Back in the 1950s, people who studied complex things like economies felt they were making real progress. The general belief was that by understanding how it all worked we could even things out and usher in a new era of continuous prosperity that would benefit everyone.
Some of the underlying “facts” that were identified at this time have been accepted as simple truths. Growth is always good, and economic growth always flows to workers, making their lives better generation by generation. There’s only one problem lately – some of the “facts” appear to not be as true as they used to be. That means that the underpinnings of modern economic theory are all being questioned and, perhaps, if we don’t keep our eyes open the new era of prosperity will be far more elusive than anyone thought.
Barataria has written before about the great divergence of opinions among economists as to how to handle the current situation. It ranges roughly from austerity to stimulus – tightening our belts to flooding the world with more money to get it working again. But all of these theories depend on conventional economics working.
In 1957, Nicholas Kaldor was a Hungarian born economist working in Cambridge, UK. He found that over a very long period of time six things appeared to be true for the economies he studied:
1. Output per worker grows at a roughly constant rate that does not diminish over time.
2. Capital per worker grows over time.
3. The capital/output ratio is roughly constant. (1+2)
4. The rate of return to capital is constant.
5. The share of capital and labor in net income are nearly constant.
6. Real wages grow over time. (2+4+5)
This was eventually extended to all economies as they were found to be more generally true. They are called “Kaldor’s Facts” or the “Stylized Facts” and they can be summarized easily: Growth is good. Just about every theory about how to run a national economy starts with these basic assumptions and their reasonable conclusion.
But one of them, at least, is clearly broken. Number 4, that the rate of return accrues to both labor and capital in a constant rate, is no longer true. Labor’s share is falling around the world at a pretty alarming rate, and has been written about in several very illuminating articles on the subject.
This is almost certainly a side effect of globalism as we have come to know it. Advances in communication technology mean that capital can flow around the world in seconds, seeking out the highest possible rate of return. Not so with labor. People are tied to their nations, their lives, their mortgages, their kids – the things that make up life and how people are defined. Where money can cross international borders easily, labor cannot both by law and by the simple truth that no one can possibly pick up and relocate on internet time.
The problem is a lot bigger than it looks. If labor can’t expect their cut of the return from capital, real wages do not necessarily grow with time. That means that the foundation of a modern consumer economy is not a reliable fact. If a consumer economy can’t be relied on, a whole lot of assumptions about credit and how to re-start the developed world aren’t necessarily true, either.
What should be done about this? At the moment, economists are largely confused as to where they go next. It goes without saying, however, that anything which puts labor at a further disadvantage have to be the highest priority for anyone trying to get the economy rolling again. Taxes on wages alone, such as the FICA Social Security tax are a real problem – 7.62% on all wages up to $110k per year only, take from both the worker and their employer.
Barataria has called in the past for a reduction in the overhead per employee and a general effort to increase worker flexibility. It’s apparently one of the most important things to do as we prepare for the next economy. During a depression, like the one we are in, we can expect many things in the economy to fail – awaiting redevelopment in a new structure appropriate for the economy that comes next.
We can’t be sure about all the needs of the next economy, but one that we can be sure of is that the disadvantage that labor sees versus capital is very real, stark, and threatening the underlying assumptions that guide all economic theory. Not paying attention to this could be the difference between a strong new economic era and a time of effective wage slavery for those lucky few who even have jobs. We live in a world in which nearly everything is up for grabs. Are we grabbing ahold of what we need to?