Welcome to Peak Capitalism
Figure 1: Labour Force Participation Rate and Non-farm Payrolls
Has the United States of America reached, and perhaps passed, "peak capitalism" – the point where the maximum number of people participate in capitalist relationships?
The argument could be made, at least on a relative basis, that it has indeed crested, and we are on the slow, inevitable march away.
Let's back pause a minute to define what this means: Capitalism is the system of relationships between the labour class and the capital class.
Individual relationships are really bilateral. There are two channels: the wage channel, whereby the capitalist negotiates with the worker for the highest output at the lowest salary, and the price channel, whereby capitalists compete with one another to provide the highest quality products and services for the worker at the lowest prices.
The capitalist does not do this at a loss. She endeavors to maintain an advantage between her expenditures and sales – her profit.
This system provides a unique suite of incentives to each class which is responsible for providing the West a previously unimaginably high standard of living, even for the lower classes. The worker is incentivised to produce more and higher quality goods, thereby increasing his advantage in competing with other labour for higher wages. The capitalist is incentivised to produce higher quality goods at lower prices, thereby increasing her advantage in competing with other companies for sales, and ultimately the capital she can accumulate.
The worker seeks to consume the highest quality of goods at the lowest prices, and the capitalist seeks to accumulate more capital.
Figure 2: Wages as fraction of nominal GDP
By looking at this (now well worn) chart of Wages as % of GDP (figure 2), it could be assumed that a net capital advantage has been accruing over time. There are other things that support this view. I would prefer to use U.S. mean family net worth by percentile of net worth to really show how this capital accumulation has played out.
Figure 3: Mean family net worth by percentile of net worth
However, if you add Government Social Benefits to Wages as % of GDP to the former chart, the picture changes dramatically! The present value, 58%, is dead from the 1959-present average.
Figure 4: Wages and Government Social Benefits as a fraction of nominal GDP
The character of change now represents a shift, not from labour to capital, but away from the classical capitalist bilateral relationship between the labour class and the capital class (through wages and prices) to a unilateral one (prices).
Thus we get to the fundamental reality: capitalists have been compensated for serving the poor and the elderly. The system has worked for everyone. The government has brokered a deal whereby capitalists accumulate capital by providing the infirm and the retired working class sustenance. Perhaps you would change the proportions of profit and transfer payments, but the basic system of transactions and incentives has been proved out.
The facilitating mechanism is the Federal government's ability to add new financial assets (money and Treasuries) into the system.
Let's apply the shift in bilateral capitalist relationships with a simple example: The legacy of the labourer's work is not just the modest sum which he was able to accumulate, but also in the accumulated labour his employer captured as surplus value. This accumulated labour is the combination of technology utilisation and process improvement which enabled his employer to produce more goods at the same cost – an improvement known as productivity.
When the worker retires, the government subsidises his means of sustenance by crediting new deposits to his bank account. He uses these credits to purchase sustenance from the capitalist class. The retired worker has already pre-paid for these newly government-created deposits with the massive productivity gains throughout his career. As long as the retired worker, and the present labour force, are able to increase productivity at a rate faster than the retiree's new deposits are created by the government, the capitalist gets paid, her worker is employed, and the retired worker is provided sustenance.
At the most basic level, the worker does not pre-pay his retirement through social security and pension fund contributions, but even more so by productivity. He has pre-paid in through continually improving his employer's capital and use of capital to expand output at the same cost throughout his career so the government can print money to deposit in his account after retirement without causing inflation.
The inevitable decline in per-capita working-aged people mean that the nature of capitalism fundamentally shifts away from the bilateral capital-labour transactions to a more complex set of transactions, introducing a third party – the public sector – to broker the deal.
The enemy of both capital and labour in the system of capitalism is running out of new markets. Wages are not paid out of the current production of employees, but from past production by capitalists with the expectation that they will produce a surplus of value over what they are paid (for why else would the capitalist make this transaction?).
Figure 5: Change in savings rate with more wealth and income
Were it to stop here, the amount of money and income circulating through the economy would contract. Capitalist income has long since maximised consumption, and is now focused on maximising capital accumulation.
At this point, this capitalist has free cashflow. There are two actions she can do with it: she can keep the cash, or re-invest it into more production.
Since capitalist's goal is to accumulate more capital, she is going to re-invest when she sees opportunity, and this free cash-flow is exchanged with new labour for more future production.
But what happens when the capitalist sees her opportunity set decline? Her expectation that the payment she makes to the new workers she'd hire would materialise into higher revenue later diminishes, and she decides to book her profit as cash.
Figure 6: Investment/Savings Ratio bears a strong relationship to the unemployment rate
Who could blame her? She isn't going to operate at an anticipated loss.
Let's analyse why our capitalist would view her re-investment returns pessimistically: The first is the shift in near-term investment expectations. Assuming new markets will always become available, the only reason to withhold investment is the worry that the market value of your capital will decline in the short-term. The investment time horizon moves from "what is the total return on this piece of capital until it is consumed?" to "will I be able to get the same price for this piece of capital tomorrow that I can get today?".
We have previously observed that these variations in investment horizon — and consequently rate of investment — are responsible for most of the economic cyclical variations.
The second is a glut of capital relative to the population. There appear to be two chief reasons for this: a rapid expansion in technology-driven productivity and demographically-driven declining final sales growth.
Let's analyse what the capitalist does when there is a glut of capital: Returns on capital are too low to create new real capital, so the capitalist's objective turns from accumulating more capital to collecting and retaining economic rent by exploiting the monopoly she has on existing capital. Our capitalist has now turned into a rentier.
Collecting economic rents siphons income from the rest of the economy, reducing the amount of income available to labour to purchase its own output. As is, the rentier now has lower final sales, thereby reducing her perception of future returns on invested capital. Her marginal proclivity shifts further into fiscal retrenchment. Unchecked, this scenario is not good for any of our three classes: the labourer is out of work or has less income, the capitalist sees her sales (and utilisation of her existing capital) decline, and the retiree still requires sustenance.
Rentierism does have a derogative connotation. Capitalists get paid to take investment risk while expanding capital stock, and labours get paid for their time. Rentiers profit simply by having a monopoly on existing capital. But if we examine their incentives, can we blame the capitalist for shifting to a rentier? She certainly has the right to try to avoid losses.
The way to mitigate the transition pain from capitalism to rentierism is to have the government pay retired workers for years of uncompensated productivity gains.
We can see a prior example of of a rapidly increasing dependency ratio and glut of capital in the past 20 years of Japanese economic history. Germany is not far behind.
Consider life in these two high dependency ratio countries: They have very low unemployment rates and low inflation rates.
- Figure 7: Old-aged dependency ratios for the United States, Japan and Germany
The principal political driving force away from bilateral capitalism to trilateral government-brokered rentierism will, perhaps ironically, be the same force that is trying desperately (and likely with futility) to hang on to more capitalist relationships: baby boomers. But even the conservative baby boomers will move to ensure their entitlements are maintained, for they will need more than they anticipated as a result of the 2008 crisis.
We have been shifting at the margins away from bilateral capitalist relationships for decades. What replaced it has successfully navigated the needs and demands of each class – accumulation to capital for enterprise value, sustenance to workers for labour and sustenance to the retiree for decades of productivity growth.
The key will be formalising how this already works so we can adjust policy within the framework for the betterment of every American.
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