The rule of capital

In the movie Margin Call, which is broadly about the financial crisis and the insidiousness of the financial sector, one of the characters laments about how he used to be an engineer who did useful things like build bridges (he calculates that one he built saved people thousands of years of travel time). But of course the money was better in finance. An angst about people who do useful things and financial people who just feed off everyone else, runs through the whole film. It is a neat reflection of a serious problem at the heart of the post-industrial, globalised system we are creating, which is causing serious imbalances between capital and labour and weakening middle classes in the developed world.

A recent article in The Economist noted that past four years have been bad for workers and savers but good for the corporate sector. Profit margins in America are higher than at any time in the past 65 years, which it said partly explains why the equity market has rebounded so strongly despite a lacklustre economy. The question is why aren’t cashed up corporations investing, especially in putting on workers?

The answer, or at least one answer, is that an implicit compact between capital and labour has been broken in developed economies; a compact that said we have to pay our workers a decent wage so that they buy our stuff. The globalisation of labour means that firms can choose not to pay middle class wages at least for some parts of their operations — so of course that is what they choose to do.

But the systemic cost is that demand in developed economies weakens and the incomes of those in developing economies are not high enough to take up the slack. Witness the attempts to make Chinese consumers consume more. It hasn’t worked, partly because they need to save for health and education, but also because they simply do not have the discretionary income to afford it. This is the hidden cost of the race to the bottom on wages. The Economist article describes a somewhat dangerous balance of capital and labour (cheap wages are the reason margins have risen):

Margins have been boosted by firms’ tight control of labour costs and by a reduction in interest expenses caused by the policies of central banks throughout the rich world. Whether such margins can be sustained is important for equities. Most stockmarket bulls build their case on the trailing price-earnings ratio for the S&P 500, which stands at 16. But there is a warning sign in the cyclically-adjusted p/e (which averages profits over ten years). At 22, this ratio is well above the historic mean, making the market look a lot less attractive.

The balance between capital and labour is typically seen as a contest between a thing (capital) and an act (labour). If one follows the metaphors, the thing (capital) is seen as more substantial and invariant. The act (labour) is seen as negotiable, movable — and dispensable.

The impression created by this language is false. Money is a social artifice, the outcome of what people (bankers, financiers) do. What is important about labour is what it leads to. What people (managers, workers) do. Their industrial output. Thus both capital and labour are, in the end, acts.

What has happened with the financialisation of developed economies is to say that one type of act: the creation of financial transactions, is intrinsically superior and worth more than other types of acts, the various forms of industrial output. Such as building bridges, for instance. Now why is one type of act seen as so much more worthwhile and valuable? As the billionaire in Margin Call, played by a rather sinister Jeremy Irons, says: “We are just salesmen.” It is true, that is what most financial players are. Usually they are selling the notion that they have some sort of superior insight when of course they cannot. They just are selling the appearance that they understand a system that in truth no-one understands, not least because the system is itself made up of the various opinions people have about it. It is a disappearing point. Financial gurus tend to be charlatans when they claim to have anything more than common sense.

So what does this imbalance between capital and labour say about us? One conclusion is that we have let the rules we have created rule us. The machinery we have created now runs us.

Finance is just rules. We have let those who exploit those rules become the rulers, partly because governments have decided to stop governing in the financial arena. It leaves us with this question. Why do people who play with numbers on a screen in an endless game of manipulation get so much greater rewards than people who do useful things like build bridges, or teach or care for the sick? It is a value system that reveals a dispiriting passivity, especially when it is obvious that if you give up your destiny to the logic of a system that you have created, you risk something worse than what happened in the GFC.

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  1. I hope MB doesn’t get swallowed up up some other entity or other for huge amounts of cash, to keep it quiet, because it’s articles like this one; one that reminds us a of a truth of which we are all too familiar, that would be a shame to miss. However it would be a validation of the point of the piece!

    • I presumed that was the reason it was set up, seems to be a popular business model in Australia, set up and antagonistic/complimentary company, and wait for on of the big bully boy monopolies to buy you “away”.

      Retire to life of luxury.

      Come on Fairfax, make your bid.

      • Will never happen, there are not enough people to worry or care what happens in this world, all they care about is the roof and food, they cant see past the front door.

        • God forbid they go the way of Crikey, …bought and modified to fit better with the way things are done here.

  2. People forget people are innately selfish, $1 to them and less to someone else is the go every time, just need to employ some pr guy to help justify it.
    You watch when this resource boom is over how many of these pr guys just go work for the highest dollar, even the greens, a perfect insight into people nowadays.
    The answer is better regulation via better gov, so this rubbish is rained in a bit as none of these super wealthy can help themselves. I loved the forest one about employing a few aboriginals etc and hence pay them a less royalty? Magnificent stuff! Likely saved himself a 100 mill, which is a 100 mill the gov/us will have to put in to support the aboriginals. Just one example of how the rich seem to be able to use their pr teams and influence to create outcomes that in the light of day, stand out like dogs balls on sights such as this and occasionally the abc.
    Slightly off the topic I know, but the more people are forced to do the right thing, the better off everyone will be in this $ no1 world.

