion it is insufficient or superficial in the sense it remains easiest prompt answer. There is working forces behind the apparent conflict or under the surface that drive employer-employee relations and what the management does.

      The questions to be examined are not restricted to the above. There are many problems we face at. I had posted a comment on Erik Reinert’s paper Paul Samuelson and the Cold War rebirth of David Ricardo that appeared as one of papers in RWER number 92, a special issue on Inequality, and as an article in this blog on August 15. I explained how deeper analyses are possible when we have more concrete understanding on international relations between countries and technological progress with regards to economic growth.

      I hope readers of this page will read my comment (on August 15, 2020 at 5:10 pm). If you have any objections on particular point of my arguments, please post your answer as a comment to Reinert’s article page (August 15, 2020) in this RWER Blog.

  3. August 9, 2020 at 11:26 am

    Ikonoclast asks’ “What happened between 1972 and 1981”? In a few words, Hayekian Thatcher becoming leader of the British Conservatives in 1975 for opposing Labour’s prices and incomes policy, elected PM in 1979 and staging the Argentinian war: the “strong” (i.e. brutal) Mrs Thatcher getting re-elected on a wave of jingoism after sinking an old Argentinian battleship in supposedly safe waters while it was fleeing the conflict. I well remember her then trying to lock up Clive Ponting, the whistle-blower, for breaching official secrets, and the jury defying the direction of the judge to acquit him.

    The question is apt, because Ponting has just died and this appeared in an obituary.

    “Thatcher’s government after two years in office was extremely unpopular just before the Falklands War. Conservative party support was at 23% in the opinion polls, well behind both Labour and the Liberal/Social Democratic Party. Thatcher’s later popularity was entirely unexpected and based on a tidal wave of jingoism as a result of a short, successful war with Argentina. Without the Falklands War the privatisation of water, rail, gas and electricity and the destruction of 90% of British heavy industry may either not have happened or have been short-lived.

    “It is worth noting that the Argentinians had occupied the Falklands without one single British casualty. On 2 May 1982 when an advanced British nuclear submarine sunk the old second world war cruiser Belgrano, killing 323 Argentinians in the most horrible of fashions, not a single British person had been hurt in the Falklands War”.

    Other events include Australia’s elected Gough Whitlam getting kicked out of office and our Labour Party changing its constitution to let in the neo-Conservatives Blair and Brown, with tragic consequences in Iraq, Afghanistan and here: still with us today.

    “Of course, New Labour were never going to accept [Ponting’s limitation of] power, and they instituted secret courts for national security cases, with no juries and where the security services can introduce “intelligence evidence” that the defendant .. is not permitted to see”.

  4. Yoshinori Shiozawa
    August 9, 2020 at 3:32 pm

    Dave, do want to say that sequence of Falklands War determined the destiny of all developed countries about fourty years after that? Have you read Richard Koo’s article Inequality Challenge in Pursed Economies?. It is a good account of what happened in various advanced countries. Of course, as it is a short paper, it is a rough vision. We may point many exceptions or objections, but they are not the core of the question. Have you better explanation than Koo on what happened since 1970’s?

    • August 9, 2020 at 5:18 pm

      Don’t know, Yoshinori. What I feel rather than think is that Mrs Thatcher was a very influential leader among those brought up to believe “Might is right”, like American Republicans (embroiled at that time in Vietnam and trying to live down Nixon’s Watergate scandal), and the cowboy Reagan who with her transformed dishonest Hayekian anti-Communism into the Cold War. She may have influenced Bush 1 by via our Labour Party and Blair:

      https://www.britannica.com/biography/Margaret-Thatcher

      What I wrote at the time was “It is no good being strong if you are wrong”. She certainly had to believe in herself to take on the British miners.

      So, I had glanced at Koo’s article, but I now see the relevance of leading economies having become pursuers. In 1972 I was down to investing in a brilliantly reliable but sadly not durable Japanese motorcycle. The question I am asking myself is whether Thatcher anticipated this or led it: seeing a way out by getting Keynesian exchange controls removed so the rich in Britain and the USA could invest their buying power abroad rather than in their own people.

    • August 9, 2020 at 8:37 pm

      Koo concludes: “Unfortunately, there has been virtually no macroeconomic theories or models that address the policy implications of capital earning higher returns abroad than at home, and very little of the policy debate in advanced countries is couched in these terms. On the contrary, economist’s continued emphasis on the efficacy of monetary policy and disdain for fiscal policy are all based on the assumption that the economy is still in a golden era where the private sector is faced with a surfeit of attractive domestic investment opportunities”.

      If “virtually no” means “no published” macroeconomic theories addressing the problem, then this is probably true; but perhaps that is because they can’t get published. My macro theory and environment-inclusive macro model do address the problem – and from something Craig says, Michael Hudson does – in terms of the financial system being parasitic (exogenous?). The policy implication of that is to dispense with it and replace it with another (endogenous?) type of control mechanism aimed at environmental rather than financial stability, my proposal being a PID information feedback structure using “credit card” (customer rather than bank-generated) “money” to monitor our use and regeneration of environmental resources. I agree with Koo’s “on the contrary”, for “very little [if any] of the policy debate in advanced countries is couched in these terms”: sadly, even among would-be-heterodox economic thinkers..

