Market Power, Minimum Wages, and the Sins of Friedmania
by Linda beale
Market Power, Minimum Wages, and the Sins of Friedmania
Two items caught my attention in today’s (June 22) newspapers and they represent diametrically opposed positions on what matters in society. One, by Paul Krugman, deals with the problems of monopoly rents–especially in industries in which there is very little production in this country combined with mostly profit-taking from some kind of intellectual property–think Apple and the financial industry. The other, by Richard Posner, talks about the importance of national security and minimizes the need for a minimum wage.
Krugman notes the “growing importance of monopoly rents,” which are “profits that do not represent returns on investment but instead reflect the value ofmarket dominance.” Krugman, Profits without Production, New York Times (June 21, 2013), at A19. He suggests that the growing importance of these rents from markiet dominance represent a “disconnect between profitsd and production” that may factor into our continued lack of robust economic growth. He contrasts GM in its heyday, when it owned hundreds of factories and employed about 1% of the total nonfarm workforce in this country, with Apple today, when it “seems barely tethered to the material world, employing fewer than 0.05% of US workers, with most work outsourced to China and “charg[ing] what the traffic will bear” for its i-products. And this story is part of a bigger story–the impact of rent-seeking corporate profits on the overall economy. It is driving rising inequality, as there is a “sharp shift in the distribution of income away from wages in general and toward profits.” Id. Since the profits reflect market dominance rents, not returns on investment, a monopolist can be profitable without expanding its production capacity–as Apple is, sitting on “a giant pile of cash, which it evidently sees no need to reinvest in its business.” Id. The effect of monopoly profit-taking is that wages are depressed. With household spending down as “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.”
The second item was a small blurb on the editorial page inthe Wall Street Journal, in which they pick out quotes from famous people worth noting. This time it’s Richard Epstein writing for the Hoover Institution. See Notable & Quotable, Wall Street Journal (June 21, 2013), at A13. Epstein suggests that “[a]ll government actions should be examined under a presumption of distrust” which is why, he says, he has supported “constitutional regimes that afford strong protections to economic liberties and private properties.” Now, folks, you have to ask, what does “economic liberty” –or even “private property” mean. For Epstein, it is a “natural right” kind of idea–the misguided, Friedman-derived notion that markets can run themselves, letting the powerful who own considerable private property succeed and the weak who don’t fail. That kind of brute force capitalism encourages corruption, rentier profits (see Krugman, above), and a depressed, highly unequal society in which them that have gets and everybody else is either a peon or some kind of low wage earner in thrall to the titans of Big Business. Epstein goes on to give an example of his belief in “economic liberty”–the veiw that “there is no coherent case for state intervention” to maintain a minimum wage. This is the view of someone who might say “let them die” of a poor person unable to afford health care, or “let them eat cake” of a poor person unable to afford bread. This is not “compassionate conservatism” but brute force capitalism. It is the view that the wage will find its bottom based on the “neutral” market forces. But neutral market forces don’t exist. They are shaped by the powerful and if you let the powerful take wages from ordinary workers to puff up their own profits, they will do so to the full extent of their market power.
Epstein then contrasts the lack of a need for the state to ensure a minimum wage, which would “degrade the efficiency of private markets” with the need for the state to “put in place institutions that limit aggression in both domestic and foreign affairs. Unlike protecting the livelihood of ordinary Americans, “national security is an area where government may be appropriately feared, but is still desperately needed.” We shouldn’t be so uptight about the FISA court’s allowing the government to grab all kinds of privacy data, because Epstein is confident that the NSA data grab is not “an intolerable invasion of privacy.”
I for one remain unconvinced that the incredible data-grab by all the federal spy agencies is an acceptable intrusion on individual liberties in the name of “national security.” And I am quite sure that the establishment of a minimum wage to prevent the huge imbalance of power in the work place from allowing owners to grab all the gains from production at the cost of workers is a very good kind of state intervention on behalf of ordinary folk. Epstein has it backwards–his ideological blinders from Chicago School economic “theory” are showing and his “economic liberty” arguments translate into the same old class warfare approach of protecting the profits of the elite at whatever cost they may bring to the rest.
