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One of the important trends in capitalism, Jonathan Nitzan and Shimshon Bichler observe, is that the capitalist share of income have increased over the last half century. Whether this is the case (or not) may be related to how we define capitalist income.
As many CasP researchers are aware, the national accounts rely on a series of often arbitrary accounting decisions. We rely on these statistics for research, but we also use them at our own peril. The national accounts are very much ‘productivist’, meaning they assume that there are different factors of production that contribute productively to the economy.
Back to capitalist income. I want to point CasP researchers to a recent paper that unpacks how the Bureau of Economic Analysis (BEA) accounts for capitalist income. The paper is called “Labor Share Decline andIntellectual Property Products Capital”. (Hat tip to Yigal for pointing out this paper to me.) Read it here:
https://sites.google.com/site/dongyakoh/IPP_USLS_ECMA_resub.pdf?attredirects=0&d=1
The paper is very much neoclassical, but it identifies an important accounting change. Prior to about 20 years ago, it seems that intellectual property rights expenses were treated as intermediate expense, and were subtracted from value added. Now (if I understand correctly) IPP expenses are added to value added.
Now, as CasP researchers know, intellectual property rights are a hugely important source of capitalist income. So we need to pay attention to the accounting going on.
I haven’t read yet the paper in detail, but it deals with something that is important to CasP. We need to understand the accounting procedures used to create the data we analyze. If we don’t like them, we need to create our own.
I’d be interested to hear your thoughts on this paper.
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Thank you Blair and Yigal for drawing attention to this paper:
I read the article and admit to being baffled.
If I understand them correctly, Koh et al. make three related claims:
1. The BEA and other statistical services have been gradually reclassifying ‘in house’ production — i.e., production for the organization’s use rather than for sale — of software, R&D and artistic originals. Originally, these expenditures were treated as intermediate services (similar to a company spending on fixing its machines, or on manufacturing semi-finished goods). Having been reclassified, these expenditures are now treated as ‘property product investment’ and are classified as part of the gross investment category of the national accounts.
2. These new forms of gross investment, the authors say, increase the expenditure and income sides of GDP. On the expenditure side, they increase the magnitude of gross investment, while on the income side, they augment the overall magnitude of non-labour income.
3. This increase in non-labour income, they argue, is responsible for the historical downtrend in the labour share of national income (blue line in their chart below). But this downtrend, they imply, is artificial. It is merely the consequence of a change in accounting conventions (the reclassifying). If we ignore this reclassification, the labour share of national income shows no downtrend, as shown by the orange line:
What I failed to understand is why this reclassification should alter the magnitudes of GDP and national income in the first place.
As far as I can tell, prior to this reclassification, the ‘in house’ production of software, R&D and artistic originals was already recorded as part of GDP and gross national income. Its magnitude was estimated either by similar services being sold on the market, or by what it cost to produce, including wages & salaries, raw materials, interest, rent and profit.
So how is it possible for the mere reclassification of these already recorded intermediate expenditures as ‘investment’ to add to GDP and gross national income on the one hand and to generate the downtrend in the labour share of income on the other?
Are there any hidden imputations here that I have missed?
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Something else to note. There is an imputation trick here that is part of neoclassical analysis. The authors partition ‘ambiguous’ income (i.e. proprietors) into a capital and labor component, based on the fraction found in the rest of the economy. From a CasP standpoint this is dubious.
Without this imputation, it seems unlikely that any BEA revisions could significantly change the labor share of income. Here, for instance, is employees share of US national income. I think this is an unambiguous definition of ‘labor share’:
It has varied over the last century by 10 percentage points. Now look at Table 1 in the Koh et al paper:
The important numbers here are the original and revised numbers for value added (lines 7 and 9). The addition of own-account IPP changes value add by about 5%, which then changes the employees share of value added by about 2.5%. That’s hardly enough to alter the trends in the Figure above.
So the imputation of the labor share of proprietor income seems to be important. And this imputation, we should remember, is completely neoclassical. It assumes you can attribute a proprietors income to a labor component and a capital component. Pretty silly.
Jonathan, I too am confused about how in-house IPP costs were not originally part of GDP. That said, I find the whole distinction between intermediate and final goods confusing and arbitrary. I would much rather work with distributional accounts that are concerned only with income, not ‘production’.
One final thought. The ultimate test here would be to go back and find vintage data from before the revisions and see how it differs from the modern data.
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What I failed to understand is why this reclassification should alter the magnitudes of GDP and national income in the first place. As far as I can tell, prior to this reclassification, the ‘in house’ production of software, R&D and artistic originals was already recorded as part of GDP and gross national income.
Right. If I understand correctly, not only ‘in house’ production but also ‘purchased IPPs’ are reclassified. And reclassification by itself doesn’t change GDP/income directly. But when you convert a part of ‘gross output’ from ‘intermediate expenditures’ to ‘investment’, it affects other components of gross output – part of which is not ‘expensed’/deducted anymore at the same amount (at the firm level that implies EBITDA will be higher because expenses are now recorded lower). So that now:
[Gross output] – [adjusted intermediate expenditures]= a recorded increase in GDP.On the income side the recorded increase is imputed automatically to GOS (gross operating surplus), as nothing changes for the actual income related directly to the relevant IPPs (it is split between wages, profits, etc. in the same way as before the reclassification). This happens because the additional income is treated as a residual, in a sense.
If I got it right, this article helps explaining it (look for tables 3 and 4 at the end).
Regarding ‘ambiguous income’, I think the BLS applies a somewhat subtler approach than Koh et al (here’s a published journal version of the article). But I don’t think it changes something dramatically. I find it pretty astonishing if indeed the latter are right, and this decade long debate between economists on the issue of declining labor share is based on an accounting “artifact”.
For us, this indicates perhaps that we would do better using ‘cash-flow’ based distributional national accounts, to get rid of the “productivist” bias. Is something like that available? Anyway, using net national/domestic income (instead of ‘gross’) seems preferable for now, since it excludes variations in the depreciation component, which are related to (some of) the above imputations and the problems they raise.
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A technical issue – is it possible to move a comment from a sub-thread to the main-thread? I didn’t know about the first option and mistakenly posted the above reply in a sub-thread (deleting and re-posting is not possible either for me).
Administrators, feel free to delete the current comment after reviewing it.
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Something like that, Max? You essentially want it as a post in the thread, and not simply a reply to Jonathan’s post.
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