October 28, 2020 at 10:06 pm #4425
I’m currently doing a post-doc with Kean Birch at York University. He uses the concept of rent, although he’s hardly alone in that. It figures prominently in Piketty and Mazucatto, arguably two of the most famous political economists. Indeed, it may be considered the defining concept of critical political economy.
Conversely, N&B have posted critically about the concept on Twitter: https://twitter.com/BichlerNitzan/status/1315785993023352839
From private conversation, I also know that Professor Nitzan considers the concept unusable because of its dialectical relationship with productivity. Briefly, the returns to rentiership are drawn out of returns to productivity. This usage is definitely at work in Mazzucato and Piketty. One consequence is that it retains a conception of returns that accrue to a productive portion of capital. Obviously this is completely rejected in a CasP analysis.
However, I contend that rent remains a useful concept in part because of the intellectual-theoretical development that ejected it from economics. With marginal productivity theory the neoclassicists eliminated rent and all returns to capital were based on marginal contribution to production. There was no longer any such thing as unproductive ownership. I think we can turn this on its head a la Marx to Hegel: all returns to ownership are rent. Indeed, this can be drawn from Ricardo, who originated the distinction between returns to ownership and returns to production.
This strikes me as analytically and strategically useful. Analytically, none of the current words for the monies that accrue to the owners of capital encapsulate every source, i.e. profits, interest, dividends, share buybacks, acquisitions…. Rent could be the umbrella term. Strategically, it makes sense to use terms that are familiar to people. High profile people are using the term. It has a long political economic history. It has political resonance. So, a redefinition that pushes it in a direction I’d say it is already going is strategically useful.
I actually presented on this subject, identifying rent within the Compustat database, if anyone is interested: https://www.youtube.com/watch?v=RaFGEJ8zo6w&feature=youtu.be
I will follow up with some other quantitative analysis I’ve done for the purpose of understanding and rehabilitating the concept.
But I’m also open to more discussion for why the concept should be left behind.
October 29, 2020 at 1:38 am #4427
In your video presentation here https://www.youtube.com/watch?v=RaFGEJ8zo6w&feature=youtu.be, you identify payments to owners and lenders — but not retained earnings or taxes — as rent.
Can you explain why?
October 29, 2020 at 1:53 pm #4433
I figured this would pique your interest!
Rent is considered returns to ownership. I tried to identify every flow from corporate revenue in the Compustat universe going to owners. I identified dividends, interest, share buybacks and acquisitions as monies that flowed to ownership. That does not mean the other flows are going to production. It makes no judgement on the productivity of any particular flow. Instead, it maps where corporate revenues are going.
As seen in this image, I created an identity for corporate revenue.
Revenue = Costs + Retained Earnings + Taxes + Rent.
Then, I mapped the distribution to these four channels.
This mapping shows that the share of corporate revenue that flows to owners has been growing, though fitfully, since the early 1980s. The other three categories have been the outlet for a falling share of revenue. It is possible for retained earnings to be negative, as you can see in 2007.
I came at rent through the national accounts as well. The categories are different, and the base is not corporate revenue, but national income. I identified three categories that flow to owners: net interest, net dividends and rental income. (NOTE: net dividends is without capital consumption or inventory valuation adjustment; rental income is without capital consumption adjustment. The end result does not change substantially if those are included or excluded).
This figure shows decade averages for rent plus the other categories that comprise national income.
The story here is similar to that for the Compustat universe: the share of US NI going to owners, i.e. rent, has been growing.
Again, this makes no judgement that the other forms of income are returns to productivity. It just identifies where monies are flowing. And a growing share is flowing to owners.
In your Twitter post, Jonathan, you include a figure that showed the ratio between net interest and retained earnings. I questioned why you offered this as a proxy for ‘rent.’ I actually constructed a similar figure, but substituting my measure, which combines net income, net dividends and rental income. I also restricted mine to the post-war era.
This would confirm your challenge of the facile equation between neoliberalism and rent-seeking. The ratio between rent and retained earnings grew with neoliberalism, peaking with the so-called dot-com bubble. It then hit a new low since the 1970s right after the GFC. But it has been rising rapidly since then. And it appears that the pandemic has created an unprecedented redistribution away from corporation and toward owners.
