Friday, June 14, 2013

A Brief Theory of the Great Stagnation

. Friday, June 14, 2013

World War II left industrialized societies with two main features: a lot of industrial capacity, and a lot of dead men. These combined to drive up wages for workers, and for cultural and pragmatic (high wages mean no need for dual income households; high fertility was encouraged to replenish the population) reasons workers were overwhelmingly men. The marginal unit of labor was thus very valuable and labor supply was restricted since the baby boom generation needed twenty or so years to grow up.

By the end of the 1960s the baby boomers were entering the workforce but industrial capacity had not grown at the same rate as the population. Thus, new entrants into labor markets -- which increasingly included women and minorities as well as young white men -- put downward pressure on wages. The marginal unit of labor was no longer very valuable. Median wages began to stagnate at the same time that over-crowding of cities was leading to social unrest. Governments did not do a good job of managing these duel pressures. The 1970s are a period of stagflation and urban decline.

The post-baby boom economy has lots of labor, so income gains are not broadly shared. Who benefits? Those who can sell the product of their labor into the biggest markets. That means the heads of major corporations, financiers, professional atheletes. The rise of information technology increases these opportunities, but only for a minority. Think of these as the prominent nodes in a network.

This isn't so much capital-versus-labor anymore. The beneficiaries aren't the landed elite or the factory owner. Instead, the beneficiaries are those in managerial positions in large corporations, those who are able to leverage technical education to create consumer products that are popular, and those who are very good (or not so good, as the case may be) at managing peoples' money. That is... it's labor. It's labor that has put itself in a central position in the economic network of late-capitalism. Michael Jordan didn't become a multimillionaire by extracting the surplus value of anyone else's labor. He did it by selling his own labor to millions of people simultaneously, and then leveraging his celebrity to move into high positions in the corporate hierarchy. Mark Zuckerberg became a billionaire by giving his product away for free. Steven Spielberg gets rich on volume, not margin, and has made more from Dreamworks than from directorial fees. And some dude at Goldman Sachs gets rich by making sure all of their money doesn't go away.

The political left and right do not understand this. This is not a dynamic that will lead to wealth trickling down, nor will increasing the strength of labor unions be able to alter it. This is a new economy, but we're treating it like it's the old economy.


Vladimir said...

"Michael Jordan didn't become a multimillionaire by extracting the surplus value of anyone else's labor. He did it by selling his own labor to millions of people simultaneously.." Yes, the defining change in the structure of production is the ability of one individual to satisfy a multitude of customers....of course there is a political economy to this. When it comes to sports think about baseball and the reserve clause (a victory for a different kind of organized labour); the invention and then protection of intellectual property -would Spielberg be as rich without it?; Goldman Sachs-well what are the tax rates on investments and persistence of "carried interest" all about?. While a technological change has occurred that gives people the potential to earn enormous amounts of money-a political framework has been shaped to legitimize and indeed enhance that potential. Case in point. The "Great Gatsby" was written in 1924, it should have left copyright in 1999, Disney if you recall was living in fear that Mickey Mouse would soon enter the public domain so the Hollywood President Clinton worked with congress to expand copyright protections. Gatsby may still be in copyright (a windfall passed down through the generations) and Disney et al get theirs. The system is redistributing money up the socio economic scale. So yes , maybe the right and the left don't get it. A dose of laissez faire applied to IP may play a part in reducing inequality and raising real incomes of the lower and middle classes.

Wonks Anonymous said...

The casualties in WW2 were largely Russian & German (that's what the war mostly consisted of). Also Japan & China, who had begun fighting even earlier. America got off relatively lightly. I don't think the casualties were enough to significantly impact the price of labor here.

CrocodileChuck said...

Wonks Anonymous is correct.

US deaths in WWII: 450,000
Russian deaths in WWII: 25,000,000

UPSHOT: US deaths 1/55th that of Russia. This is a superficial and erroneous argument.

Kindred Winecoff said...

Vladimir, I agree that policy plays a big role in this. But it's not just policy.

Anon and Chuck, You should understand that my story isn't just about the U.S., nor is it only about battle deaths. Even considering only the U.S. there was a greater than 35% jump in the number of under-19 year olds from 1950 to 1960 (from 51 million to 69 million, if Wikipedia can be trusted). Part of that is battle dead and part of that is the baby boom. The point is, by the end of the 1960s all those kids are grown up and entering the labor market. You really think that wasn't going to impact wages? 35% increase in the supply of eligible workers entering the market? Probably even more, when you consider greater integration of women and minorities during the same period. Remember that the employment-to-population ratio was going up at the same time: more potential workers + greater % of population working = big increase in the supply of labor.

A Brief Theory of the Great Stagnation




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