At the mercy of the profit motive?

Anwar Shaikh has argued that a condition for the success of macroeconomic stimulus is the maintenance of an adequate rate of profit. My first comment is merely to second his argument. We can think of stimulus policies as providing a kind of subsidy, either in the form of lower interest rates and financing costs, or in the form of higher demand prices for output as a result of higher public spending. But whether this “subsidy” feeds through to investment depends on whether it is captured as profit or wages. Following a classical surplus approach, this depends on the relative strength of capital and labour, which is influenced in turn by both the level of unemployment and institutional conditions. 

This said, my second comment is to suggest that our current situation is slightly different. Major economies have recently implemented not only substantial fiscal stimulus but monetary stimulus on an unprecedented scale. The resulting recovery is widely seen as disappointing, and largely driven by consumer demand, rather than investment which has tended to lag behind. Yet real wages have remained subdued, and have even fallen substantially in the case of the UK. In this case, it appears that the stimulus “subsidy” has gone less to wages or entrepreneurial profits, and more to rents from unproductive speculation in real estate, share capital, bonds, and so on. For example, the widespread practice of using retained earnings for share buy-backs suggests that shareholders and executives see a higher return in inflating share values than in productive investment. The main stimulus transmission mechanism may have been via the effect of rising asset values on consumer demand (the “wealth effect”). 

We might then add, as a further condition for successful macroeconomic stimulus, the maintenance of a certain distance from the zero-lower bound, to reduce the risk of asset price inflation. Alternatively, we could suggest the implementation of measures to block such asset price inflation when the zero-bound is near, such as land value taxation or different institutions of firm ownership (see Keynes’ famous remark about “When the capital development of a country becomes a by-product of the activities of a casino…” [Chapter 12 part 6, General Theory]).

Thirdly, I feel the need to comment on Shaikh’s apparent pessimism. On reaching the end of his epic Capitalism, it is hard not to be slightly disappointed that the only prospect he offers us is the better management of this system, whereby the over-riding imperative is to ensure the adequate repression of the wage share. My comment is that there are alternatives. Moreover, I think there may be promising paths to follow even within the context of today’s mixed economies, and not only “after the revolution”. 

Public ownership, for instance, provides a vehicle for investment that is driven by public interest, as well as profit considerations. If there exist viable investment opportunities that would raise productivity or employment, but are not acted upon by entrepreneurs because of a certain conjuncture of incentives, then this is a kind of market failure. One possible response is public action to change these incentives: stimulus, wage policies, etc. But another is for the public sector to step in to fill the investment gap directly. Increasing the rate of public investment is not just a stimulus tool, but also a way to directly fill an investment gap. A larger share of public ownership in the economy would be a way to increase economic resilience to negative shocks to the profit rate.

Cooperatives and other labour-managed enterprises comprise another sector with another set of incentives. In labour-managed firms, the divide between wages and profits doesn’t much matter as they are both received by the same people. Instead, the interest of members is to maximise average earnings per capita. Incentives to invest in raising productivity are thus unaffected by the shifting divide between the wage and profit shares. Encouraging the growth of the cooperative sector and other “alternative forms of ownership” – something that is currently on the UK Labour Party agenda – is thus another way to increase economic resilience to periods of weak profitability. 

However, the literature on labour-managed firms has also long recognised a weakness when it comes to incentives for investment in job creation. Existing coop members don’t have an obvious incentive to create jobs for new members – from whose labour they will be unable to profit – unless it is to achieve economies of scale or for more altruistic reasons. There is thus a complementarity between the public and coop sectors. There is also scope to explore public policy options such as tax incentives for employment growth, not only with regard to the coop sector, but also for the normal private sector; such tax incentives would raise post-tax earnings for better performing firms, whilst wages might be more influenced by sector-wide conditions.

Another option to consider is a greater activist role for the state in coordinating investment activity across sectors or acting as what Mazzucato has termed the “entrepreneurial state”, creating and shaping markets and thus investment opportunities. Indeed, the coordinating and market-creating role of the state is something that probably ought to play a greater role in the analysis of the wartime economies that Shaikh mentions. 

This Commentary may be downloaded as a pdf here. 

John Marlow