October 29, 2020 at 3:38 pm #4435
Your basic equation separates revenues into four components.
Revenue = Costs + Retained Earnings + Taxes + Rent.
You use the last component, ‘rent’, to denote ‘return to ownership’ as you call it. You include in this flow dividends, net interest, share buybacks and acquisitions (and maybe rent?).
Some issues with what is included and excluded in your notion of ‘rent’.
1. SHARE BUYBACKS AND ACQUISITIONS. The problem with including this flow in ‘rent’ is that when corporations buy back their shares, their owners receive $X in cash but give up $X in equity. Their net assets do not change. (One often hears that buybacks and M&A lead to capital gains, and that these capital gains are a return to ownership. But these are gains only relative to the historical cost of the assets; when compared to their current market value there is no gain.)
2. RETAINED EARNINGS. In terms of ownership, retain earnings are not different from dividends and net interest. Dividends and net interest flow to the bank accounts (or to spaces under the mattresses) of owners, while retained earnings augment the assets of the corporations they own. As they stand, though, both types of income flow to owners, and only to owners. In this sense, both income streams qualify as ‘rent’ as you define it.
3. CORPORATE TAXATION. This flow is more ambivalent. Since it does not go to private owners, it lies outside your definition of ‘rent’. But insofar as corporate taxes come from the gross income of owners, they can be viewed as part of that income. And if we accept this latter point, then corporate taxes, too, are part of ‘rent’ (just as pretax and after-tax profit are different forms of profit, and pretax and after-tax wages are different forms of labour income).
An there is a broader issue.
4. CONFUSION. Rent has a concrete accounting meaning as well a long theoretical history. Accounting wise, rent is payment for the temporary use of an existing asset such as a house or a car. Theory wise, it often connotes earnings not backed by ‘productivity’. You propose to redefine this term in a totally different way. Your definition might prove useful, but this usefulness is likely to be greatly offset by the confusion it creates.
November 19, 2020 at 8:44 pm #4517
The analysis I’m doing is trying to identify where the revenue that flows through a corporation ends up. I’m not focused on what is happening with the recipients. Part of the revenue is used to buyback shares and that money flows to the asset owners, while the company gains back a portion of its outstanding shares. In theory this has a neutral effect on the value of the company and on the value of the assets of the owners, although in practice the exchange will likely cause a market revaluation.
As for retained earnings, I think that it matters who or what is controlling the monies. For some purposes it makes analytical sense to sink corporate assets into the assets of the ownership class — as Zucman & Saez do in their measures of wealth. For other analytical purposes, I think it makes sense to keep them separate. The systematic shift between the monies flowing to owners and the monies remaining with corporations suggests to me that owners view the distinction as relevant. The standard productivist conception would identify retained earnings as useful for investment in productive assets. A business/industry based analysis would draw other conclusions. I haven’t thought explicitly about the owner-corporation distinction from a CasP perspective. But I do think identifying how monies flow through the corporation is a good empirical starting point, and identifying the monies that flow to owners as ‘rent’ is a means to connect the analysis to the history of political economic thought.
November 19, 2020 at 10:10 pm #4518
We can agree to disagree for now. And I’m always willing to be re-convinced.
November 21, 2020 at 9:53 pm #4528
The systematic shift between the monies flowing to owners and the monies remaining with corporations suggests to me that owners view the distinction as relevant. The standard productivist conception would identify retained earnings as useful for investment in productive assets. A business/industry based analysis would draw other conclusions. I haven’t thought explicitly about the owner-corporation distinction from a CasP perspective. But I do think identifying how monies flow through the corporation is a good empirical starting point
Can we find here a start to a power analysis between owners and executives? Let say our corporation is considered Introvert. The owners, on the other hand, look for economy-wide investment portfolios (so dividends are required) . And on top of that, executives are making money using intenal-industry benchmarks for bonuses which the (much more universal) owners think is misguided.
Does it make sense to look on [dividends/retained earnings] as a proxy for the power of the two groups?
November 21, 2020 at 10:23 pm #4529
Much of the modern principal-agent debate can be traced to the 1932 work by Berle and Means on the ‘Modern Corporation and Private Property’. But since the 1980s, when top managers became large owners, the debate has cooled off. This chart, taken from a recent paper by the Economic Policy Institute, shows the tight correlation between CEO realized compensation and the stock market. Owners and top managers are no longer at odds.
