Inequality and Global Supra-surplus Capitalism

The following sections are included:

• DEDICATION
• CONTENTS
• ABOUT THE AUTHOR

In his elegant and persuasive magnum opus, John Kenneth Galbraith (JKG) devoted a chapter with the above title. We repeat it here, with a summary of Galbraith’s chapter in The Affluent Society. This position of production is not simply a matter of belief, though that is important, but rather of reality. First, we spread caution to the winds about production, then we take a look at the national income accounts and the place of production there. We end on the quite unconventional note that income is more important than production, followed closely by employment. As promised, the first words of caution emanate from JKG. Why, we must ask, does production have such a prominent position in the USA and other economies?

Some years ago John Kenneth Galbraith (JKG) wrote of the affluent society. A major theme of Galbraith was that the production of goods and services is a measure of civilized progress. The Gross Domestic Product (GDP) remains the accepted measure of not only economic but of larger social achievement. The counterpart to GDP is Gross National Income (GNI). National Income is somewhat smaller than GNI: it excludes the consumption of fixed capital and a statistical discrepancy. In the latter, business executives, athletes such as Bubba Watson and movie/TV stars such as Taylor Swift are handsomely rewarded. Of course, in the case of business executives, especially those in the financial sector, they essentially set their own pay, even though the boards of directors (also business executives, for the larger part) oversee this wonderful process. When challenged about being overpaid, the executives blithely answer: “the income is not the important thing; rather, it is the jobs we are creating.” This establishes the business executive as a person of compassion. The movie star and star athlete do not get off so lightly; they must prove their compassion through public service. And so Brad Pitt, Harrison Ford, George Clooney, Angelina Jolie, and even Tiger Woods (with his Foundation for youngsters) have their favorite public charities. Billionaire industrialist Charles Koch has a foundation that, in one way or another, aims to please conservatives.

Before unconventional wisdom came conventional wisdom, a term that has become part of the global lexicon. Many elements contribute to the acceptability of ideas. We often associate truth with convenience; that is, with what most closely aligns with self-interest and personal well-being or in the least promises to best avoid awkward effort or unwelcome dislocation of life. Most acceptable is what contributes to self-esteem. We like to hear speeches from those which we best understand. No self-respecting Republican will listen intently to a speech by a Democrat, no matter how much sense the speech-maker is making, and vice-versa. The understanding of economic and social behavior is complex and mentally tiring. We are always looking for short-cuts to the understanding of complex subjects or issues. In this regard, vested interests play a big role. Frequently we react with something like religious passion in the defense of what we have so laboriously mastered. In this regard familiarity does not bred contempt. Familiarity in the realm of social ideas is the touchstone of acceptability.

Besides laissez faire, a second, not necessarily conflicting tradition, deflected off Adam Smith. Smith had noted how wages had to be somewhat above subsistence for the family to survive. Smith was not categorical about this iron law. He conceded that a scarcity of workers might keep wages above the subsistence level for an indefinite time. Also, wages would rise along with economic growth, a very new concept. While England, according to Smith, was a much richer country (had more wealth) than North America, the wages of labor were much higher in North America than any part of England. Smith’s association of high wages with rapid economic growth was largely lost to the conventional wisdom of scarcity.

The most recent event to alter the way the ordinary person thinks about economics was the Great Recession. The National Bureau of Economic Research (NBER) has long served a useful purpose as the arbiter of recessions — when they begin and when they end. As prestigious as it is, the Bureau erred when it “officially” declared the end of the Great Recession as June 2009. Even by this overly conservative ending date, the 18-month duration greatly exceeded the post-WWII average of 10 months. There was one other remarkable episode, the sharp and deep 1981–1982 decline of Ronald Reagan’s first term. At the time, I called it the “Great Recession,” not without cause. As it turns out, I was among the first (if not the first) to call the more recent decline “the Great Recession.” At the time I wrote, As the Dow became more and more volatile, the National Bureau of Economic Research officially declared a recession beginning in December 2007. Most likely, the long recession would be named the second Great Recession of the post-WWII era or the Great Recession of 2007–2010, the longest and most worrisome since the Great Depression of the 1930s. Today the 2010 ending date is a provisional one. A year later, I amended the name of the latter episode to the “Global Great Recession.” The Great Recession had circled the globe. Besides “Global,” you naturally raise the question of why the Bureau and I are at odds. The short answer is found in the magnitude of the unemployment rate that continued to bedevil policymakers for many years. It remained disturbingly high, reaching 10.2 percent in October 2009, followed by 10 percent rates. Dreadful numbers spilled over into 2010 and got stuck at 9.6 percent in August, September, and October. Worse, the possibility of a significant decline remained remote. Economists were referring to “the jobless recovery” when indeed economic growth remained at a snail pace. The economy had stagnated, awaiting more stimulus from monetary policy, as fiscal policy was taken off the table because of that old visceral fear of federal deficits and debt.

