Profits Without Production

By PAUL KRUGMAN, June 20, 2013

One lesson from recent economic troubles has been the usefulness of history. Just as the crisis was unfolding, the Harvard economists Carmen Reinhart and Kenneth Rogoff — who unfortunately became famous for their worst work — published a brilliant book with the sarcastic title “This Time Is Different.” Their point, of course, was that there is a strong family resemblance among crises. Indeed, historical parallels — not just to the 1930s, but to Japan in the 1990s, Britain in the 1920s, and more — have been vital guides to the present.

Yet economies do change over time, and sometimes in fundamental ways. So what’s really different about America in the 21st century?

The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance. Sometimes that dominance seems deserved, sometimes not; but, either way, the growing importance of rents is producing a new disconnect between profits and production and may be a factor prolonging the slump.

To see what I’m talking about, consider the differences between the iconic companies of two different eras: General Motors in the 1950s and 1960s, and Apple today.

Obviously, G.M. in its heyday had a lot of market power. Nonetheless, the company’s value came largely from its productive capacity: it owned hundreds of factories and employed around 1 percent of the total nonfarm work force.

Apple, by contrast, seems barely tethered to the material world. Depending on the vagaries of its stock price, it’s either the highest-valued or the second-highest-valued company in America, but it employs less than 0.05 percent of our workers. To some extent, that’s because it has outsourced almost all its production overseas. But the truth is that the Chinese aren’t making that much money from Apple sales either. To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and given the strength of its market position, the traffic will bear a lot.

Again, I’m not making a moral judgment here. You can argue that Apple earned its special position — although I’m not sure how many would make a similar claim for Microsoft, which made huge profits for many years, let alone for the financial industry, which is also marked by a lot of what look like monopoly rents, and these days accounts for roughly 30 percent of total corporate profits. Anyway, whether corporations deserve their privileged status or not, the economy is affected, and not in a good way, when profits increasingly reflect market power rather than production.

Here’s an example. As many economists have lately been pointing out, these days the old story about rising inequality, in which it was driven by a growing premium on skill, has lost whatever relevance it may have had. Since around 2000, the big story has, instead, been one of a sharp shift in the distribution of income away from wages in general, and toward profits. But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment? And, no, investment isn’t depressed because President Obama has hurt the feelings of business leaders or because they’re terrified by the prospect of universal health insurance.

Well, there’s no puzzle here if rising profits reflect rents, not returns on investment. A monopolist can, after all, be highly profitable yet see no good reason to expand its productive capacity. And Apple again provides a case in point: It is hugely profitable, yet it’s sitting on a giant pile of cash, which it evidently sees no need to reinvest in its business.

Or to put it differently, rising monopoly rents can and arguably have had the effect of simultaneously depressing both wages and the perceived return on investment.

You might suspect that this can’t be good for the broader economy, and you’d be right. If household income and hence household spending is held down because labor gets an ever-smaller share of national income, while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand. I don’t think this is the only reason our recovery has been so weak — weak recoveries are normal after financial crises — but it’s probably a contributory factor.

Just to be clear, nothing I’ve said here makes the lessons of history irrelevant. In particular, the widening disconnect between profits and production does nothing to weaken the case for expansionary monetary and fiscal policy as long as the economy stays depressed. But the economy is changing, and in future columns I’ll try to say something about what that means for policy.

The Meaning of Intelligence by Krista Tippet

On Being, August 30, 2012

When he was in high school, Mike Rose was placed in a vocational track, until it was discovered that a clerical error with test scores meant he should have been in college prep classes. His insights from his own schooling, plus the time he spent watching his mother work — and think — as a waitress, have informed his academic study of the role of education in physical labor, and democracy. As he explains, America’s contradictory opinion of learning rarely addresses the ways education can help people reach their full potential.

“Valuing Intellectual Depth and Its Relationship to Work and Life in All Its Forms”

I was hooked by the opening lines of Mike Rose’s lovely book, The Mind at Work:

“I grew up a witness to the intelligence of the waitress in motion, the reflective welder, the strategy of the guy on the assembly line. This, then is something I know: the thought it takes to do physical work. Such work put food on our table, gave shape to stories of affliction and ability, framed how I saw the world … I’ve been thinking about this business of intelligence for a long time: the way we decide who’s smart and who isn’t, the way the work someone does feeds into that judgment, and the effect such judgment has on our sense of who we are and what we can do.”
Mike Rose grew up in an immigrant family in the center of Los Angeles; I grew up in a small town in the melting pot of Oklahoma. I did not grow up around much physical work, but I did attend a school where advanced classes in languages, math, and science were axed to sustain a strong football team. His story of his late discovery of the strength of his own mind, and, even later, grasping the forms of intelligence he had known without appreciating, sparked all kinds of longing and recognition in me.

Our stories taken together are disparate but kindred facets of a disconnect in the American story that thrives, largely unexamined, in our public life. Despite our national history of exceptional intellectual achievement, we harbor what the historian Richard Hofstadter classically observed as a “national distaste for intellect.” At the same time, we harbor a learned dismissal of the cognitive accomplishments of “average” people, working people, and “manual” labor.

Mike Rose can demonstrate the error of such dismissiveness with hard research. But his concern goes deeper than that and is relevant to us all. Failing to see and nurture the intellectual and civic substance of all kinds of work, he worries, is profoundly undemocratic. It limits our collective vision and range of action from school reform to social planning. We shape educational policies with economic competitiveness in mind, Mike Rose says; but we need also to ask what kind of education befits a democracy? Here is part of his answer to that question, in our conversation:
“So what kind of a language should we use in a democratic society? Certainly a language that includes the economic motive. Absolutely. Of course. But that braids that motive in with all the other reasons that actually historically in our country we’ve talked about as well. The civic motive. We send kids to school to become civic beings. We sent kids to school to learn how to solve problems with each other. Children go to school because their parents want to help them develop into better people. They want them to find passions. They want them to learn how to learn.

And what about in a democracy learning how to speak up when you think something is not right? Or learning to take a risk. You know, in this kind of test-based world that students grow up in, you’re penalized if you take a risk but yet just about any intellectual breakthrough of any kind that you’ll study has seen that it’s been a path of breakthrough and failure. So where in all of this are children encouraged to take intellectual risks? What kinds of classrooms are created that allow that?

What you see when you travel through all these communities and you talk to parents and you watch these teachers who work so hard and you spend time with these kids, is you get a sense of this immense rich thing that a classroom can be, a place of both learning subject matter but of learning how to exist in a public space and how to have this feeling, this sense, that you matter and that your mind matters and that this is a place that’s safe and respectful and where I can take chances and I can learn something. And that can have an effect on who I’m going to be.”

I Recommend Reading:

 »The Mind at Work: Valuing the Intelligence of the American Worker
by Mike Rose

This refreshing, wonderfully written examination of beliefs about the mind explores blue-collar vocations and offers ample opportunity for the reader to reevaluate one’s assumptions about the complexity of thinking that takes place as a hairdresser snips a lock, a waitress juggles multiple tables and orders, a carpenter problem-solves on site.
About the Program
On Being is a spacious conversation — and an evolving media space — about the big questions at the center of human li