Profits Without Production
Paul Krugman
The New York Times
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.
COMMENTS
Daniel AbramsBronx NY
We've been moving to a rentier economy for a while. The extension of copyright and patent has been driven by corporate desire to maintain profits. Thus books, soound recording and movies that ought to be in the public domain at this point have been turned into perpetual sources of revenue for corporations. This same extension of copyright discourages creativity as why do a new recording or book when it's already been done and even doing an extension of an older work may land you in court.
June 21, 2013 at 5:29 a.m.
JamesMarin County
Really thoughtful article that provides a great foundation for discussion!
#1. Someone commented that businesses don't exist to create jobs for workers but rather to make profits for its owners. That's very true.
#2. I think most companies, such as Microsoft, etc., would argue that their "products" have improved the efficiency of their user base and the quality of business decisions, both of which lead to increased profits. That is what makes their output tangible.
#3. Most important, however, is the fate of "the worker." The economy is truly global. And there is strong demand for workers with the right technical, analytic, scientific, financial, and marketing skill sets, and not much demand for other workers, except low-paid retail/service jobs.
What coordinated efforts are America and its government and corporate institutions making to facilitate the development of this century's job skills among our workers? I'm not seeing anything coordinated and institutional, like you see in other countries such as Germany, where students are slotted/steered into career types based on their aptitudes. In America, job skill development seems quite ad hoc and that is increasingly to our great disadvantage.
June 21, 2013 at 5:33 a.m.
SpenceMalvern, PA
Wall St. is the poster child for profits without production. Gambling with other people’s money and not worrying about the consequences because of the government backstop. Moral hazard is built into the system. There is no downside only upside…
Why is this??
Well, lobbyists and corporations have written the laws so they win no matter what. Congress is no where to be found. With a compromised DOJ/SEC, the foxes are now running the hen house.by taking over egg production and distribution, thus controlling all levers of government by transferring wealth to themselves through tax laws, tax shelters, low tax rates, while gaming the system with massive loopholes the average American could only dream about.
Corporations don't have a soul. They don't know right from wrong or good from bad and they don’t care. What they do embody is the mentality of their managers and to some extent their SHs. As with most profit oriented entities, the bottom line always comes first, second and third, ethics and criminality be damned.
June 21, 2013 at 5:33 a.m.
Murphy's LawVermont
“This Time Is Different.”____________________________________
It certainly is. There is now a permanent oversupply of labor.
Population growth, technological advances and a globalized economy will counter traditional intranational recovery efforts.
Unemployment is a global problem that requires global solutions.
International initiatives in education, health care, infrastructure projects need to be implemented.
There is plenty of work for all the unemployed, it is just a matter creating the political will to extract the required funding from those that can provide it.
June 21, 2013 at 5:36 a.m.
AndyIllinois
Perhaps Prof. Krugman has chosen the wrong example by picking on Apple. After all, Apple is an innovation-based company that should be the poster child of the so-called "new economy" - aren't all economists these days writing Very Serious articles(including on the NYT) about managing the transition to a knowledge-based economy, the need for higher education, the shifting of the middle class towards higher skilled jobs, and so on?
We cannot lament that Apple has outsourced 800,000 low-skilled factory-slave jobs to China - are these really the jobs we want for America's "new" economy?
Rather, if we want to point the finger at the distortions in the market that create inefficiency, the unproductive rent-seeking businesses, the overpaid CEOs - then we should first of all look at the true unproductive, inefficiency-generating, money-hoarding, sociopathic parasites of the 21st century: banks, banks, banks, and again banks, and any "financial" business that creates money from money without ever investing into anything remotely productive or innovative for society.
Oh, and throw in the for-profit health insurance industry for good measure - they are also outrageous overhead generators that reap huge profits on the misery of ordinary citizens, without providing any "market efficiency" whatsoever.
June 21, 2013 at 5:51 a.m.
PaulWestbrook.
We seem to be intent on becoming the next China. As our population grows and our manufacturing disappears we have a society of haves and have nots instead of haves and have more. We cannot seem to fathom how important it is to make the things we use every day.
Unfortunately, those of us who exist in this “world,” can do nothing to turn the tide. Politicians on the right thoughtlessly support the monopolies because underlying their political philosophy they have a slave/master mentality. They are great at keeping the dialog on things that don’t matter, and are largely absurd. When the discussion begins to focus of Apple’s sitting on a mountain of money, they will invariable focus on building a fence on our border to prevent illegals from entering the country. The right has a firm grasp of the overwhelming blindness of the masses they herd under their tent. Instead of being sympathetic and understanding of the limits of ordinary folks, they exploit them. They profess a belief that “corporations,” will solve all of our ills. They seem oblivious to the fact that those “corporations,” are the cause.
