The Class Struggle on Wall Street: A Footnote

Remember back at the beginning of February when the stock markets were all crashing? Feels like ages ago now, I know. Anyway, Seth Ackerman and I had an interesting conversation about it over at Jacobin.

My rather boring view is that short-term movements in stock markets can’t be explained by any kind of objective factors, because in the short run prices are dominated by conventional expectations — investors’ beliefs about investors’ beliefs… [1] But over longer periods, the value of shares is going to depend on the fraction of output claimed as profits and that, in general, is going to move inversely with the share claimed as wages. So if working people are getting raises — and they are, at least more than they were in 2010-2014 — then shareholders are right to worry about their own claim on the product.

One thing I say in the interview that a couple people have been surprised at, is that

there has been an upturn in business investment. In the corporate sector, at least, business investment, after being very weak for a number of years, is now near the high end of its historical range as a fraction of output.

Really, near the high end? Isn’t investment supposed to be weak?

As with a lot of things, whether investment is weak or strong depends on exactly what you measure. The figure below shows investment as a share of total output for the economy as a whole and for the nonfinancial corporate sector since 1960. The dotted lines show the 10th and 90th percentiles.

Gross capital formation as a percent of output


As you can see, while invesment for the economy as a whole is near the low end of its historic range, nonfinancial corporate investment is indeed near the high end.

What explains the difference? First, investment by households collapsed during the recession and has not significantly recovered since.  This includes purchases of new houses but also improvements of owner-occupied houses, and brokers’ fees and other transactions costs of home sales (that last item accounts for as much as a quarter of residential investment historically; many people don’t realize it’s counted at all). Second, the investment rate of noncorporate businesses is about half what it was in the 1970s and 80s. This second factor is exacerbated by the increased weight of noncorporate businesses relative to corproate businesses over the past 20 years. I’m not sure what concrete developments are being described by these last two changes, but mechanically, they explain a big part of the divergence in the figure above. Finally, the secular increase in the share of output produced by the public sector obviously implies a decline in the share of private investment in GDP.

I think that for the issues Seth and I were talking about, the corporate sector is the most relevant. It’s only there that we can more or less directly observe quantities corresponding to our concepts of “the economy.” In the public (and nonprofit) sector we can’t observe output, in the noncorproate sector we can’t observe profits and wages (they’re mixed up in proprietors income), and in the household sector we can’t observe either. And financial sector has its own issues.

Anyway, you should read the interview, it’s much more interesting than this digression. I just thought it was worth explaining that one line, which otherwise might provoke doubts.


[1] While this is a truism, it’s worth thinking through under what conditions this kind of random walk behavior applies. The asset needs to be and liquid and long-lived relative to the relevant investment horizon, and price changes over the investment horizon have to be much larger than income or holding costs. An asset that is normally held to maturity is never going to have these sort of price dynamics.

V for Varoufakis

I have a long review up at Boston Review of three books by Yanis Varoufakis: The Global Minotaur, And the Weak Suffer What They Must?, and Adults in the Room. Here’s the start:

In the spring of 2015, a series of debt negotiations briefly claimed a share of the world’s attention that normally goes only to events where celebrities give each other prizes. Syriza, a scrappy left-wing party, had stormed into office in Greece on a promise to challenge the consortium of international creditors that had effectively ruled the country since its debt crisis broke out in 2010. For years, austerity, deregulation, the rolling back of labor rights and public services, the rule of money over society, had been facts of life. Now suddenly they were live political questions. It was riveting.

Syriza was represented in these negotiations by its finance minister, Yanis Varoufakis. With his shaved head, leather jacket, and motorcycle, he was not just a visual contrast to the gray-suited Eurocrats across the table. His radical but rigorous proposals for a different kind of Europe—one based on meeting human needs rather than rigid financial criteria—offered a daily rebuke to the old refrain “there is no alternative.”

The drama was clear, but the stakes were a little obscure. Why did it matter if Greece stayed in the euro? Orthodox economic theory, after all, gives little role for money or finance. What matters are real wants and real resources, for which money is just a convenient yardstick. University of Chicago economist John Cochrane probably spoke for much of the profession when he asked why it made any more sense to talk about Greece leaving the euro than about Greece leaving the metric system.

