Home » Money » The “Facts” are Failing

The “Facts” are Failing

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.

may-you-live-in-interesting-timesBarataria 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)

Baron Nicholas Kaldor.  Yes, he got a Lordship for his work.

Baron Nicholas Kaldor. Yes, he got a Lordship for his work.

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.

Did you get our jobs?

Did you get our jobs?

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?

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15 thoughts on “The “Facts” are Failing

  1. Brilliant blog, but chilling. I have always wondered why there is so much disagreement among eggheads but I chalked it up to politics. This explains a lot even though I have to wonder why these were labeled “facts” to start with. Isn’t it always the assumptions that bite you in the butt?

    • Bingo! It is always the assumptions that you have to watch out for. And they are what are failing us here. Among economists there is a soft right-wing slant towards the “growth is always good” no matter who sees it first largely because of these “facts” and what flows naturally from them. How badly they are failing now is critical and something we need to understand in depth if the economists are going to make a case that they have a handle on this situation.

  2. This explains a lot. I can’t help but think that this is what big unions were warning us about back in the 1990s when NAFTA came up. There is a race to the bottom for wages all around the world. But what will it take to reverse this? We can’t just price ourselves out of the market as a nation, we need jobs. I hate to support tarrifs but if we are going to create jobs for our workers there has to be a way out of this spiral to the bottom.

    • YES! It has gone down pretty much as union leaders said it would, I have to admit. It’s hard to be against free trade for the long haul, but right now we have a serious problem that’s only getting worse. I don’t have a good answer right now, no. That bugs me.

  3. So we come to rents a major portion of profits. Rents cannot be exported necessarily altho they are by finding places with a lower cost of living (rents etc.) . I read a brief scan of the book “The Failure of Nations, Why some succeed and others do not.” And sorry that I can’t find it right now at the library at which I am typing. I recall Chapter 1 was a comparison of the 2 Nogales cities across the Mexican/US border. Also with Nogales as compared to the rest of Mexico. The book is an offense against the geographic arguement for success failure. They go back in history to the early colonial failures and successes in the U.S. That there were so many other options besides mining for the early colonialists as they had the wilderness and indian tribes of various natures. That white slaves could try escape and that it ended up better granting small private landholdings to common people.
    For example the Mexican model for success is Carlos Sim with a virtual monopoly of telecommunications vs. Bill Gates and Microsoft where the U.S. challenged that monopoly. And sorry without the book handy I cannot go into much more detail except by looking at the authors’ blog and the wiki page. .
    The Strib did have an article today about the new low wage middle class ALICE. Assets Limited Income Constrained Employed. Many places of employment are not even bothered now to contribute with their employees to United Way as they are such low wage employers and their staff is more likely to need income supplementation rather then being able to put cash forword to help non profits.

    • I have been digging into Kaldor’s work to try to find how he came to the conclusion that the share of income that went to labor was a constant – I want to see how far back he went with it. People were indeed slaves as a whole until some level of industrialization came along. The struggle for common people to get their share does indeed go back to the very begining of this nation, I agree, and it’s very much worth looking at.
      It goes along with my li’l Pa Ingalls analogy from a while back. Resiliency was a hallmark of people like that – but it isn’t today. This is one of those things where I think the Tea Party does have a point, if it is a bit muddled by contemporary politics of the moment.

  4. gee who knew globalism would end in a race to the bottom? oh thats right, everyone did – economists thought they knew better & were proven tools

    • Yes, you and Anna have a good point here. This was anticipated, but it was shouted down by the “all growth is good” line. Some growth, apparently, is just enslavement.

  5. Why don’t we have a revolution to establish a democratic sociaist government.

    –highly progressive income taxes
    –guaranteed family income
    –100% capital gains tax and 100% inheritance tax
    –no socialized risk
    –government provided health care
    –free higher education
    –free training and re-training
    –an end to patents
    –an end to corporations as people
    –centralized bargaining for wages, everyone in a union
    –Katie Holmes aand Jim Scheibel as co – presidents

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