Also, investors focus on total returns – namely, capital appreciation + dividends. Insofar as the two complement each other, the question of whether owners receive their earnings directly or have the corporation retain them is irrelevant to them. They don’t need the company’s dividends to buy other assets. They can simply sell the company’s stocks.
November 22, 2020 at 9:05 am #4532
But since the 1980s, when top managers became large owners, the debate has cooled off
It’s a longshot, but maybe in declining industries (like oil&gas) it’s a resurgent conflict.
Insofar as the two complement each other, the question of whether owners receive their earnings directly or have the corporation retain them is irrelevant to them.
In that case, owners sentiment might be that allowing cash to accumulate in firms’ hands actually interferes with total returns (capital appreciation will be lower since investment decisions would favor own-industry/sector activity, not taking into account all investment alternatives, neglecting proper risk assessments, etc.). I sometimes think to recognize this sentiment in investors’ talk of giving preference to “high-yield dividends companies”.
This goes beyond relative distribution between owners and management. Managers might actually perform “their best” for owners, but they can still be limited to business decisions in a specific industry/sector and need to be “disciplined” with regard to the best benchmark available for re-investment of profits.
November 22, 2020 at 9:31 am #4534
The more you disaggregate, the greater the possibility of a discord of the kind you describe.
My point here is merely that the broad transformation of top managers into large owners brought their pecuniary interests in line with those of non-managing owners and greatly lessened the principal-agent problem.
This convergence within the ruling class doesn’t make things better to the vast majority of humanity. Possibly the opposite.
November 22, 2020 at 10:52 am #4535
I agree, Yoni. This “business anthropology” doesn’t carry any positive value judgement. At times, the “micro” level seems to offer some concrete points useful for de-legitimization of the existing order in general, and sometimes it’s easier to locate those points outside of the general trend.
October 29, 2020 at 5:54 pm #4442
There is something to be said for taking a common term and turning it on its head. I don’t personally use the term ‘rent’ much in my research. It seems to be too tied (for my liking) to the concept of ‘unearned income’. That’s a fundamentally unmeasurable concept.
But I do like, Troy, that you’re experimenting with new ways of grouping income. In the end, its the accounting that matters. What you call it is just semantics. (Although, as Jonathan says, many people will ignore the accounting definition and just respond to how they understand your words.)
October 29, 2020 at 8:04 pm #4446
D.T: “all returns to ownership are rent”
Right. Couldn’t agree more.
Starting with this definition of economic rent:
Payments to factors of production in excess of what would be required to bring those factors into production
And focusing on household assets and income, the top of the accounting-ownership pyramid, where the “buck” stops:
All measured HH property income is by definition unearned income, received just for owning things. Otherwise it would be classified as earned labor income, received for doing things. (Yes, some proprietors’ “mixed” property income should by “just deserts” be classified as labor compensation; fine. How much?)
Households’ ownership rights, assets, wealth are not factors of or inputs to production. And even if they were, would wealthholders choose to be less wealthy if returns were lower, starving the production line of that valuable ownership “input”? (What’s the elasticity on that?)
Yes, portfolio churn amongst wealthholders, their collective asset reallocation, does affect what enterprises have/get funds to purchase actual inputs.But does a household’s periodic portfolio rebalancing qualify as significant labor “deserving” of compensation for that “input to production?” Seems “in excess” to me; they’d do that rebalancing anyway, wouldn’t they?
And Blair, yes: just call it unearned income instead?
October 29, 2020 at 8:13 pm #4445
In your Twitter post, Jonathan, you include a figure that showed the ratio between net interest and retained earnings. I questioned why you offered this as a proxy for ‘rent.’
Here is the Twitter chart you refer to, which is an updated version of Figure 12.4 from our 2009 book Capital as Power http://bnarchives.yorku.ca/259/
The chart plots the U.S. ratio of net interest to corporate profit and contrasts it with the rate of unemployment. This ratio and its comparison to unemployment say nothing about ‘rent’ in the specific way that you define it.
