It's the Macroeconomy, Stupid
Source Dmytri Kleiner
Date 12/03/13/12:50

It's the Macroeconomy, Stupid. To understand neoliberal policy you need to look at the structure, not the level of wealth

I'VE BEEN thinking a lot recently about macroeconomic identities. An
accounting identity is an equality that must be true, no matter what the
values of its variables are.

Macroeconomics has many such identities. For instance, Y = P + W.
Meaning total income (Y) is equal to profits (P) plus wages (W). As this
is an accounting identity, this must always be true, and therefore any
change in either profits or wages must either be compensated by an
inverse change in the other, or be reflected in a change in total income

This identity tells you that when profits grow faster than income
growth, that wages must be falling. When profits grow and wages fall,
this generally means wealth is concentrating.

What's important here is that this is true, wealth is concentrating, even
when Y falls, so long as P falls less.

Another key identity is Y = I + C. Total income is equal to the sum of
investment (I) and consumption (C). This tells us, for instance, that
any reduction in the combined sum of investments and consumption
invariably means negative economic growth.

This identity is currently making the heads of honest economists
worldwide spin, they are often outraged and mystified by the apparent
economic voodoo behind neoliberal austerity programs currently being
inflicted on economies worldwide, which clearly and invariably will
result in economic stagnation.

Now why would the financial elite be pushing for policies that are
certain to reduce total income? Doesn't this mean they would make less
money? Isn't it their goal to make more money? No, not necessarily.

The goal is not wealth, per se, the goal is power, and power depends
not so much on the level of wealth, but rather on the structure of
wealth, not the total sum of wealth available to capital, but rather the
structure of wealth in society, the relative amount of income that
returns to private owners compared to the amount that is retained by
workers. Not the absolute level of profits, but the relative share of
profits in the total income.

The financial elite are not elite by nature of the level of wealth, but
by the structure of wealth. The more wealth is concentrated, the more
power it's owners have, even when the total level of wealth is lower. It
doesn't matter whether the capitalist class makes a million, a billion,
a trillion, or a duodecillion dollars, only what percentage of the sum
of all the money that is made in the economy ends up as their own.

Therefore it's not economic ignorance or policy voodoo that drives the
current austerity policies, but rather the rational self interest of the
financial elite: their desire to stay on top of the pyramid. To see this
identity we need to break down our understanding of the macroeconomy,
not based on total income, but based on the relative incomes as accrued
by class, and break income flows down to distinguish those that
reproduce private capital, and thus cause further concentration, from
those that do no reproduce private capital, and thus lead to capital
dissolution. We need to isolate the relative share of profit in the
total income, not the absolute level of profit.

To start with, P + W = C + I is a combination of the two identities
above, since both equal Y, they must also therefore be equal to each
other. So the sum of profits and wages is equal to the sum of
consumption and investment.

Renowned economist Mikhal Kalecki isolated profit from this identify by
breaking down consumption into consumption by capital and consumption by
workers, resulting in P + W = Cp + Cw + I. Reasoning that workers, as a
class, spend all the income they make, Kalecki equated W and Cw,
resulting in P = Cp + I. Meaning Profit is equal to the sum of
capitalist consumption plus investment. This means that wages are
essentially meaningless when it comes to profits when wages eventually
return to capitalists by way of worker's consumption.

Yet, the assumption the workers consume everything they earn as a class
is based on wages being determined by an efficient labour market.
Workers can, as a class, use their social power to work against the
workings of the labour market.

In one of his later papers, "Class Struggle and the Distribution of the
National Income", Kalecki reasons that through non-market processes like
collective bargaining, workers can negotiate wage increases that do not
entirely flow back to Capital in the form of profits. Collective
political action, can likewise push to enact laws and lobby for benefits
that move aggregate wages above class subsistence levels, and thus
enable workers to earn more than they spend, and therefore allow workers
to invest, breaking the monopoly on investment enjoyed by capital.

Kalecki wrote in 1960, "According to [my] first theory, the absolute
level of profits is determined by capitalist consumption and investment.
According to [my] second theory, the relative share of profits in
national income is determine by degree of monopoly."

The degree of monopoly is determined by class struggle, and the
relative share of profits in the national income is the result.

Roughly following Kalecki, lets expand both consumption and investment
to add a class dimension, lets say P + W = Cw + Cp + Iw + Ip. Now, to
isolate relative profits (R) from absolute profits, we could use R = C +
Ip. In other words relative profits are equal to all consumption of
capitalist goods plus investment derived from capitalist profit. The
social capacity of workers to invest (Iw) reflects a part of the
national income that is not being consumed, and, more importantly, not
flowing through to capitalist profit.

We can now introduce a new equation to express wealth concentration (X)
as X = C + Ip - Iw. This wealth concentration equation quantifies
Kalecki's concept of the "Degree of Monopoly." This equation is
macro-economically consistent, since Y = X + Iw.

If we understand that the neoliberal agenda is to maximize X, not Y, we
clearly see that X can rise even if Y falls, so long as workers'
capacity to invest, meaning the amount of their income workers can
sustainably divert from consumption, falls more.

Thus, the macroeconomy of class struggle boils down to this, any action
that decreases X is revolutionary and any action that increases X is
reactionary. Just as the concentration equation reveals the logic of
neoliberal policy, this also serves to guide the objectives of all who
oppose it. Understanding that the goal of neoliberalism is to make X as
close to Y as possible, we know that the goal of building a fairer
society requires us to increase worker's capacity to invest as much as
possible, thus reducing X as far below Y as possible.

The level of workers' capacity to invest is not the result of the
market, but a social choice born of collective action, such as
collective bargaining and political struggle, and only maintained by the
further social choice of not simply spending it back into the market.
Workers' ability to invest can only come from a collective will to fight
for more wages and benefits, and then intentionally use the extra wages
and benefits in ways that do not create capitalist profits.

The further investigation on how to decrease X, what I have described
elsewhere as as integrated strategy of counter-politics, venture
communism and insurgent finance, will be explored in upcoming articles.

[1] Total income refers to the sum of all incomes within the economy in
question, in the case of a nation, the national income. If the economy
in question is anything smaller than the entire global economy, then
balance of payments between this and other economies affects these
identities, but this will not be covered here.

-- Dmytri Kleiner
Venture Communist

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