As a brief aside - and risking any conceptual confusion that might result from (1) a non-economist attempting to summarize economics; and (2) the offering of summaries in general by someone with an agenda - I thought it might be useful to differentiate what you'll see in ROKE versus from, e.g., Paul Krugman, Brad DeLong, Mark Thoma, etc.
One difference between "Post" Keynesian economics ("PKE") and "neokeynesian" economics ("NKE") - of the variety you see with Paul Krugman - is that PKE advocates policies that assume that wages have an effect on aggregate demand and therefore drive growth. NKE, on the other hand, accepts a sort of "Say's Law" take on demand, wages and investment (a legacy of the Hicks ISLM model), i.e., that growth and jobs rely more on business investment than on distributing higher wages. Still, NKEs acknowledge the impact of fiscal stimulus as a way to drive demand. It seems like splitting hairs at first glance - but the repercussions can be enormous. For example, if the PKEs are right, we suddenly have a purely economic reason to raise the minimum wage to $20 and to fire Scott Walker.
Anyway, this post will summarize (as best as this non-economist is able) an article from the Autumn 2012 volume by Aldo Barba (Universita di Napoli Federico II, Italy) and Massimo Pivetti (Universita di Roma La Sapienza, Italy) entitled Distribution and Accumlation in Post-1980 Advanced Capitalism (free download available here).
In a nutshell, the article first describes growth levels both pre- and post- 1980, noting that (1) growth was much less in the latter period; and (2) the latter period is characterized by a change from manufacturing to service and technology industries. The article acknowledges that while "computerization" suggests the loss of jobs, it also argues that because the turnover of capital equipment in tech is much quicker than in "normal" industry, the impact on jobs shouldn't have been so severe, and income inequality shouldn't have become so egregious. So what gives?
The authors finger the usual culprits - globalization, lack of unions, and the explosion of finance. But they put it into a perspective, and add a causal mechanism, that you won't find in the Wall Street Journal. It's a story of bargaining power and the key role played by consumer demand (fueled by wages) in keeping our economy churning.
Specifically:
(1) when the economy transitioned to service and technology, it transitioned to a work force that lacked any sort of union cohesion and, therefore, had less bargaining power;
(2) Globalization further lowered domestic workers' bargaining power both in the old manufacturing industry and the burgeoning tech/services industry;
(3) As a result, wages stagnated, reducing consumer demand.
(4) Meanwhile, privatization (and now, austerity) further weakened consumer demand by (a) cutting benefits and (b) decreasing relative payouts to the consuming public as a "cut" now had to be given to "privatized" government services as profit.Under PKE, the reduced consumer demand, resulting from an overall relative reduction in wages to profits, discouraged business investment (this is the common sense conclusion - why invest in a few factory if no one is around to buy the products?)
Here is where the circle gets even more vicious:
(1) The lower levels of business investment mean increased worker competition, leading to... you named it, lower wages and even weaker demand;
(2) Meanwhile, people with money to invest are looking for profitable alternatives, since there's not enough consumer demand to fuel investment in the real economy. Enter the financial markets;
(3) Liberalized capital control rules (free trade across borders), Alan Greenspan's cheap money policy (and disregard of employment) and deregulation further encourage investment in financial products;
(4) as a result, workers enjoy even less bargaining power vis a vis a robust and hungry capital market... leading to, ultimately, lower demand and therefore lower growth and higher unemployment.The authors point out that we were able to dodge the inevitable for a while -- the growing financial markets also permitted consumers to finance their consumption with debt for a time. But, well, the bubble burst and here we are.
I'd note at this point, too, that the authors give us a different story about the benefit of equity markets from the one we corporate lawyers usually tell. We learn in law school that hedge funds and KKR and other such entities are good for growth because they discipline management to spend company money wisely. To quit buying golden toilets and avoid million-dollar executive-office-suit renovation. So, activist investors load up companies with debt and distribute the company's cash to shareholders. The shareholders then re-circulate the cash back into the real economy by funding other business ventures, leading to growth, new jobs, and all others sorts of good stuff. The reader will note that this is supply-side (Say's Law) economics. But sadly this is the "golden rule" taught to every law student as a Law of Nature....still. Thus, this is the "economic" justification for shareholder rights. The more power shareholders have in a company, the more they can do this kind of "house-cleaning."
But there's another version, as pointed out by the authors: the money extracted by activists does not go to build new plants or fund the next silicon valley start-up; rather, much of it remains in the financial market, used to buy and sell other companies. In other words, it's not used to create jobs and fund new investments. It's used to speculate. It's like monopoly, except that instead of building houses and hotels, you trade for someone else's that's already built.
Thus, overall, at least a portion of that money serves as a dead loss to the economy. Or Joe Stiglitz's "rent-seeking" loss.
This story makes even more sense when you recognize that given the lackluster consumer demand, there's no where else for the money to go.....
If you accept this PKE version of events, we suddenly have an economic (rather than just moral or political) reason to give "stakeholders" more of a voice regarding the distribution of corporate profits.
Or, that maybe Dodge v. Ford Motor should have gone the other way.