If an increasing share of the economy driven by monopoly profits and increasing inequality from depressed wages and the impact of rent-seeking profits on business expansion are bad things, what might be considered reasonable policy steps to take to deal with this problem Krugman has pointed out and Posner has disregarded? It seems to me there are several policy positions that noticing the damaging effect of rent profits should push for: 1) increase minimum wages, 2) enact “Medicare for all” so that all those who lose out in a monopoly-driven corporate environment have an opportunity for decent health care (and the monopoly power of insurers is removed), 3) reinvigorate anti-trust legal actions to break up huge corporate empires like Big Oil, Big Banks, Big Pharma, etc., and 4) reinvigorate labor law to protect workers and ensure that those who want to organize can do so easily (with card-check and similar provisions, similar to motor vehicle registration of voters.
Related articles
Paul Krugman: Profits Without Production
Friday Musings on Profits, Production, Trade, and Inequality
The importance of redistribution
Time to raise the minimum wage
crossposted with ataxingmatter
The conundrum lies in the fact that private property is a phenomenon of government. Big government for that matter. Without government there is no means by which an owner of property can maintain a claim to that property and require others to pay for its use.
“And I am quite sure that the establishment of a minimum wage to prevent the huge imbalance of power in the work place from allowing owners to grab all the gains from production at the cost of workers is a very good kind of state intervention on behalf of ordinary folk.”
Given that thegovernment is the perpetrator of the concept of private property why would we expect that same government to require owners of property to distribute their profits in any particular manner. See the conundrum? We’re expecting the government of act in a schizoid manner. Notice that it still hasn’t happened to any significant degree.
“Epstein has it backwards–his ideological blinders from Chicago School economic “theory” are showing and his “economic liberty” arguments translate into the same old class warfare approach of protecting the profits of the elite at whatever cost they may bring to the rest.”
That’s exactly the reason why government as we know it in America, and most of the rest of the world, will not concern itself with the plight of workers. It is an ideological issue, not a rights issue. The size of one’s share of the profits is determined by power, whether it is the power of a monopoly or the power of “law enforcement.” Once we agree to the concept of private property we have to accept all the inequities that follow from that ideology. There is nothing natural about private property and the proof is the very complex and cumbersome legal frame work required to maintain such ownership of property.
well, i agree with linda about 99%, and i don’t like Posner a lot.. I hope he is reincarnated a million times as a “worker” so he can enjoy the fruits of his philosophy.
but i hope someone can convince me of the flaw in my “reasoning” on at least one question Linda raises:
Apples sells a product. The people can buy it or not, as they choose. It is not even marginally “essential.” I can’t see any good reason Apple should not be allowed to sell that product for whatever people are willing to pay for it. And no reason why they should not be allowed to keep the money and spend it as they choose…. assuming they pay taxes and don’t spend it on corrupting the country.
If that means workers don’t have enough money to spend on other things and the “economy” suffers… well, i can’t see any injustice in that. i can see a problem. but if i’d rather have an i pad to spend my time with than a baseball bat, where is the public interest in seeing that i get my i pad cheaper so the baseball manufacturers (including the workers) can stay in business?
i really hate the cheap rhetoric of “no coherent case for…” but someone help me make a coherent case for taking apple’s profits from them and giving them to Louisville Slugger.
Jack
i don’t think private property is the problem. IF you could just come over and “borrow” my Louisville Slugger any time you wanted, we would still have much the same problems, including “unequal distribution.”
even your simplest pre-capitalist society has private property enforced by the most tyrannical government of all: community moral suasion.
but i do think that what we have today is a system that makes something like slavery (for wages) nearly impossible to avoid. there is no way you can make a living by hunting and gathering or even farming your own little plot of land. nor can you “work” for wages and hope to save and set aside enough to “retire” or even take a real vacation and come back to your job or another one that will not either pay you starvation wage or require you to devote your whole life’s energy to keeping the boss happy.
and as far as i can tell this system is not entirely enforced by government or monopoly power but is in fact endorsed by community moral suasion.
“and as far as i can tell this system is not entirely enforced by government or monopoly power but is in fact endorsed by community moral suasion.”
I don’t disagree. As has been said, the masses are asses.
I would add taxing the rich a lot to the list. This money could be used to help the poor directly and — in addition — rebuild infrastructure and deal with global warming, thus creating jobs. We are going to have to build many new bridges and dikes and levees. plant new trees, build new windmills, build light rail and improve existing railroads, insulate every building in the country… Most importantly, if the rich would have less power is they had less money. I realize the MMT people don’t believe we need to raise money through taxes, but that still leaves the problem of the rich.