“Marx is very clear that labour is exploited and that a higher wage would make workers’ lives less miserable without removing the exploitation per se. But he doesn’t think, therefore, that a higher wage will make the system operate better or indeed even make workers as a whole better off. In fact, in the discussions of this in “The Reserve Army of Labour” he argues something quite striking given his political view: namely, that if workers get into a better situation to the point that the reserve army of unemployed labour shrinks and the wage begins to rise relative to productivity, then the wage share rises and the profit rate falls. If the profit rate falls, accumulation slows down, mechanisation speeds up, the import of labour becomes more feasible, and the system re-creates the reserve army of labour. So, now you have a situation where the success of labour leads to the undermining of that success – from the internal logic of the system. Many people, many of my friends who are Post Keynesians, argue this is not true, because if workers’ wages are higher, consumption demand will be higher, then demand will be higher, and capitalists will hire more people. I think that’s not true as a general proposition because of the limits I described. I would like it to be true, but for me you cannot, you should not, persuade yourself that something is true because you would like it.”
In the spirit of recent posts, the above is another extract from an interview with Anwar Shaikh in the book What is Heterodox Economics? Conversations with Leading Economists. Shaikh is clearly being intellectually honest here, admitting that he would like capitalism to enable wage increases for ordinary workers across the economy that drive faster growth and falling unemployment in a win-win sustainable process, but that his own theoretical understanding suggests that this is unlikely to be sustainable. For Shaikh, falling unemployment will tend to strengthen the bargaining power of labour, such that at some point wages for the economy as a whole will start to rise faster than productivity growth, leading to a rising wage share and a falling profit share. The latter will blunt the stimulus to investment and growth will then slow down, leading to rising unemployment once again, and ‘re-creating the reserve army of labour’.
Shaikh works in the Classical Keynesian tradition, drawing on many intellectual threads, but mainly from Smith, Ricardo, Marx and Keynes. As he says, many of his friends are Post Keynesians, who emphasise the role of aggregate demand in the economy among various elements, and are perhaps the truest followers of Keynes himself. The Classical economists and Marx focussed more attention on the rate of profit, the source of which was the surplus value achieved by capitalist firms in the process of production. That is not to say that Post Keynesians ignore profitability, far from it, but that it receives more attention from the Classicals and Marx, in which it emerges more from the supply-side than in Keynesian thinking, broadly conceived. In his book Capitalism, Shaikh argues that while Keynesian economics is demand-side, and neoclassical economics is more supply-side, his own approach is profit-side, with supply and demand receiving equal billing.
These ideas are important, as they give rise to different potential limits in a capitalist economy, including the limits to what can be achieved by economic policy. Clearly if rising wages can boost growth and employment over a long period, then there may be no conflict between greater equality and rising living standards, which is good news for many progressives. But if rising wages lead to a profit squeeze, slower growth and a renewed period of rising unemployment, then this shows up less agreeable limits to what can be achieved, and provides fuel both to the political right, who could then justify the enactment of policies to weaken labour, and the socialist left, whose case for replacing the system itself could receive greater support.
Production and realisation
Many of these kinds of ideas find a clear exposition in Marxist writings of there being a tension between the production and the realisation of surplus value under capitalism. For classical Marxists, the source of profit lies in the surplus value produced in the workplace by the capitalists coercing labour to work and produce beyond what is necessary to reproduce and sustain their customary standard of living. Without surplus labour there can be no profit, and thus no investment and no economic growth.
Surplus value is produced in the workplace, but only realised upon the sale of output in the marketplace. Every capitalist would like to maximise the surplus produced by his firm, and one way of doing this is to pay relatively low wages and work labour harder and longer than his competitors. However if every capitalist held wages down, this would reduce the realisation of the surplus, since consumption for the economy as a whole would be restricted, weakening sales demand. This is the tension between the production and realisation of surplus value, and hence of profit.
Competition in the labour market may also lead to workers being paid below the average wage moving to an employer who is paying a higher wage, assuming for the moment that differences in skills do not get in the way of this process, which of course they may do in reality. Over a longer period, workers can retrain and relocate, aiding the flexibility of the labour market. This means that competition can provide a limit to how far wages can fall. However this still depends on the strength of demand in the overall economy, which determines whether or not competition drives wages up or down. A weak economy with higher unemployment tends to create a buyers’ market for employers, who can negotiate lower wages, while a booming economy with a much tighter labour market should increase workers’ bargaining power and their ability to achieve higher wages. Of course, the current global experience shows that this need not always be the case, with higher price inflation outpacing wage inflation despite tight labour markets in countries such as the US and UK.
The notion of a tension between the production and the realisation of surplus value, and hence profitability, suggests that there are limits to how far wages can fall and profits rise, and vice versa, without harming economic performance. If the wage share in total output were to fall to zero and the profit share to rise to its theoretical one (or one hundred percent), there would be no consumption by the impoverished workforce, and the only incentive for capitalists to invest in the capacity to produce would come from their own consumption, which would come out of the profits themselves. Workers would go unpaid and this would be a dire domestic economic situation, and would not generate much growth, with misery for the masses, who would be forced to produce for themselves at some minimum subsistence level, or beg from the capitalists. Vast inequality would surely prove unsustainable, and the system as a whole could no longer be called capitalist. If demand came from abroad, then the capitalists would then find a new source of demand for their output, but they would still need workers to engage in production for them.
On the other hand, if the wage share of output were at its maximum, with the profit share at zero, then there would be no funds available to invest in new productive capacity and drive economic growth and rising living standards. In the absence of rising productivity wages would stagnate at their particular level, and once again the system could not be called capitalist.