The following sections are included:

• Piero Sraffa: A Life in the Slow Lane
• Origins of Surplus Value
• Going from the Necessary to the Surplus Economy
• Budget Shares, 1870–2013

While at Cambridge, Marxist economist Michal Kalecki (1899–1970), was befriended by John Kenneth Galbraith. “A small, often irritable, independent, intense man,” Galbraith relates, “Kalecki was the most innovative figure in economics I have known, not excluding Keynes.” Like Sraffa, Kalecki seldom put pen to paper. But when he did, the clarity and depth of his thoughts were powerful.

Where demand is influenced by advertising, salesmanship, marketing and other forces, the orthodox theory of demand will not suffice. For help, we turn to Thorstein Veblen. Veblen has contributed such evocative terms as “conspicuous consumption, conspicuous emulation,” “pecuniary culture,” “vicarious consumption,” and “the leisure class” to the language of economics. Though little noted, and not yet celebrated, important improvements in demand theory have emanated from The Theory of the Leisure Class (hereafter TLC). Since the enduring Veblenian contributions to our language are related to consumption it is hardly surprising that even the mainstream has ratified Veblen with “Veblen effects”

Most economists would agree that Veblen’s logical successor is John Kenneth Galbraith. Though Galbraith was a best-selling author, he is not mainstream among professional economists. Thorstein Veblen’s influence on Galbraith’s demand theory is most visible in The Affluent Society. Galbraith’s “conventional wisdom,” an established set of ideas used to explain the world and how it operates, providing stability, cohesion, meaning, and predictability in a highly complex environment parallels Veblen’s “vested interests.” Since, by its nature, the conventional wisdom denies a change in the environment, it always and everywhere lags behind the times. This “inertia and resistance” comprise Veblen’s institutional lag.

Industries’ ability to pay a demanded wage is enhanced by its ability to impose price markups on the consumers. The industrial union’s power tool is the wage rate rather than the labor supply. This means that, in the short run, employment is not related to the wage rate and the wage rate is related to employment only if full employment extends across all labor. Therefore, a high wage can be associated with a high unemployment rate, because employment is decided by technology and effective demand rather than by the marginal product of labor. This process was so deeply imbedded in the economic system that it too a four-year global recession (1979–1982) to slow wage (and price) inflation in the United States. History went into reverse beginning with the Great Recession (2007–2009), from which we have yet to experience a full recovery. Power was ceded by labor unions to the giant corporation.

H. Peter Gray develops a paradigm for the analysis of international involvement (IEI) in his 1999 book. He wants to avoid a formal construct, such as that characterizing the Heckscher–Ohlin–Samuelson theory (H–O–S) or even the intra-industry trade models based on economies of scale and product differentiation (Krugman). He shuns the later because their treatment of technology is too limited and they, at best explain trade only among the industrialized nations. Gray also dismisses the “technology gap” models of North–South trade for focusing exclusively on trade between innovating countries and follower countries while failing to explain differences among technology-intensive goods and other goods.

The following sections are included:

• In the Beginning
• Historical Periods of Stagnation in the United States
• Stagnation in Japan
• Stagnation in the UK
• Innovations: The Blockchain Revolution
• Innovations: The Driverless Car and Robots
• Those Who Welcome Robots
• Some Innovative Companies
• Conclusion
• A New Look for the Global System’s Second-oldest Profession

Like the Roman God, Janus, supra-surplus capitalism has two faces. One is of industrial surplus and the other of financial excess which I chose to call “casino capitalism.” Like all things, it has a beginning, but, like the movie “Casablanca,” it could have any one of two endings. Or, like F. Scott Fitzgerald’s The Last Tycoon, it may not have an ending. Present at inception was Ronald Wilson Reagan. It has reemerged every few years. It is instructive nonetheless to go back to the beginning and examine the residual.

Most economists do not like to look at net worth or wealth, except perhaps their own. If we are to understand the effects of the shift of supra-surplus capitalism to Casino Capitalism, however, we will find the answers in balance sheets. Balance sheets were once for nerds, but accounting firms could not flourish without them, nor could the Federal Reserve keep track of wealth changes.

