Thursday, April 19, 2012

"What Are Capitalists For?"

If private investment out of corporate profits does not encourage sustainable economic growth but rather the inflation of speculative bubbles in financial markets, as James Livingston argues in Against Thrift, then why is this the case? The proposition seems to be counterintuitive at best - and absurd at worst - on its face. In a capitalist economy like ours, one would think that the facilitation of capital formation would be the driving force of the economy. That's why they call it capitalism, right?

But according to Livingston (and the economists and thinkers that he draws from in making his case), that's not how the economy works today. In fact, that's not how it has worked in quite a while. If you take a look at the charts and graphs in the book's appendix, you'll see that long-term economic growth in the 20th century took place in spite of a secular decline in private investment. In his account, there are two main factors behind this shift from "extensive" economic development (investment in capital goods, like the machines in factories) to "intensive" economic development (activity driven by demand for consumer goods, like laptop computers): technological innovation and the increased importance of "human capital" in advanced economies.

Technological innovation has not only increased what Keynes called "technological unemployment." It has also allowed companies to continually replace old machinery with new and more productive (and in many cases, even cheaper) machinery. So as Livingston observes, capital stock and productive capacity can increase even in the face of declines in private investment. As economies develop into mature, advanced economies with less need for direct human labor in goods production, what Marx called the "general intellect" - the general level of knowledge, skills, ideas, and techniques in a given society - becomes an increasingly important factor in economic activity. Academic economists caught up to this insight in the 1950s and 1960s, when numerous studies found that investments in public education as well as technological-scientific innovation had come displaced the pursuit of profit in driving economic growth and development. (212-213)

Livingston is somewhat vague in describing the significance of this shift, so I won't rely on his account to explain it here. Instead, I'll turn to Gar Alperovitz and Lew Daly, whose recent (and fascinating book) Unjust Deserts: How the Rich Are Taking Our Common Inheritance covers much of the same ground. An interview with Dissent that offers a fairly good synopsis of their thesis, so I'll quote from it at length:

JL: And how has growth changed?

GA: Basically the story is that we have moved from a labor-intensive, small-scale farming economy to a knowledge-based information economy. In the process, the sources of growth have changed, but it’s important to understand that individuals have not really changed. We work no harder today than our ancestors did in 1800 or in the ancient past, and just the same, we are no more intelligent, in terms of basic brain capacity and reasoning ability. The cave paintings of earliest human culture are works of roughly the same basic intelligence as the theory of relativity. Let’s hold that thought: Essentially, we work no harder and are no more intelligent than our ancestors from the near or even the ancient past. And yet our economy is more than 1,000 times larger than it was in 1800, and the best measure of prosperity, per capita Gross Domestic Product (GDP)—the amount of output the economy generates for every person—is twenty times higher today than it was in the early nineteenth century (it was $42,000 in 2006, the equivalent of almost $170,000 for a family of four). The key to this growth, experts agree, is rising productivity, usually measured in terms of the amount of output per hour of work, which rose more than fifteen-fold since 1870.

JL: Wasn’t economic growth always based on some combination of knowledge, capital, and labor?

GA: Yes, but the recipe—the balance of ingredients—is very different from what it used to be. After the Second World War, economists began to formally study economic growth, and a method known as growth accounting was developed to measure the sources of growth—the idea being that if we understand the “how” of economic growth, where it’s coming from, then we can develop better policies to improve the economy and raise living standards. The pioneer in this work was MIT economist Robert Solow, who, in a brief but now-famous paper published in 1957, made a startling discovery (he later won a Nobel Prize for this work). In contrast with the then-dominant assumption that increases in the supply of capital (factories, machines, etc.) were the main engine of economic growth, Solow found that less than 13 percent of growth in the first half of the twentieth century could be attributed to capital accumulation or increases in labor supply (in fact, labor supply per person had been diminishing as the forty-hour week became the norm). Most of the growth, that is, was not coming from the conventional inputs of labor and capital, what workers and employers supply. The nearly 88 percent of growth that remained unaccounted for—which became known as the Solow Residual—could only be attributed, Solow concluded, to something broader and deeper than the everyday economic activity embodied in labor effort and capital accumulation. Solow defined this as “technical progress in the broadest sense,” or, in other words, the cumulative knowledge and technological capacity of our society. This did not make any sense in terms of our traditional individualistic way of thinking about economic activity or economic rewards.

JL: But in a technological society, isn’t individual brainpower more important than ever?

GA: Maybe not. An engineer working today might have the same human capital as an engineer working 100 years ago. Yet, as the Stanford economist Paul Romer points out, the contemporary engineer is typically far more productive. The reason is self-evident: “He or she can take advantage of all the additional knowledge accumulated as design problems were solved during the last 100 years.” The value is in the knowledge, not the individual.

JL: What does it mean to say that the value is in the knowledge?

LD: Romer’s example suggests something deeper about the cumulative impact of expanding knowledge: As knowledge grows and improves against a relatively fixed baseline of human effort and intelligence, the importance of individual contributions shrinks proportionally. In other words, the locus of value or value-generation is shifting from the individual to society. And this, in turn, means that our conventional individualistic basis for judging economic differences no longer holds. How do we measure “who deserves what” in an era of knowledge-based growth, where the cumulative knowledge of society is increasingly more important than individual effort or intelligence? Clearly, the way we talk and think about inequality doesn’t account for the enormous “free lunch” of inherited knowledge at the heart of both our annual GDP and our total wealth.

So that brings us back to the question that lies at the heart of Against Thrift: "what exactly is it that capital does, or rather, what are capitalists for?" (213)

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