    • Ikonoclast
      August 10, 2020 at 1:53 am

      Yoshinori Shiozawa.

      You ask davetaylor1: “Dave, do want to say that sequence of Falklands War determined the destiny of all developed countries about forty years after that?”

      From the point of view of Chaos Theory, a positive answer to that question is not necessarily absurd. In Chaos Theory (and its math) a small change in initial conditions can make a very large difference in long-term system outcomes. But to actually assert it in this case is problematic in the sense that in the economy system we have a “many-body problem” and no math known is equal to solving many-body problems. That much I think I can assert without being an advanced mathematician. There is no way to calculate a proof. There is also no way to test such an hypothesis empirically. We cannot run history again with different initial conditions (starting parameters).

      “What might have been is an abstraction
      Remaining a perpetual possibility
      Only in a world of speculation.” – T. S. Eliot.

  5. Yoshinori Shiozawa
    August 12, 2020 at 10:45 am

    Dear Ikonoclast,

    I have written a long comment on your chaos theory. But unfortunately, I have deleted the draft by pure mistake. I was much discouraged by that. So, I want to argue my point only briefly.

    Chaos theory occupies important place among science of complexity and therefore among economics of complexity. So, I had worked on it for some years many years ago. What you are talking about is the question of the sensibility of solutions to initial conditions. This is often called butterfly effect. There are many misunderstandings in this effect. But, I do not enter into it. It would be sufficient to cite Wikipedia article: “Butterfly effect in popular culture.” We have also article “Butterfly effect” which gives more accurate account of the effect.

    If we understand that butterfly effect may manifest in various occasions, how should we consider the making of economics? To understand that economics must be predictive science is wrong, because, after a certain lapse of time, we cannot tell the future event however we measure accurately the present situations (This does not in principle exclude the possibility to tell for example the growth rate of the next year, but the performance of this kind of predictive models are very bad). This fact excludes several types of economics. The type of argument like “Falkland War was the cause of kinked curve of real wage rates”. Falkland War may have been one of many causes of the kink, but it is impossible to say anything certain with this type of analyses. (Another implication is rational expectation hypothesis.)

    Then, what kind of economics is it possible? This must be the true point of question for economics and for all social sciences. One possibility is to detect a pattern of past series of events. If we can find a stable pattern, we can expect it may repeat in the same pattern, even if we do not know how this pattern occurs. Another possibility is to find a structural causalities. Economy is a large system but it is working everyday (or every year) according to a rather stable structure and mechanism (although they are changing slowly). If we can know the structure or working mechanism, we can know what would happen with high certainty. In a wider sense, this is also a pattern finding, but much refined one than the simple pattern findings.

    Economics, in my belief, is to find this kind of structure and working mechanism that may be useful in considering important questions like the reasons of the kink in the real wage curves.

    Now, we have many structural explanations. Ikonoclast’s explanation by the change of power relations like indicated in the top post in this page (August 9, 2020 at 6:35 am) is one possibility. There are some others that can explain the same phenomena with more or less depth. If we can find a structure that can explain the change of power balances between capital and labor and that seems to be influencing the change of power balances, the structure can be deemed deeper structure than the power balances. The theory that explains deeper structure can be called deeper theory than apparent power balance theory.
    I wonder if someone have such a deeper theory.

    Political relations are often very important, but in many other occasions economy without state interventions is as well important. “Political economy” economists have a strong tendency to claim that politics matters. They may be right. However, economy matters, too. “Political economy” people often forget economy matters too and think that they can change the economy if we change the politics, state or ownership system.

    They are wrong. The most convincing evidence is the experience of Marxism-Leninism in the 20th century (1917-1991). We must not forget this tremendous human tragedy, which was our precious experiments and experience.

  6. Ken Zimmerman
    August 16, 2020 at 4:19 pm

    Perhaps I am missing some finer points, but I believe part of the answer to the puzzle you describe is presented in President Trump’s answer to a question about his significant cuts in funding at the CDC during a February 27, 2020 news conference on the Federal government’s response to the coronavirus. Trump’s defense for his massive CDC budget cuts is direct, and, based on historical experience wrong. But it is the basis for his actions, nonetheless. “I’m a businessperson. I don’t like having thousands of people around when you don’t need them … When we need them, we can get them back very quickly.” Based on our historical understanding, highly educated, skilled, and experienced workers in technical and scientific areas are difficult to recruit, as they have various job opportunities. Moreover, it is difficult to create a unified and effective working unit of such workers. Requiring many years to achieve both the coordination and trust necessary. The difficulty is compounded when members of the unit come and go, by chance or the design of supervisors. This kind of knowledge of working group coordination and group accomplishment seems now missing from the formal and on-the-job education of business owners (direct and indirect) and senior business managers (e.g., CEOs, CFOs). That is, if President Trump reflects their views accurately.