    • Perhaps people are innately selfish – though I doubt it.

      If they are then it needs to incorporate things like making others feel good can make us feel good. At which point what ‘selfish’ means tends to get complicated.

      There are ways to set up environments where selfish is much more likely. Organisations like corporations and laws like ‘the single interest test’ governing investing organisations.

      However the Australia Institute’s report on Downshifting gives me hope. It seems to me to mean that great numbers of people just don’t buy it. That increasing consumption isn’t what they care about.

      Thanks for a great piece SoNiC

    • It’s not so much that people are innately selfish that gives the FIRE sector such a bad rap… it’s the fact that there is very little teaching and enforcing of ethical practices.

      • To expand on my point… everyone in the FIRE sector is competing against each other – trying to get rich quicker than the bloke in the next cubicle/office. This makes it easier to shed ones sense of ethics.

        Contrast to STEM careers – very much team-based. Without everyone working together to achieve the common goal, then it all falls a part.

      • No, that’s not it at all.

        People are innately selfish, self interest rules, it always has and always will.

        Agency is a massive issue.

        It will be why in line with Minsky’s thoughts there will always be movement away from equilibrium.

        What should be accorded is that when designing regulation, remuneration and punitive action is how to effectively curb self-interest whilst minimising impacts to operational processes.

  3. ceteris paribus

    Unbalanced profit share between capital and labour? The pursuit of money not intrinsically valuable?

    This author is too dangerous to be left walking the streets, Call the secret police.

  4. It’s arguable IMO that much capital does equally as poorly as labour – that the so-called ‘capital’ which has cruelled the pitch for both labour and capital is in fact the BIG rent-seekers who capture the greater part of the 30% of the economy constituted by our publicly-generated land rents. [Includes banks lending on bubble-inflated mortgages, and the increasing number of owners of our natural monopolies such as tollways, airport, ports, rail, etc.]

    Of course, the neo-classical economic textbooks dutifully tell us public land rent is only 1% of GDP, “So move along please folks, there’s nothing at all to see here.”

    • How does labour do poorly?

      When labour has historically received higher shares in line with access to skills training, (Post WWII Western economies, Bismarckian Germany) productivity and technology gains abound.

      Every country that has rapid industrial and post-industrial development done so by labour share capturing a high proportion and distrubting it to its high performing labour, thus creating aa abundant middle class.

  5. Overpaid monkeys in suits throwing darts at a board charging their “muppet” clients a small fortune.

  6. thomickersMEMBER

    Does anyone think farming will have a good 30 year outlook?

    I do!!!

    Median age of a farmer approaching 60 everywhere in the world.

  7. …and right on cue, on TV tonight, we had the 1976 classic “Network” ( how little has changed!) and it’s underlying solution to an economic problem: “We’ll do… whatever it takes”

  8. Yes, it is important to remember, though, that, long term, the ratio of non-financial capital to labour in relation to production is increasing.

    The piece of paper you paid for captures your rights to a cut of that bit.

  9. Related or parallel issue observed in Australia is the common complaint that we don’t make anything and/or cannot compete so the government must subsidise manufacturing while trying to nobble a very successful services export, international education.

    Fact is good high value quality manufacturing is more of a service industry like in Germany, but Oz competes where most developing countries can compete, not just on cost inputs alone, for international investment by e.g. electronic contract manufacturers, in just putting boxes of components together.

    Not exactly high end stuff when just announced China is making first automotive manufacturing investment in Europe via Bulgaria.

    While Australian politicians and media worship manufacturing and luminous vests, especially for photo opportunities suggesting some iconic Oz culture, services such as finance and other service industries have more potential internationally.

    However, this is provided….. Oz companies make a real effort in e.g. Asia, but not like what I had observed in Taiwan in 90s where an Oz retail finance co. was managed by cardboard cut out yobs i.e. all male, all had moustaches, and all had strine accents incomprehensible to local personnel……

  10. This question has intrigued me a bit lately. A seed of thought in my mind has been the possible divergence between the value of money (fiat) to insiders (corporates and business in our case) and the value of goods and services to the general public

    Part of this is surely linked to the cyclical corruption of fiat money. At the end of a longish cycle we have reckless monetary policy that creates a divergence between the cost/availability (and very nature) of fiat money to insiders and the meaning of that fiat money to the public.

    As has often been discussed on this site, fiat money is just a concept, a form of trust or confidence. That a esoteric money manipulator can earn more than a tangible service provider (doctor/nurse etc..) perhaps can only be sustained for a while until people realise that money has much less utility than they thought and the service provider stops trusting its value and so does the public.