We treat net interest and corporate profit as two forms of capitalist income. The main difference between them, we argue, is that interest income is ‘promised’ while profit is merely ‘expected’. We further suggest that net interest, because it is a promise, relies more than profit on strategic sabotage, and propose that when sabotage — proxie here d by unemployment — increases/declines, the ratio of net interest/profit should also increase/decline. This positive correlation seems to continue since we published the book more than a decade ago.
The underpinnings of this relationship are complex, and I admit that we have never actually investigated them in any systematic way.
Tangentially, the graph seems to suggest that, since the 1980s, neoliberalism — which many associate with ‘financializion’ and ‘rent seeking’ — shows a downtrend in unemployment, accompanied by a lower proportion of capitalist income going to interest.
October 30, 2020 at 12:29 pm #4448
And Blair, yes: just call it unearned income instead?
Can income, including the income of capitalists, be ‘unearned’?
In everyday English, income is always earned. According to Merriam Webster, to earn means ‘to receive as return for effort and especially for work done or services rendered’. And if you look at any official account of earned income, there is always a description of what the income is earned for — i.e., the ‘effort’, the ‘work’, the ‘service’ being rendered.
So in order to say that a certain income is unearned, we have to demonstrate that that there was no effort/work/service rendered in order to receive it. And since this demonstration depends on our theory, we are back to square one. . . .
November 4, 2020 at 7:09 pm #4474
The political usefulness of the concept ‘rent’ also comes into question from the “outside” (analytically speaking):
Wage/salaries for the top 1% income bracket accounts for about 50% of its total income, and for the top 0.01% it accounts for about 20%-30% (depends on the exact type of measurement). Shouldn’t these income type (and possibly others more) be considered ‘rent’ as well, if what we want to denote are capitalistic incomes de-facto? And if so, where does it leave the effectiveness of the concept, now expanded?
- This reply was modified 2 weeks, 5 days ago by max gr.
November 10, 2020 at 12:45 pm #4486
>we have to demonstrate that that there was no effort/work/service rendered
When a person/family/dynasty receives dividends and interest (and capital gains) over decades from holding a portfolio of ETFs — unrelated to any imaginable “compensated” labor — wouldn’t the burden of proof fall rather to proving that they had rendered effort/work/service?
This especially as 60% of U.S. household wealth is inherited — so even the wealth from which that ownership income arises is not conceivably attributable to any effort, work, or service rendered. (Unless, at a rather distant stretch, one presumes that “just deserts” are themselves heritable down multiple generations — a distinctly aristocratic notion.)
Both the title and content of a paper I came across today — “Accounting for Factorless Income” — reinforces my sense that in fact the whole “factors of production” construct is untenable and impracticable. Certainly empirically, and arguably conceptually. And thus the standard factor-based definition of rent I bruited above is as well.
So I’m moving to a firm “no” in answer to this thread’s question.
- This reply was modified 1 week, 6 days ago by Steve Roth.
November 21, 2020 at 12:56 pm #4523
The analysis I’m doing is trying to identify where the revenue that flows through a corporation ends up. I’m not focused on what is happening with the recipients. Part of the revenue is used to buyback shares and that money flows to the asset owners, while the company gains back a portion of its outstanding shares.
I’m admittedly a novice on the accounting practices of national accounting. But I am curious why the “Owners v. Corporations” chart has rental income on the owners side, when it can technically include landlords who do not have rental income travel through a corporation. If rental income is counted on the assumption that corporations rent some of their properties to others, this is how the BEA explains the definition:
Rental income of persons is the net income of persons from the rental of property. It consists of the net income from the rental of tenant-occupied housing by persons, the imputed net income from the housing services of owner-occupied housing, and the royalty income of persons from patents, copyrights, and rights to natural resources. It does not include the net income from rental of tenant-occupied housing by corporations (which is included in corporate profits) or by partnerships and sole proprietors (which is included in proprietors’ income). Like other measures of income in the national income and product accounts (NIPAs), rental income of persons measures income from current production and excludes capital gains or losses resulting from changes in the prices of existing assets.
If the intention is to naively look at the flow of profits (before economics defines what is rent or not), your case can be made with undistributed v. dividends. In the United States, at least, the ratio of dividends/undistributed profits has tended to increase since the 1980s.
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