    But this does not explain how ordinary workers are treated. For this we must look at the history of work. Before the invention of industrial capitalism approximately 200 years ago in England, work referred in a generalized way to activities directed at satisfying the human need for survival (food, shelter, water, defense, etc.), for many humans at a subsistence level. In terms of the 40,000+ years history of human societies, it is only in the recent past that work has become synonymous with regular paid employment, a separate sphere of specialized economic activity for which one receives payment. Thus, the current conception of work is a modern social construction, the product of specific historical conditions that are typically denoted by the term ‘industrial capitalism.’ Struggles, many physically violent are part of the entire history of industrial capitalism. Industrial capitalism represents a revolutionary change from the ways of life common for the entire prior history of humans. Even today, the fundamentals of industrial capitalism are not agreed upon in any society on earth. In particular, the role of and appreciation for the life and contributions of people is not agreed upon. Making the experience of workers a key concern. The spatial separation of home from work, initiated by the creation of specialist work sites following the introduction of inanimate energy sources to power machine technology, represents the first major change from what had been the norm in all pre-industrial societies, the unity of home and work. With profit making the priority in a capitalist culture, workers are recruited based on potential productiveness rather than parentage. Hence the move from working and living at home in a rural community to working away from home in an urban area meant being treated as a cost of production in a largescale organization and interacting with people to whom one was not related or even knew personally prior to working in the same workplace. In other words, the industrial (factory work) and capitalism (labor treated as a commodity) reinforce each other, thereby highlighting the impersonalism of the new work situation and the contrast between this and family and other cultural relationships. Industrial capitalism’s organizational structure began rather simply. With individuals, often members of the same family, owning and managing one or a relatively small number of local productive units. Today the structure is densely bureaucratic with many shareholders, individually or institutionally, employing others to manage many productive units in many parts of the world. A second major and unprecedented change for workers in industrial capitalism is work now involves monetary payment typically agreed in advance in relation to time and/or output. This arrangement operates as part of a market structure in which ‘productive property’ is privately owned with a view to making a profit and that everything has a price, including labor. All ‘modern societies’ are industrial societies. While the process of modernization may start with industrialization, it is one that covers all aspects of social change, not just economic change. No end of things here to piss-off workers.

    Industrial capitalism is problematic for human societies and cultures. The rise of industrial capitalism involved the development of a market economy in which capital, labor, goods and services are exchanged for money free of traditional social obligations and constraints such as restrictions on who could engage in certain economic activities or what could be exchanged in those activities. In other words, the idea and practice of free trade or laissez-faire. More importantly, in industrial capitalism economic relations become separated, supposedly at least, from non-economic relations, and distinguished by the primacy accorded to the freedom to maximize economic gains by employing free wage labor. In contrast to pre-modern paternalism, employers had and have no obligations beyond paying the lowest wages possible in the new competitive market system, since to do otherwise risked economic failure. But since industrial paternalism did not completely disappear, in some instances it constrained the more extreme operation of the free (labor) market culture (Patrick Joyce, 1982). But generally, nothing could eliminate the ‘anomie’ of workers in industrial capitalism. Instability resulting from a breakdown of standards and values or from a lack of purpose or ideals has been and remains a central problem (perhaps insoluble) of industrial capitalism.

    We have known for a long time that sometimes cultures hit dead ends. They fail. And must change direction or cease to exist. Perhaps that is what is happening with industrial capitalism.

    • Craig
      August 16, 2020 at 6:42 pm

      Industrial capitalism has already failed and finance capitalism is its even more oppressive “alternative”. All of the legitimate and yet stultifying-ly repetitive analysis of economics misses the mark as it fails to look at the real problem which is the inevitably destabilizing present monetary and financial paradigm of Debt Only as the sole, i.e. monopolistic, form and vehicle for the creation and distribution of money/credit.

      Integrate the new paradigm of Monetary Gifting intelligently into the system and all manner of immediate, universally beneficial, rational and ecology saving effects are enabled. What’s more such change will have trans-systemic and trans-body of knowledge positive effects and will become only the third mega-paradigm change in the history of the species.

      We need to discover and focus on the real, the deepest problem problem.

      • Ken Zimmerman
        August 17, 2020 at 3:25 am

        Craig, financial capitalism is just industrial capitalism with ‘financial work’ substituted for ‘factory work.’ The rest remains unchanged. It is much easier to manufacturer and distribute money. And the profit is larger.

        Why would the people who control and benefit (greatly) from these arrangements agree to replace them with a gifting economy? There’s little chance until the people who benefit are removed.

      • Ed Zimmer
        August 17, 2020 at 3:57 pm

        Ken, financial capitalism is NOT just industrial capitalism with ‘financial work’ substituted for ‘factory work. You’re missing a very important societal factor articulated as far back as
        Aristotle – the accumulation of money itself is an unnatural activity that dehumanizes
        those who practice it
        . Industrial capitalism (at least up to the point of oligopoly) focuses on serving customers – giving customers better quality, lower prices, more choices –
        NOT on simply accumulating wealth. I see the production-and consumption economy (as measured by GDP) as the essential economy (as it provides our livelihood). I see the FIRE economy as just one big (corrupt) gambling casino

      • Ken Zimmerman
        August 18, 2020 at 11:26 am

        Ed, I cannot agree. Not fully, at least. First, the purpose of capitalism is, as the capitalists themselves point out the unregulated pursuit of profit. There is nothing said about limiting profit. As for capitalism, both industrial and financial being unnatural, neither is. They are cultures created by humans. As for industrial capitalism having greater focus on customer service, that clearly is not the case. Industrial capitalism fills the novels and short stories of Charles Dickens. This is a brutal and cruel culture. A ‘winner take all’ culture focused mostly on increasing profits, with little concern for the externalities damaging humans and human community. Clearly, experience shows us that financial capitalism is even more rapacious than industrial capitalism and much more a danger to human community. So, essentially the accumulation of wealth in certain members of a community can harm the community when the accumulation is excessive. But it is not always easy to see the point at which the accumulation becomes excessive. Break down of social norms, increases in violent schisms, and decreases in concern for one’s fellows warn us we are near that point today.