    The point is really – you need a heck of a lot (drastically increasing levels) of available money to make so many jobs out of managing it.

  11. I think that is the question, aj. What happens when people wake up to the strange passivity of allowing finance rules to rule us? It is that area that we will find the next surprises, I expect.

    • Jumping jack flash

      I agree.

      This fiat money experiment has just about run its course.

      Once it all goes belly up there’s going to be the surprise – everyone is going to suddenly realise that only real skills are real.

      Making metal, bashing metal, joining metal to other pieces of metal in such a way, that it makes something useful that doesn’t fall apart. This is real skill.

      Anyone can push piles of worthless money around and pray they grow, then when they don’t, print more to add to the piles.

  12. Jumping jack flash

    I gave up a 6 figure salary for doing basically nothing as a manager in the service economy, to go back to school to learn how to do useful things like build machines and bridges.

    It is working out well so far. Downsizing was only possible because I had no debt anvil weighing me down.

  13. I really do hope that more of our best and brightest start to favour STEM careers again.

    Not just from a technological innovation standpoint, but those careers also teach and enforce ethics, as opposed to the FIRE industry.

    • By the way, Margin Call was a great movie, if you haven’t seen it. Pretty much today’s “Wall Street” (the second one was a lame duck and doesn’t deserve mention).

      • Science, Technology (IT/software), Engineering and Mathematics

        However, Education and Medicine are also very important.. but they generally aren’t the biggest drivers of innovation.

        • Thanks Jason, I definitely agree. And they should all have Capitals, unlike finance, insurance and real estate. I think the Hammurabi Code should be brought back for those industries before we start Capitalising them again, and made to fully privatise (i.e have no implicit or explicit government backing, with no “limited” private companies). But then again, I have an extreme view on this…

  14. “Finance is just rules. We have let those who exploit those rules become the rulers, partly because governments have decided to stop governing in the financial arena. It leaves us with this question. Why do people who play with numbers on a screen in an endless game of manipulation get so much greater rewards…”

    The question is redundant, as you already provided the answer: we let those who exploit the rules become the rulers.

  15. I think someone was thinking along similar lines over one hundred years ago. A little Marxist theory:

    “Within the capitalist system all methods for raising the social productivity of labour are put into effect at the cost of the individual worker […] All means for the development of production undergo a dialectical inversion so that they become a means of domination and exploitation of the producers; they distort the worker into a fragment of a man, they degrade him to the level of an appendage of a machine, they destroy the actual content of his labour by turning it into a torment, they alienate from him the intellectual potentialities of the labour process […], they transform his life into working-time, and his wife and child beneath the wheels of the juggernaut of capital. But all methods of the production of surplus-value are at the same time methods of accumulation, and every extension of accumulation becomes, conversely, a means for the development of these methods. It follows therefore that in proportion as capital accumulates, the situation of the worker, be his payment high or low, must grow worse.”
    — Karl Marx, Das Kapital: Kritik der politischen Ökonomie, 1867.

    This process whereby the worker is increasingly impoverished in order to oil the wheels of capitalism is referred to as immiseration. “The nature of capital production logically requires an ever greater reduction in real wages and a worsening of the working conditions of the proletariat” [Wiki]. Putting it very simply, Marx thought this would eventually result in uprising of the proletariat and the overthrow of capitalism; that capitalism itself was unsustainable. And some may argue that globalisation is the ultimate ‘survival of the fittest’ capitalist model.

    Back in the seventies Barbara Ehrenreich observed/defined a ‘new working class’, “salaried mental workers who do not own the means of production and whose major function in the social division of labor…(is)…the reproduction of capitalist culture and capitalist class relations” – the professional-managerial class (academics, teachers, social workers, engineers, mid-level administrators etc). This new working class were educated and self-identifying as middle class but as they do not own the means of production, remaining wage earners (wage-slaves!) paid to produce capital. [Wiki] At the peak of the GFC in 2008, Ehrenreich wrote a short piece on the irony that the 160 year anniversary of the Communist Manifesto coincided with the near implosion of rampant wild unregulated capitalism itself:

    May we live in interesting times – and we do! I watch with slight bemusement the anguishes of the Occupy movement if only because of two things: we have all participated in this game, benefited from and enjoyed the rewards of the trinkets of capitalist economies; and that increasingly this has been made possible by the labours of impoverished workers on foreign shores (for whom we had little real concern) – we have priced ourselves out of the market! And we certainly don’t like it when it looks that we too may feel pressures of the capitalist vice.

    I can’t recall the full quote but it was along the lines of “we fool ourselves if we think we can continue to import cheap goods ad infinitum without also at some point importing lower wages and a decreased standard of living…”

    We’re all proletariat now, baby!