One good example is the buffalo-hide boom of the 1870s: The
failure of the clothing industry to put a limit on demand through high prices
practically insured that the great beasts would be hunted almost to extinction,
with devastating effects on the Plains Indians who had built their lives and
tribes around the buffaloes’ migrations. But none of this was the suits’ intent
— they were simply trying to give the customers what they wanted, that’s all.
Economics is supposed to be an empirical discipline,
concerned with how people do behave
rather than how people ought to
behave. Part of the problem with calling self-interested behavior rational is that self-sacrificial
behavior is subtly, subconsciously apostrophized as irrational; any behavior becomes “moral” so long as you can make a
business case for it. The boundary between is
and ought is not only frequently
crossed but was probably blurred to begin with. Moreover, it creates a false
position in which economic laws become not just observed (or at least
theoretical) relationships but something inviolable and self-enforcing as the
laws of physics; invisible, indefinable “market forces” create an economic karma which punishes the unrighteous and
creates order in the house.
The narrowness of vision imposed by self-interest becomes
manifest in what we could call the Standard Capitalist View of Income and
Wages:
To the executive,[*]
revenue comes into his business by way of consumers and leaves by way of
employees; where the consumer gets his money, and what the employee does with
her wages, the executive neither knows nor really cares — as far as he’s
concerned, the two buckets aren’t connected. After all, he makes turbojet
engines, and his employees don’t buy turbojet engines, do they?
But the real flow of revenue and wages looks more like this:
Everything that employers pay in wages, bonuses and
incentives can be thought of as going into a common pool from which the
businesses then draw income through purchases of goods and services. The
executive’s employees may not buy turbojet engines, but they do buy airline
flights, and airlines buy not only passenger jets but also replacement engines.
The turbojet manufacturer buys supplies and raw materials, and the money he
pays for these goods is also partially
transformed into wages, some of which may or may not go towards airline
tickets. Then again, the manufacturer occasionally has to send representatives
off on business trips ….
In sum, once we view the flow of money as a cycle rather
than simply as a collection of streams
with unknown sources and unknown destinations — once we realize that employees
are consumers and consumers are employees — it becomes apparent that
the individual businesses’ deliberate efforts to hold down wages become the
group’s inadvertent collective effort to depress consumption. Investors are
consumers too; however, consumption by investors can’t by itself uphold the
cash flow cycle.
Now let’s look at some statistics: Since 1980,
- Gross domestic product rose 104.62%.
- Corporate after-tax profits rose 198.79%, per employee 106.85%;
- The median income of the top 5% rose 72.53%.
However,
- Industrial capacity is at 79%, down 6.18%, the lowest it’s been since 1978;
- Labor force participation fell a net of 1.88%;
- The Consumer Price Index rose 200.75%, while
- The median income of the bottom 80% only rose 8.12%;
- The consumption/income ratio — spending as a proportion of income — rose 6.38%;
- Consumer debt per household went up 96.33%; and
- Personal saving rate went down 59.62%.
Since 1999,
- Gross domestic product is up 26.21%;
- Corporate after-tax profits are up 167.25%, per employee 146.31%;
- The median income of the top 5%: down 2.40%.
But,
- Industrial capacity is down 3.42%;
- Labor force participation is down 6.55% from a March 2001 of 67.2%;
- The Consumer Price Index is up 42.43%;
- The median income of the bottom 80% is down 10.58%, with the bottom quintile down 15.90%;
- Consumption/income ratio is up 4.46%;
- Consumer debt per household is up 16.25%; and
- Personal saving rate is down 26.32%.
In that time, the US Gini coefficient, a rough measure of
income inequality, went from 0.403 to 0.477, putting us roughly among such
economic powerhouses as Venezuela, Uruguay, Guyana and South Sudan. In
particular, from 1978 to 2012 CEO
compensation jumped roughly 875%;
as a ratio when compared with average employee wages, it jumped from about 29:1
to about 278:1. In fact, CEO compensation grew faster relative to other very
high wage earners than the wages of college grads grew relative to high-school
graduates. As
I’ve pointed out elsewhere, the
majority of the noveaux riches no
longer become rich through investment but through overly generous executive
compensation packages.
 |
| Source: Economic Policy Institute. |
Nevertheless, it turns out that B. Lester’s comment about
people “pathologically hoard[ing] so much cash that they impoverish the entire
nation” isn’t mere demagoguery or economic illiteracy … it’s an empirically
demonstrable fact. The money has to be spent in either ordinary consumption or
capital investments proportionally to its collection in order to fulfill its
role in a strong economy; it can’t just be stuck in safes or wagered in “investments”
that simply trade debt instruments back and forth. Unfortunately, the money’s
not being spent.
Moreover, it’s clear that there’s a badly-flawed theory of
value in play which overestimates the contribution of executives and
undervalues the contribution of nonsupervisory labor, allowing the top ranks to
pillage corporate profits while the only negotiation allowed the lowest ranks
is “Do you want the job or don’t you?” Ironically, holding down wage rises is
part of the executives’ job of maximizing shareholder profits.
That’s the tragedy of the corporations.
[*] From this point, it should
be understood that I’m addressing large enterprises, generally consisting of
more than 1,000 employees, earning more than $100 million in revenue and whose
stock is traded on the NYSE.