      • Ed Zimmer
        August 18, 2020 at 6:33 pm

        “the purpose of capitalism is, as the capitalists themselves point out the unregulated pursuit of profit”</i? – Ken Zimmerman

        Gawd, that's depressing! I'm assuming you're young (or at last still of working age), & to hear you voice neoliberal myths is disheartening. No, the purpose of capitalism is not the pursuit of profit – it’s the pursuit of customer satisfaction, profit being just a necessary factor in achieving that. You express disappointment in the degrading state of today’s society, yet you fail to see that’t the very myth that’s brought us to this state.

        In the middle of the last century, we were a small-business economy. The aspiring entrepreneur could still start & grow their own business & government was still concerned with the welfare of its people. And then Reagan came on the scene (U.S.) promoting all the selfish shortsightedness of Austrian economics & that vision grew to dominate our society into what it’s become today.

        In 1970, I spun out from being a corporate engineering manager to develop & manufacture the first commercial computer display terminal (breaking us out of punched-card days). “Pursuit of profit” was never my objective – rather it was making a living doing something I enjoyed that others found useful. I grew that business into what today would be a $50 million business, with never any need for outside capital, & wrapped it down after nearly 20 years because others could provide as good or better products.

        During that time & through the early 2000s, I helped many others start & manage their own businesses via the Internet, not by providing capital but simply acting as their sounding board. That ended as VCs came on the scene & convinced wannabes that venture capital was the only path to entrepreneurial success. Which of course proved not to be true. For every success applauded by the media, there are many more who saw only disappointment or failure, not from their lack of talent or trying, but from the demands of VC. The VC’s business (obsession) is making money on money & any mistake or delay in that achieving goal dooms the entrepreneur to being backroomed or replaced. I find it tragic that so many talented individuals no longer have the opportunity to learn how to “do business”.

        I’ve had a great life, active & fun. I’ve always had more money than I’ve had any interest in spending. And the FIRE economy keeps building up that pile of paper – to what end? (Especially in denying the young the fullness of life I’ve had.)

      • Ken Zimmerman
        August 20, 2020 at 9:09 am

        Ed, that is certainly one view of capitalism, combined with some early America nostalgia and pieces of socialism. Here is another.

        Prior to going to the Marine Corp. in 1965 I had the pleasure of working on the Lyndon Johnson Presidential campaign. Johnson’s Republican opponent was Barry Goldwater. I disagreed with almost every aspect of his campaign, but particularly his foreign policy which I still believe would have led to a nuclear war within two years had he been elected. Then, you and I would not be having this polite conversation today. Goldwater’s economic positions also generated much controversy. Many considered them contradictory and unworkable, including me. So, Goldwater’s campaign brought in the big gun, “…a leading ‘classical’ economist and Paul Snowden Russell Professor of Economics at the University of Chicago” Milton Friedman to explain “The Goldwater View of Economics.” These are excerpts from that article in the NYT times (Oct. 11, 1964).

        The unusual aspect is that no one seems to realize that Goldwater does have a philosophy, and not merely views on particular economic problems.

        Yet the philosophy is far more important than the views on particular issues. If Senator Goldwater is elected President, like all Presidents he will find that he cannot get some policies he wants, and he will change some of his particular views. Senator Goldwater’s philosophy, however, will not change—it is a basic part of the man.

        Freedom and opportunity are Senator Goldwater’s basic goals for mankind: freedom of the individual to pursue his own interests so long as he does not interfere with the freedom of others to do likewise; opportunity for the ordinary man to use his resources as effectively as possible to advance the well-being of himself and his family. Government exists to protect this freedom and to widen this opportunity.

        Throughout history, the great enemy of freedom has been concentrated power—private or governmental. If freedom is to be secure, power must be limited and it must be dispersed. The most effective way simultaneously to disperse private power and to limit governmental power is to rely primarily on voluntary exchange through a free market—competitive capitalism—to organize economic activity. The most effective way to disperse the remaining governmental power is to rely on a constitutional system of checks and balances, and a federal system of decentralized political responsibility.

        As Senator Goldwater said in opening his campaign in Prescott, Ariz., “This country has grown great and strong and prosperous by placing major reliance on a free economy. . . .Private property, free competition, hard work—these have been our greatest tools. This system has preserved and protected our freedom, our right to disagree, our diversity, our independence from arbitrary interference in our affairs. This system is the mighty engine of progress which enabled this country to develop from a small but independent citizenry to become a multitude spanning the continent and living on a level that is the envy of the world.”