The idea of a casino and speculation at its tables is not new. Casino Baden–Baden in Germany has been operating since 1809. It is one of the most exclusive and elegant in all of Europe and features 14 table games, for American roulette, Baccarat, French roulette, and poker. Despite this attraction, most people come to Baden–Baden for its therapeutic mineral springs. Still, no visit would be complete without a visit to the Casino’s tables. Perhaps most famous is the Casino de Monte Carlo, which has been attracting visitors, including royalty, movie stars, and the world’s filthy rich since 1863. It is the top tourist attraction in tiny Monaco. Macao, China is known as “the Monte Carlo of the Orient,” in part because of the Venetian Macao, which has over 800 table games. The Venetian is also the largest hotel in Asia. It’s enough to make Donald Trump envious. There are dozens of casinos in Moscow but the most elegant is the Casino Metropol, located just a few minutes from Red Square and the Kremlin.

Hyman Minsky (1919–1996), a laconic but persistent American Post Keynesian with Italian connections, connected the dots between Kalecki’s markup, retained earnings, and inside money to financial fragility. Minsky’s theory of investment focuses on how Keynesian uncertainty, speculation, and an increasingly complex financial system lead to business cycles. Minsky has extended Post Keynesian monetary theory to include not only credit, but the special problems of financial speculation. The system’s stability depends on profit flows to borrowers sufficient to service the loans. Charles P. Kindleberger (1910–2003) extended Minsky’s theory to the global economy.

The darkest side of supra-surplus capitalism is inequality, which has been growing since the 2008 financial crisis, that has left the American and global social fabric fraying at the edges, the rich getting richer, while the rest face hardships is inconsonant with many dreams. While inequalities prevailed before, they have worsened since the Great Recession following 2008. This is the case not only in the USA but in many other countries. The growth in the financial sector, the rise of Casino Capitalism, has contributed to increased inequalities, at home and abroad. Jamie Galbraith has shown that countries with larger financial sectors have more inequalities and it is it not accidental. Inequalities are driven by CEO pay that varies by industry and by state. Deregulation and hidden and open government subsidies have distorted the economies, not only leading to larger financial sectors but also enhancing the ability to move money from the bottom to the top. The persistence of monopoly pricing and power has contributed to the problem. As a result, there are even inequalities among those in the top 1 percent.

While it is customary to think of interest rates belonging to individual nations, a handful of economists have referred to a global real interest rate. By “real,” they simply mean that the nominal rate has been deflated by a price index. One such economist is Olivier Blanchard. He was chief economist at the International Monetary Fund during 2008–2015, a most interesting period. He is a handsome, mature Frenchman who is now a Senior Fellow at the Peterson Institute and Robert Solow Professor of Economics at MIT. He is arguably the most cited economist in the world today. According to Blanchard, the global real interest rate fell from a peak of about 5 percent in 1986 to about 2 percent before the Global Crisis of 2008, and to about 0 percent in 2012. At low inflation rates, it has gone negative since. This may be the legacy, among others, of the Crisis. He considers this “bad news” for monetary policy but good news for fiscal policy. Given his credentials, we cannot ignore Blanchard, though there are some who disagree with him.

In recent times there has been a debate between the stimulus view and austerity view of economic policy. Nowhere is the debate clearer than when it comes to fiscal policy. John Maynard Keynes and his General Theory are the most famous proponents of the stimulus perspective. Keynes says that government must stimulate the whole economy by giving millions of public jobs to people in fields like teaching, nursing, engineering, and construction work. This can be done indirectly by government deficit spending or by tax reduction. Deficit spending has been the surer path. Beyond the initial stimulus, each of those hired will spend new income this leads to the hiring of many more. There is a Keynesian multiplier effect.

The following sections are included:

• A Global Tax on Financial Capital
• The Atkinson Proposals for Britain
• A Transactions Tax on Speculative Wealth

If it had not been for the Truman close encounter with Thomas Dewey, the Donald Trump victory would have been the greatest upset in American history. Donald Trump, real estate tycoon and business deal maker, won the election of 2016 in the USA. Given his apparent arrogance and gunslinging insults, how did he pull it off? A fractured, discontented electorate handed him the presidency. Key battleground states — Pennsylvania, Michigan and Wisconsin — had traditionally voted for the Democratic candidate. In fact, this has been the case in every presidential election for a generation. Ohio also has been under the Democrat’s tent. Most of the pre-election polls reflected this “reality.” However, Trump outperformed expectations in all states, moving most into the Republican column after President Barack Obama had twice swept the region. We would be remiss to leave out Florida and North Carolina also as key.

The following sections are included:

• APPENDIX 1
• APPENDIX 2