How can corporate profits be so high?
Economist Michal Kalecki famously observed that workers spend what they earn and capitalists earn what they spend. Workers are paid less than the price of the products they produce and therefore cannot be the source of system wide profit. This being the case, how can profits arise? Where does the extra purchasing power come from? There are only a few possibilities: increases in worker debt, government deficits, or capitalist spending through either investment or consumption. As we clearly know, rising worker debt is not an option, and the level of government debt is ultimately constricted by our misguided notions of sound money. If we assume capitalists could not possibly use their massive hoards for consumption, we are left with: profits = private investment, an equality that Hyman Minsky thought a profound insight into the nature of capitalism.
But given the extremely depressed level of global investment, how can we explain today’s record high corporate profitability? The explanations we often hear cannot really be true or, if there’s a kernel of truth, they’re rife with contradictions. Let’s look at some of the explanations for high corporate profits in a world with little private investment. I don’t think too much light is actually being shed here but I at least found the exercise somewhat interesting.
1) Increased margins from labor arbitrage (Cannot really be true) Transnational corporations are able to produce goods in cheap labor markets, sell in higher income markets, and pocket the expanded margins. This is one of the principle dynamics of globalization but, counter-intuitively, it doesn’t explain increased profits. Global aggregate wages may be declining but workers can never provide the demand for profits. Even if the mega corporations were able to outsource to a supply of free slave labor, profits could only arise from non-worker spending i.e. from government deficits or private investment.
2) Increased margins from oligopoly and reduced power of labor (Cannot be true) Yes, corporations have oligopoly pricing power and labor is much diminished, but the argument from above still holds. Profits do not arise from oligopoly power and are not, within the strict logic of neoliberal capitalism, directly related to labor power.
3) Financial profits on consumer debt (Can be true only in the short run) As our current crisis demonstrates, there are very tight limits here given that the ultimate source of repayment is the wage itself. If profits cannot arise from workers, then, in the long run, profits cannot arise from loans to workers.
4) Government deficit spending (Contradictory) There can be no doubt that this is a, if not the, major source of corporate profits. How can it be that this critical prop to corporate profits is opposed by nearly everyone in the corporate world? I think the very same Kalecki gave us an excellent answer – it’s ultimately about power, not profits. Within our dominant and misguided paradigm of sound money, there are also strict limits on the extent the government can finance corporate profits and we appear to be butting against those limits today.
5) Creative accounting (Contradictory) A very high percentage of sales in the world are between subsidiaries or quasi independent companies that compose supply chains for the largest firms. The opportunities for creative accounting are huge and I’d think a creative accounting bubble could soon burst. Ultimately, profits can only come from government spending and investment.
6) Speculation (Contradictory) Speculation on commodity prices, interest rate spreads, currencies, credit default swaps, and the near infinite variety of other games can add to short term profits. But the global casino is ultimately zero sum.
What’s the conclusion? Other than “investment” in past real estate bubbles, the dot com bubble of the late 90’s, and a few rising technology industries, there’s been very little real private investment for decades. To a great extent the corporate world is today living off government spending as in the past it was living off rising worker debt. That record corporate profits can arise from public spending should strike the average citizen as wrong. But such is the lack of consciousness in our neoliberal world. I noted yesterday that Barak Obama believes the private sector and not the government is responsible for jobs. That’s not a very consistent philosophy though given that his government appears to be the major source of private sector profits. Regardless, I don’t see how profits can be maintained at these levels given the limits of our monetary paradigm and the lack of any foreseeably significant investment opportunities. I wouldn’t be too long the stock market these days.