        Wherever men are today reasonably free and relatively prosperous, they have gained their freedom and earned their prosperity through a system based on private property, free enterprise, and free markets. There is not a single exception. Centralized governmental control over the economy has been able to produce spectacular achievements—from the pyramids of ancient Egypt to the sputniks and space exploits of Russia today. Such a system has been able to attain great military strength. But it has never been able to achieve either freedom or a decent standard of living for the ordinary man.

        THE Berlin Wall is a dramatic monument to the superiority of the free economy. Before they were torn asunder, the Germans, east and west, shared the same technology, had much the same level of living, and they are the same people. The West Germans chose the path of freedom. The East Germans had collectivism thrust upon them. The results are clear for all to see—growth and prosperity under freedom versus stagnation, deprivation and misery under collectivism.

        Of course, every economy is a mixture. In all, economic activity is partly organized through a free market, partly through rigid customary relations, partly through explicit governmental authority. But the proportions vary widely. Freedom and prosperity have gone along with a mixture in which the market is dominant; tyranny and misery, with one in which custom and the government sector are dominant. Yet the evidence is often misread. After a talk I once gave in Kuala Lumpur, I was informed that the success of the United States was attributable to the 20 per cent of socialism in its mixture, and the failure of India to the 20 per cent of free enterprise in its!

        GOVERNMENTAL activity, though it must be limited to its proper, sphere and decentralized as much as possible, is of critical importance in protecting men’s freedom and widening their opportunities. Government must provide for the common defense, preserve law and order, define the rights of men and enforce contracts among them, keep markets free, provide a stable monetary and fiscal framework for the private economy, construct public facilities that for one reason or another cannot be provided by the market, and assist in easing distress and relieving misery.

        It is always tempting to have governments go still further, to have them try to do directly for the people what the people seem at the moment not to be able to or to want to do for themselves. But history teaches that this course seldom achieves the intended objectives; that it generally only weakens the capacity of the ordinary man to provide for his own needs. In addition, it has unintended consequences. Governmental power, once established, gravitates into the hands of private groups that use it for their own selfish purposes—groups that, by forming a coalition with government, are able to strip the consumer of the protection of the market place.

        . . .

        THESE examples illustrate, I hope, the Senator’s general approach to specific problems. His goal is always the same: to promote the freedom of the individual and to widen his opportunity; to stop the drift toward centralization and collectivism that has been underway in the past few decades, a drift that has not achieved its professed objectives but that has served to curtail individual freedom, to undermine individual responsibility and to weaken the moral fiber of the people.

        His means are various but always conservative, in the sense that they emphasize gradualness, order and dependability, the limitations of our present knowledge and the need to learn from experience.

        THE same approach explains his policy on other specific issues: his support of free collective bargaining, combined with his concern over compulsory unionism and his fear that we are drifting toward compulsory arbitration: his vote against the so-called “Trade Expansion Act,” on the grounds that, despite its label, its grant of discretionary power to the Administration to impose and to change restrictions on trade would lead to greater restrictions rather than less—as has, indeed, been the outcome; his vote against the interest equalization tax, on the grounds that it will interfere with the free flow of capital, is a further step toward the direct control of foreign transactions and yet will be ineffective in reducing the payments deficit; his belief that a strong domestic economy is the surest guarantee of the strength of the dollar to world markets and that if the U. S. follows sound policies at home, it need have no fear of a run on the dollar; his unwillingness to see Federal aid to education, if enacted, go solely to public schools and thereby impose penalties on those parents who wish to send their children to private schools, whether religious or secular.

        SENATOR GOLDWATER is often depicted as a reactionary mossback who wants to turn the clock back to an earlier but vanished era. The irony is that the critics who charge him with retreating to the 19th century, are themselves working as hard as they can to turn the clock back to the mercantilism of the 16th and 17th centuries. The policies of government intervention, of wage- and price-fixing, of control over the flow of trade, of paternalism that they favor are the very policies that were then the rule throughout Britain and Western Europe. It was those very policies that had to be overthrown to permit the economic, social and political revolution of which we are the beneficiaries.

        Mr. Goldwater is, of course, inspired by ideas of an earlier age. So are we all. How else can we get wisdom and knowledge, except by learning from experience? As the Senator said in accepting the Republican Presidential nomination, “We must and we shall return to proven ways—not because they are old, but because they are true.”

        The criticisms of Goldwater’s and Friedman’s economic views are of course many and deep. I will summarize those as follows.

        First, they miss what history and much of social science tell us about human life in community. C. Wright Mills (The Sociological Imagination) reminds us of the inclusiveness of community, in all its variety and inevitability.

        NOWADAYS men often feel that their private lives are a series of traps. They sense that within their everyday worlds, they cannot overcome their troubles, and in this feeling, they are often quite correct: What ordinary men are directly aware of and what they try to do are bounded by the private orbits in which they live; their visions and their powers are limited to the close-up scenes of job, family, neighborhood; in other milieux, they move vicariously and remain spectators. And the more aware they become, however vaguely, of ambitions and of threats which transcend their immediate locales, the more trapped they seem to feel.
        . . .