But money does indeed matter—especially in economic relations between countries, as Varoufakis himself has convincingly shown. In his three books—The Global Minotaur (2011), And the Weak Suffer What They Must (2016), and Adults in the Room (2017)—Varoufakis offers a fascinating lens on the euro system and its masters. While the first two books chart the history of the international monetary system from World War II up to the debt crisis, his last and most recent book is a reflection on his five months as Greek finance minister. Taken together, they read as if Varoufakis is the protagonist in some postmodern fable, in which he is transformed from a critic of the play to one of the main characters in it. …

Read the rest there, and then comment here if you are so inclined.

Posts in Three Lines

Seeing as I’m not teaching this semester, maybe I’ll start blogging more regularly. If so, here are some of the posts I might write.


Taxes and investment. Discussions of tax cuts’ effects on investment need to distinguish between two possible channels: changes in the expected return on investment, and changes in internal funds available to the firm. Economists tends to focus on the first, but if external funds are not a good substitute for retained earnings then the second may be more important. Tax cuts will fail to stimulate investment in the first case if they raise the opportunity cost for investment as much as expected returns, and in the second case if shareholder demands mean that internal funds are no longer available to finance investment; or in either case if monopoly power, demand constraints, etc. mean that the expected return on investment curve slopes steeply down.

The probability approach in economics. Empirical economics focuses on estimating the parameters of a data-generating process supposed to underlie some observable phenomena; this is then used to make ceteris paribus (all else equal) predictions about what will happen if something changes. Critics object that these kinds of predictions are meaningless, that the goal should be unconditional forecasts instead (“economists failed to call the crisis”). Trygve Haavelmo’s writings on empirics from the 1940s suggest third possibile goal: unconditional predictions about the joint distribution of several variables within a particular domain.

Walking the labor-market tightrope. There’s a tension in how to think about the past couple years of low unemployment and somewhat faster wage growth. On the one hand, we’re still very far from reversing the declines in employment and wages after 2008, or from any other reasonable measure of full employment; but on the other hand, it’s important that there has been some progress — it means that despite fears of robots/China/etc., there is still a reliable link from aggregate demand to employment and wages. It’s also worth noting that the faster wage growth has come without any pickup in inflation, but has translated one for one into a higher wage share (and lower profit share).

The interest rate and the interest rate. Every couple months, Martin Wolf writes something to the effect that central banks can’t change the real interest rate. The idea seems to be that the monetary interest rate influenced by central banks must fundamentally correspond to the intertemporal rate of substitution in a Walrasian world without money, set by preferences and production possibilities. It’s worth thinking through all the reasons why this doesn’t work; I think they point to some deep fissures opened up by the incongruence of economic map with social territory.

Financialization. One critical response to my conversation about financialization with Seth Ackerman was that a focus on finance as a device for disciplining nonfinancial firms ignores the ways those firms themselves have become major players in financial markets. Several very smart comrades in heterodoxy have made this same argument, that nonfinancial firms are increasingly seeking to profit from ownership of financial assets rather than of means of production. I’m not convinced — I think that most or all of the apparent rise in financial assets on the balance sheets of nonfinancial firms is really goodwill from mergers, interests in unconsolidated subsidiaries, and similar accounting devices, rather than the sort of financial assets that you can purchase and collect an income from.

The European central bank is not the central bank of Europe. I finally finished my review of Yanis Varoufakis’ three books, months past the deadline (hopefully they’ll still take it). One important issue I couldn’t address in the review, is whether he is right to dismiss as politically inconsequential the question of who runs the Bank of Greece. Personally, I’m not convinced — I still think the national central banks are important strategic terrain that any future left government in the euro zone needs to get control of.

The boss’s brain is under the worker’s cap. Business Insider has been doing some great reporting on the chaos created by Whole Foods’ new inventory management system. One of the key points that comes out is the heroic effort and emotional energy that employees, including line managers, put in to keep the machinery running, no matter how hard top management tries to wreck it. I feel like much of corporate America is run by mad kings who sit around burning their tribute while insisting they deserve credit for everything the peasants do to produce it.

Evolution ≠ natural selection. My recent reading has included two books on evolutionary biology — Peter Godrey-Smith’s Darwinian Populations and Natural Selection, a high-level, philosophical restatement of the logic of natural selection; and Olivier Rieppel’s Turtles as Hopeful Monsters, a ground-level narrative of some particular debates within evolutionary biology. Reading these two books together really highlights the distinction between evolution (the concrete development of living creatures over time) and natural selection (a mechanism postulated to account for that development). One way of thinking about the evo-devo revolution is that it’s saying the former is not reducible to the latter — the capacity to produce large-scale, complex structures is not a generic implication of natural selection but a specific trait that itself has evolved.