In between these two limiting extremes in the relationship between the shares of profits and wages, there are all sorts of theoretical outcomes. One important question must be whether the system itself could reach either of these two situations, and whether or not it could find its way out and back to some kind of more functional mode of operation, in the absence of state intervention or social revolution.
Wage-led versus profit-led growth
The notion of a tension between the production and the realisation of surplus value leads us quite nicely into considering the concept of demand-driven economic growth being either wage-led or profit-led, which has given rise to a burgeoning literature, largely authored by post-Keynesians, and criticised by some Marxists.
If demand is wage-led, then a rising wage share in overall output will stimulate consumption demand, increasing firms’ capacity utilization and ultimately new investment in productive capacity, so that output, productivity, employment, wages and profits can all rise together. An initial rise in the profit share and a falling wage share in a wage-led regime will lead to weaker consumption, and from there weaker investment and growth.
If demand is profit-led, then a fall in the wage share and a rise in the profit share will stimulate new investment and growth, while a rise in the wage share will lead to weaker investment and growth. This tends to be the perspective of many Marxists, while post-Keynesians are open to demand and growth being either wage or profit-led, with empirical analysis leading them to draw their own particular conclusions. Small, open economies can potentially benefit from and sustain a profit-led regime, with wage repression making export prices more competitive and with demand from abroad contributing substantially to overall growth. Large, less open economies ultimately cannot rely on wage repression and profit- and export-led growth in the long run, as the resulting trade surpluses arising from weak consumption growth would weaken global growth as a whole, forcing trade deficits and debt accumulation abroad, and likely generating opposition to free trade.
Shaikh has rejected the post-Keynesian support for wage-led demand, in favour of a profit-led regime which he argues holds in the long run. Economies can appear wage-led in the short run, if growth continues while the wage share rises, but the resultant fall in the profit share will ultimately slow growth so that the two different demand regimes are part of a sequence rather than alternatives which are amenable to policy.
Global imbalances and models of development
Another economist whose work I have often discussed on this blog is Michael Pettis. He characterises two distinct models of growth and development, which are similar to those described above: the high wages model and the high savings model. I have described these before, namely here, so I will not go into more detail. But in many ways they offer a broader global and historical vision than the post-Keynesian distinction between wage-led and profit-led demand regimes, encompassing diverse experiences of economic development, including ‘growth miracles’ and their often difficult economic aftermath, as well as the source of global current account imbalances and the role of these in debt accumulation, financial crises, recessions, imperialism and conflict over international trade.
Limits within capitalism
For Marx, the raison-d’être of capitalism is growth, via capital accumulation or productive investment. This enables rising living standards, even if these are unevenly distributed across time and space. But rising living standards are afforded by higher productivity, making possible some combination of greater incomes and consumption, and greater leisure. Decisions as to how these play out are as much political and social as they are economic and, today, increasingly environmental too.
Rising productive investment in new economic capacity makes possible rising consumption for the mass of workers through higher wages. There are thus systemic limits to the repression of wage growth relative to productivity growth, and thus a higher profit share in overall output. These act to depress domestic consumption demand in the absence of higher consumer credit and debt accumulation, leading either to weaker growth and unemployment, or to larger current account surpluses and the forcing of higher debt on the rest of the world, reflected in larger current account deficits abroad. Higher debt in the rest of the world could fund productive investment, but in the long run this would ultimately need to serve greater export capacity and higher consumption relative to production in the current account surplus country, which would then require a higher wage share and a smaller current account surplus. In the absence of this, higher debt levels in the rest of the world will fund unproductive and therefore unsustainable investment, or higher consumption, which someone will eventually have to pay for, leading either to a process of deleveraging and weaker demand, debt forgiveness or bankruptcy.
There are also limits to a rising wage share and a falling profit share in overall output. If firms still wish to invest in the presence of the latter, they can borrow to do so, but if profits continue to disappoint, then funds to pay down the debt will not be fully available, eventually leading to financial fragility and, if it occurs on a wide enough scale, to a financial crisis.
Policies for stability?
Hyman Minsky’s famous phrase was that ‘stability is destabilising’. Even if economic trends and policies combine to produce long periods of stability and prosperity, this will tend to increase the appetite for risk among economic agents and eventually be destabilising and lead to crisis. The mitigation of even minor crises by policymakers can further fuel risk appetite and ultimately produce a deep and lasting crisis, a Great Depression.
Minsky argued for “Big Government” (fiscal policy) to stabilise profits and a “Big Bank” (a lender of last resort) to prevent a major financial crisis and recession, but also for improved anti-trust laws to limit the scale of corporations and improve the functioning of the competitive process. He also argued that a reformist programme was ongoing and subject to change given the innovative nature of the system, not least in the financial sector. Innovation in the latter is not always a good thing if it leads to increased fragility.
Despite all this, there is a case for policies which stabilise wage growth relative to productivity growth, which by definition will stabilise the wage share and profit share in overall output. These are the two major categories of income in the economy as a whole, and policymakers can act to help prevent major economic imbalances from occurring, both domestically and internationally. A package of policies which makes this possible draws on the experiences of ‘social corporatist’ or coordinated market economies, particularly in parts of Western Europe such as Germany, Austria and the Scandinavian countries, with trade unions playing a strong role in national wage determination. This does not necessarily make such a path easy. Strong unions can sometimes play a role in wage repression, which as discussed above can improve international competitiveness, while exporting some combination of deflation, unemployment and rising debt, which is ultimately unsustainable, particularly for larger economies. But if policymakers aim to prevent frequent and destabilising imbalances from occurring, then institutions which enable a more coordinated capitalism to emerge are vital. There are limits within the current system to increases in wages relative to profits, and vice versa. There is then a need for creative institution-building and adaptable policymaking which draws on the lessons of the past to create a more widely-shared and sustainable prosperity for the future.