        Yet men do not usually define the troubles they endure in terms of historical change and institutional contradiction. The well-being they enjoy, they do not usually impute to the big ups and downs of the societies in which they live. Seldom aware of the intricate connection between the patterns of their own lives and the course of world history, ordinary men do not usually know what this connection means for the kinds of men they are becoming and for the kinds of history-making in which they might take part. They do not possess the quality of mind essential to grasp the interplay of man and society, of biography and history, of self and world. They cannot cope with their personal troubles in such ways as to control the structural transformations that usually lie behind them.

        Second, how cultures (including economies) based on capitalism operate often is far away from the idealized picture Goldwater and Friedman present and admire. Charles Dickens described in detail the life of and showed compassion and empathy toward the vulnerable and disadvantaged segments of British society and contributed to several important social reforms. Because the new industrial capitalism had literally pushed many in that society to the brink of annihilation. Death by overwork, starvation, or suicide. But still early and brutal death. Dickens was the conscience of 19th century British society, demonstrating a capacity to empathize with the victims of social and economic injustices that was scarce in that time. In contrast to Goldwater’s and Friedman’s description of how capitalism would raise people up and reduce injustices, the first decades of capitalism in Britain added new injustices and persecution to those brought over by the “underclass” from Feudalism. Social protest and new laws finally began to turn the tide of persecution and discrimination against workers and the “poor.” But the process is cyclical. Seems the wronging, unequal treatment, and oppression of the poor and workers continues to raise its head. As it has again over the last 50 years in America.

        I consider Goldwater the last genuine conservative to seek the US Presidency. Followed by a wide margin by George H.W. Bush. Reagan certainly was not a conservative.

      • Ed Zimmer
        August 20, 2020 at 5:21 pm

        Goldwater brings back memories – not pleasant ones.I do appreciate your responding.

      • Craig
        August 17, 2020 at 4:39 am

        There are still way more non-financial jobs and plenty more people who have low paying or no job at all who would obviously benefit from the new paradigm. All it would take to politically get Gifting implemented is a mass movement not unlike MLK Jr’s civil rights movement.

        Of course that would meet resistance, but who cares? The wealthy financial are few, we are many, and every legitimate business model except finance would hop on the bandwagon because the policies of the new paradigm more than double the potential individual income/business revenue for their products and services. When has any economist, pundit or pol offered them a policy that immediately creates that reality?

      • Ken Zimmerman
        August 17, 2020 at 11:43 am

        Craig, will your proposal lead to those in charge losing that control? If so, they will do all they can to stop it. And yes, making such changes will need a mass movement as large or larger than civil rights and BLM combined. The push back on both was and is extreme. And it is getting more extreme. Witness the Pettus Bridge and just a few weeks ago Portland. A lot of people will die or will just disappear. You ready for that? Fascists are predictable in this way.

      • Craig
        August 17, 2020 at 8:00 pm

        Of course I’m ready for that, because there is no acquiescing to the enslavement of all legitimate economic agents by the current monetary and financial paradigm of Debt Only. We must heed the Japanese military strategist Sun Su’s observation that if you can make the enemy (the enslaved in this case) believe that there is no hope in fighting, then you have won the war without raising a sword.

        The protests of such a movement must be determinedly peaceful, and also quick to declare and counter any attempt at a “wag the dog” war being fomented by finance or its proxies.

        Such movement already has the evocative ethical force to defeat enslavement, and also has the advantage of its policy effects being relatively simple to see and understand (Do the math!). Finally, it is also integrative of political and economic opposites because it not only helps the individual (democratic constituency) it also benefits business management (republican constituency) by more than doubling the money actually available for their goods and services, and eliminating the costs of both their transfer taxes and enabling the slashing of individual and corporate taxes as well.

      • Ken Zimmerman
        August 18, 2020 at 11:44 am

        Craig, fine words and all quite correct. May I just point out that thus far protests without the hammer of political and/or military violence have never changed anything in the United States. I hope the violence does not go beyond political maneuvers (laws, petitions, etc.) to suppress, defund, financially penalize, etc. Fascists, White supremacists, etc. and their associated political agents. That is my hope. Not a guarantee. The second act could be a bloody mess.

      • August 28, 2020 at 1:26 pm

        Ken’s “capitalism (labor treated as a commodity)” [Aug 16] and what Ed Zimmer picked out: “the purpose of capitalism is, as the capitalists themselves point out the unregulated pursuit of profit” [Aug 1] seem to me contradictory. Wasn’t labour being treated as a commodity the result rather than of the nature of capitalism, with Ed’s financial capitalism a twentieth century perversion of the original industrial capitalism that sought to make profits by investing [the newly available fictitious] money in accumulation of capital equipment, rather than by [nominally] indebting first firms and more recently consumers?

        Craig on the whole is right, I think, apart from ignoring the need to continue doing what needs to be done, and still believing democracy is about power (c.f. Orwell’s “Animal Farm”) rather than self-government (c.f. the Mondragon co-operatives). The productivity of the financiers being zero, they won’t like their wages being zero too, so they need reassuring by taxes being zero and their being pensioned off like everyone else with an adequate credit rating, free to be grateful for what they are given and encouraged to earn it by doing something useful. Same with politicians: they could use their freedom to study and give advice on what needs doing, but the economic freedom provided by credit needs to be constitutional, i.e. built into the system like which side of the road we drive on, as well as written inalienably in our nations’ formal constitutions: changeable not by politicians but only by national consensus.

