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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.
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?
You start with the notion of hierarchy as a necessary evil (oppressive but efficient); you then say it is necessary (because autonomy is impossible); and finally you conclude it’s desirable (über alles). During this journey, injustice tends to diminish and eventually is assumed away as an issue. That’s how Carl Schmitt, a Nazi, could become the darling of many leftists and CasP the sweetheart of the post-liberal Right….
Thank you Steve. A couple of small clarifications:
3. You are correct that the actual sale of an equity or a bond is a mere ownership swap against existing M-assets. But banks can meet demand for equities by increasing loans, and when these loans become deposits, the overall amount of M-assets increases.
4. My point here is that M-assets are not the only ‘means of payment’, so this is an insufficient reason to use only M-assets in money-based theorizing of inflation.
It seems to me that so-called M assets — M0, M1, M2, MZM — although different from other assets, should not have a special role in monetary explanations of inflation.
(1) It’s true that M assets have a ‘fixed price’ — the $ — but so do all other assets at any given point in time.
(2) The quantity of M assets isn’t really fixed — they are augmented by interest payments, and their volume expands and contracts with the ebb and flow of credit expansion and contraction.
(3) Ultimately, any asset can be converted to an M asset (cash or deposits), and once converted, it can be used for purchases.
(4) Payment vehicles change. In terms of ease of use, M0 is no longer the most ‘liquid’ — checking accounts and other deposits are often easier to use in purchases. Similarly, although the $ price of cryptocurrencies changes, some institutions accept them as means of payment. Another example is corporate mergers and acquisitions, where payment is often made by swapping non M-assets such as equities and debt.
Why Is Modern Capitalism Inflationary?
By Shimshon Bichler & Jonathan Nitzan
Ever wondered why inflation over the past century is so different than it was beforehand?
The enclosed figure, taken from our 2009 book Capital as Power, shows prices in the U.K. since the 13th century (note the vertical log scale). The chart indicates that, until very recently, prices tended to zigzag up as well as down. Many people don’t know it, but the 19th century, for instance, was largely deflationary rather than inflationary. (Immanuel Wallerstein told us that he had always suspected that much, but hadn’t seen the evidence until we presented it in a conference he attended.)
In any event, since 1900, and particular after the Great Depression, commodity prices have tended to increase continuously and uninterruptedly.
So the early 20th century marks some sort of ‘structural change’, as economists like to call it. And in our view, one reason for this important change was the emergence of large-scale, forward-looking capitalization.
When capital accumulates as rising credit and/or rising equity, it increases the sum of money values in society. And because this expansion is forward-looking – and this point is critical – it occurs before (and often without) a comparable increase in the ‘volume’ of goods and services. So right off the bat, rising capitalization increases the ratio of money values to commodities, or what economists call ‘liquidity’. In this monetary sense, rising capitalization is inherently inflationary.
Moreover – and in our view crucially – increases in capitalization and commodity prices tend to be differential: they redistribute assets and incomes in favour of those who own the inflated assets and more expensive goods and services. In other words, asset and price inflations are almost always redistributional. And since, according to CasP, redistribution is the key driver of modern capitalism, inflation tends to be one of its permanent features.
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. . . .
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.
Regarding the connection between corporate equity and money, this paragraph, taken from pp. 240-241 of my 1992 PhD dissertation “Inflation as Restructuring”, may be relevant:
“It is fairly clear, then, that the accumulation of corporate assets creates ‘new funds.’ Much like bank deposits — corporate bonds, stocks, bank loans, accounts payable and other records of ownership are all pecuniary magnitudes and, when they expand, they inflate the aggregate sum of money values existing in the economy. Furthermore, since the accumulation of capital is ‘forward-looking,’ the inflation of pecuniary values occurs without a concurrent change in the congeries of goods and services, or in the capacity to produce them. It is like diluting water with water. As we argue below, the accumulation of capital may or may not lead to changes in industrial conditions, but if it does, the change will occur after accumulation has taken place. Following Veblen, we can hence argue that, ceteris paribus, capital accumulation is a purely inflationary process. The meaning of this statement must be interpreted with caution. We do not claim here that accumulation raises or will raise the average price paid for goods and services (although that may very well happen). Instead, we simply state that, at the moment of accumulation, there is an inflation of the aggregate sum of pecuniary values without any change in the existing quantity of goods and services.”
I also added the following footnote to this paragraph:
“Bank deposits are records of ownership. They cover part of the capitalized earning capacity of a corporation (the bank) and are hence capital for all intent and purposes. There is nevertheless a difference between the creation of bank money, which is sometimes restricted by reserve requirements, and the expansion of non-bank liabilities, which is potentially limitless. To illustrate that there is no technical ceiling on the expansion of such ‘new funds,’ consider a hypothetical scenario with only two corporations — AAA Inc. which has $1 million worth of machines capitalized in the form of shares, and BBB Inc. which has $1 million in cash, also capitalized in the form of shares. The owners of AAA Inc. could use their assets as collateral to borrow $1 million in cash from BBB Inc. Following the transaction, the total assets of BBB Inc. remain unchanged, but those of AAA Inc. now stand at $2 million. In the second stage, BBB Inc. could generate expectations for new profits and use them to sell $1 million worth of shares to AAA Inc., thereby increasing its own assets to $2 billion. In the third step, AAA could create expectations for further increases in future profits and use them to sell $1 million in bonds or shares to BBB Inc., raising its assets to $3 million, and so on. Since there is no required reserve ratio preventing non-financial corporations from having all their assets invested in financial papers, this kind of expansion could (at least in principle) go on for ever.”
Troy:
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.
Troy,
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?
