In a previous post, I covered the arguments of several mainstream economists who sought to explain the slowdown in productivity and investment growth especially since the beginning of the 2000s as due to market power.
Now there is yet another round of mainstream economic papers trying to explain why investment in the major economies has fallen back since the end of Great Recession in 2009. And again most of these papers try to argue that it is the rise in ‘market power’ ie monopolistic trends, especially in finance, that has led to profits being accumulated in finance, property or in cash-rich techno giants that do not invest productively or innovatively.
That investment in productive assets has dropped in the US is revealed by the collapse in net investment (that’s after depreciation) relative to the total stock of fixed assets in the capitalist sector.
Note that the fall in this net investment ratio took place from the early 2000s at the same time as financial profits rocketed. That suggests that a switch took place from productive to financial investment (or into fictitious capital as Marx called it).
In a new paper, Thomas Philippon, Robin Döttling and Germán Gutiérrez looked at data from a group of eight Eurozone countries and the US. They first establish a number of stylised facts. They found that the corporate investment rate was low in both the Eurozone and the US, with the share of intangibles (investment in intellectual property such as computer software and databases or research and development) increasing and the share of machinery and equipment decreasing. But they also found that investment tracked corporate profits in the Eurozone, but fell below in the US. In other words, productive investment slipped in the Eurozone because profitability did too.
But there appeared to be an ‘investment gap’ in the US.
But there is an important issue here of measurement. As I showed in my previous post, these mainstream analyses use Tobin’s Q as the measure of accumulated profit to compare against investment. But Tobin’s Q is the market value of a firm’s assets (typically measured by its equity price) divided by its accounting value or replacement costs. This is really a measure of fictitious profits. Given the credit-fuelled financial explosion of the 2000s, it is no wonder that net investment in productive assets looks lower when compared with Tobin Q profits. This is not the right comparison. Where the financial credit and stock market boom was much less, as in the Eurozone, profits and investment movements match.
Nevertheless, mainstream/Keynesian economics continues to push the idea that there is an ‘investment gap’ because the lion’s share of the profits has gone into monopolistic sectors which do not invest but just extract ‘rents’ through their market power. This argument has even been taken up by the United Nations Conference on Trade and Development (UNCTAD) in its latest report. In chapter seven of its 2017 report, UNCTAD waxes lyrical about the great insights of Keynes about the ‘rentier’ capitalist, who is unproductive, unlike the entrepreneur capitalist who makes things tick. UNCTAD’s economists conclude that there has been “the emergence of a new form of rentier capitalism as a result of some recent trends: highly pronounced increases in market concentration and the consequent market power of large global corporations, the inadequacy and waning reach of the regulatory powers of nation States, and the growing influence of corporate lobbying to defend unproductive rents”.
But is the rise of rentier capitalism the main cause of the relative fall in investment? As I have pointed out above, the rentier appears to play no role in the low investment rate of the Eurozone: it’s just low profitability. However, there does seem a case for financial market power or financialisation as a cause for low productive investment in the US.
Marx considered that there were two forms of rent that could appear in a capitalist economy. The first was ‘absolute rent’ where the monopoly ownership of an asset (land) could mean the extraction of a share of surplus value from the capitalist process without investment in labour and machinery to produce commodities. The second form Marx called ‘differential rent’. This arose from the ability of some capitalist producers to sell at a cost below that of more inefficient producers and so extract a surplus profit – as long as the low cost producers could stop others adopting even lower cost techniques by blocking entry to the market, employing large economies of scale in funding, controlling patents and making cartel deals. This differential rent could be achieved in agriculture by better yielding land (nature) but in modern capitalism, it would be through a form of ‘technological rent’; ie monopolising technical innovation.
Undoubtedly, much of the mega profits of the likes of Apple, Microsoft, Netflix, Amazon, Facebook are due to their control over patents, financial strength (cheap credit) and buying up potential competitors. But the mainstream explanations go too far. Technological innovations also explain the success of these big companies. Moreover, by its very nature, capitalism, based on ‘many capitals’ in competition, cannot tolerate any ‘eternal’ monopoly, a ‘permanent’ surplus profit deducted from the sum total of profits which is divided among the capitalist class as a whole. The continual battle to increase profit and the share of the market means monopolies are continually under threat from new rivals, new technologies and international competitors.
The history of capitalism is one where the concentration and centralisation of capital increases, but competition continues to bring about the movement of surplus value between capitals (within a national economy and globally). The substitution of new products for old ones will in the long run reduce or eliminate monopoly advantage. The monopolistic world of GE and the motor manufacturers did not last once new technology bred new sectors for capital accumulation. The world of Apple will not last forever.
‘Market power’ may have delivered rental profits to some very large companies in the US, but Marx’s law of profitability still holds as the best explanation of the accumulation process. Rents to the few are a deduction from the profits of the many. Monopolies redistribute profit to themselves in the form of ‘rent’ but do not create profit. Profits are not the result of the degree of monopoly or rent seeking, as neo-classical and Keynesian/Kalecki theories argue, but the result of the exploitation of labour.
The key to understanding the movement in productive investment remains its underlying profitability, not the extraction of rents by a few market leaders. If that is right, the Keynesian/mainstream solution of regulation and/or the break-up of monopolies will not solve the regular and recurrent crises or rising inequality of wealth and income.