      • Ken Zimmerman
        August 29, 2020 at 4:27 pm

        Dave, the capitalist I quote writing of capitalism as the “unregulated pursuit of profit” is Milton Friedman. If there are other references that indicate that conclusion is incorrect, please send them to me. Thanks. It is my view financial capitalism is not a perversion but rather an extension of industrial capitalism. Profit is still the motive. But the product sold is now money debt at interest. It just cuts out the middle. Profits come directly from money rather than through money. Finally, it is my view that anything whose value is decided in a capitalist market (not all markets are capitalist) is a commodity. Unless I misunderstand the last 200 years of capitalism’s history, the value of labor is decided through a market. While economic theory and some economists might see a role for productivity in that decision, I do not. It is my view that productivity is just a subterfuge used by employers mostly to keep workers under control by never allowing wages to move beyond mere subsistence.

      • Ed Zimmer
      • August 28, 2020 at 1:29 pm

        This one was definitely a transmission error rather than a typo! For “Aug 1” read “Aug 18”.

      • Craig
        August 28, 2020 at 4:57 pm

        Dave, As with everything in life the best plan is an integration of seeming opposites guided by the highest and most relevant ethic. That’s what I envision politics becoming…once the idiocy of the current monetary and financial paradigm is replaced by the new one.

        Human systems reflect human individual psychology and it is established human psychology that when a neurotic confronts and handles their primary neurotic computation many other attending behaviors either dissipate or disappear. I trust that will occur with the new paradigm as it is what keeps so many other intractable and chronic problems in continual suspension.

        As with overcoming primary neurosis so with mega-paradigms.

        And you are correct that the new paradigm and its policies need to become constitutionally enshrined. The American Revolution was not about a minuscule tax on tea, but rather about the British annulment of the colonists creation of their own money. The irony was that after the war the American founding fathers “dropped the ball” on monetary reform and adopted a system like the Bank of England.

  7. Yoshinori Shiozawa
    August 18, 2020 at 9:19 am

    Please read my post on August 15, 2020 at 5:10 pm added as a comment to Erik Reinert’s article (a digest from his paper in RWER #92) Paul Samuelson and the Cold War rebirth of David Ricardo. I have given my account on recent change of advanced countries including the USA, Japan and Europe. I argued there that the issues pricked up by Reinert as well as Richard Koo and David Rucio can only be understood with reference with catching-up countries like East Asian countries, South East Asian countries, China, and India. Effects of catching-up of these countries are less keenly sensed in Europe but we can see the similar structure within the European Union itself.

  8. gerald holtham
    August 18, 2020 at 11:55 pm

    If you want to know why there was an inflexion point in the 1970s, I can tell you. The post-wa era was characterised by full employment with a large proportion of the labour force in the developed economies employed in maufacturing and unionised. Exchange controls were general so capital could not move entirely freely. The period or full employment to which democratic governments were committed led to creeping inflation as workers in many countries succeeded in pushing up the wage share. This inate conflict erupted when oil prices quadrupled after the Yom Kippur war in 1973. Economies were worse off but no-one wanted to take the hit and inflation exploded in a wage price spiral. Many countries saw annual inflation in the teens and some in the twenties. Industrial unrest was common.
    Frightened voters put in Reagan and Thatcher. Many countries then followed contractionary policies to induce a recession, discipline trades unions and get wages back under control. Moreover exchange controls were abolished, welfare benefits were reduced and in some countries anti-union legislation was adopted. There was a fork in the road and electorates preferred to see the system preserved, as they understood it, rather than get into a new, possibly anarchic system.
    However what really cemented the change was the collapse of communism in Russia and China, in effect releasing a new, educated reserve army of cheap labour onto the global market economy. Capital could now flow to take advantage of cheap labour, China became the workshop of the world, reducing the price of goods in the developed countries – a favourable terms of trade shock, the opposite of the oil shock. That killed inflation in the West and buried it by undermining the market power of lower-skilled Western workers. Globalisation and the development of international supply chains was also facilitated by technical advance, especially in informatics.
    Since saving and investment were very high in China and consumption low, there was, however, a catch. Aggregate demand began to lag behind output as wages lagged the growth of GDP and profits rose. That led to an investment boom in the 1990s but those always peter out eventually. The system was kept going by easy money which allowed the workers to borrow against the collateral of their houses. In the noughties about 1 per cent growth of US GDP every year was consumption, financed by equity withdrawal from houses, whose prices rose with the money supply. When the housing boom burst in its turn we had the recession of 2008. Attempts to repeat the trick with “quantitative easing” have failed to stimulate activity and only inflated asset prices, worsening wealth inequality.. And now we have Covid.
    But my bet is electorates will react as they did in 1979. Better the devil you know and all that. They are not going to go for socialism. The Democratic Party in the US calculated they were more likely to win an election with Joe Biden than Elizabeth Warren. She is thoughtful and he is past it – but electorally were they wrong? Two world wars, and a great depression did not kill off capitalism. Pray by all means but don’t hold your breath.

  9. Yoshinori Shiozawa
    August 19, 2020 at 8:49 am

    Gerald

    As a short (and necessarily rough) account of what happened since 1970’s, your comment is right and splendid. But I wonder if it is an economic explanation. You raised a lot of things but how are they connected? What are the mains difference before 1970 and after 1980?

    To explain why we observe two different phases of real compensation (1948-1970 and 1980-2020) separated by a kink or inflection or a transition period, I believe it is necessary to present a unified theory that explain two phases and a reason of inflection. With this regard, I believe my explanation with the new theory of international values (as a part of classical theory of values) is much better than your explanation.

  10. gerald holtham
    August 20, 2020 at 10:13 pm

    YS: An economic theory should be consistent with events but it will never explain them fully because every historical episode embodies a host of other elements: political, geographical and accidental. The key economic difference to my mind between pre 1975 and post 1975 was the move from labour scarcity to labour abundance. The move had political elements: the abolition of exchange control enabling capital to pursue cheap labour and the liberalisation of the Chinese economy in particular which restored the “reserve army of labour” to the global economy This explanation is consistent with economic theory, including yours, I believe, but would not have been predicted by economic theory alone – unless like Marxist theory it attempts to embrace and explain political developments themselves as the outcome of underlying economic factors. Modern economic theory does not generally do that.

  11. Yoshinori Shiozawa
    August 21, 2020 at 4:50 am

    GH, Yes, of course, theory can explain almost nothing without information on what happened. The main function of a theory is to provide a framework for analyses. If it is not universal unified one, what a theory can give is a framework that can cover a narrow domain. But, sometimes, a good theory can give a deeper understanding on what happened in the past.

    Your understanding that the key economic difference between pre 1975 and post 1975 was the shift of phases form labor scarcity to labor abundance is not wrong. If we see the change from advanced economy side, the situation seems like that. But, how do you explain the same shift for developing countries? China has been labor abundant since many centuries. How do you explain the change in China particularly since 1990?

    It seems for me that what you lack is the theory of international trade or international economics. This is the field that is most retarded in economics. It is true not only for mainstream economics but for heterodox economics. Post Keynesian economics, for example, has its theory on international money and exchange rates but it continues to argue on the small open economy assumption.

    However, you have now a good theory of international trade. If you read my post on August 15, 2020 at 5:10 pm added as a comment to Erik Reinert’s blog article (a part of a paper) “Paul Samuelson and the Cold War rebirth of David Ricard”, I believe you will see how the new theory can be used in explaining deeper processes that lie beneath the surface.

    Please see my chapter The new theory of international values: an overview in Shiozawa, Oka and Tabuchi (eds.) A New Construction of Ricardian Theory of International Values: Analytical and Historical Approach, Springer Singapore, Singapore, 2017. You can read a draft of this chapter which is freely downloadable.

  12. gerald holtham
    August 21, 2020 at 4:18 pm

    YS I cannot claim to have assimilated your new trade theory. Ii may very well be helpful in understanding the precise modalities of international trade expansion after Chinese liberalisation. It cannot, however, explain why Deng overturned the Maoist approach and initiated the commercialisation of the Chinese economy. No economic theory can explain the Great Leap Forward or the Cultural Revolution either, because these were events dictated by the desire of a small power elite to retain power. They were not motivated by the desire for material gain on the part of themselves or others and they were not constrained by economic considerations. They therefore lie outside the domain of any existing economic theory.
    I am not a specialist in this area but I had supposed that the growth of international supply chains owed a lot to two factors. One the relative drop in transport costs that made re-export and re-import less expensive; two, the development of information technology that facilitated management of logistics and the management of complex supply chains. Even here, though, there was an element of non-economic “fashion” – the fashion for outsourcing and against vertical integration based on the belief that managers should focus on core competences..
    I don’t think we are disagreeing however. There is certainly a need to develop trade theory as you are proposing.

  13. Yoshinori Shiozawa
    August 21, 2020 at 11:21 pm

    Gerald, you are right. No theory can be almighty. A theory has its proper range of validity. We must not apply it outside of its range of validity. The stories of Mao and Deng are much more complicated. But the turn from Mao line to Deng line is clearly motivated by economic reasons. Marxian economics had been leading economic theory but was based on completely wrong understanding how market economy works. Most of them had estimated the market system easy to be replaced by central planning. My economics of complexity is deeply motivated by this failure of economics.

    As for the growth of GVCs, you are right. In addition to two factors, I want to add a third factor, which is the political change. Deng was a cautious but bold leader who changed the basic economic policy of China to Reform and Opening-up. In my theory of international values, these are interpreted as a decline of “transportation cost”. We can rephrase it by “transaction cost” if you think the latter is more general. I sometimes call three factors by three Ts: transportation cost, transaction cost, and tariffs. We can add to them non-tariff barriers. Tariffs are only a substitute of all political factors.

    Please see Section 9 Transportation and Transaction Costs and Nontraded Goods in my paper The New Theory of International Values: An Overview.

    Last but not least, I thank you for defending me from unreasonable and malicious blames against me. I must also thank Calgacus for the same reason.

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