What’s with the stock market?

by John Quiggin on August 12, 2020

In a couple of recent posts, I’ve been looking at returns to capital. First, there’s the fact that real returns on long-term (up to 30 year bonds) are now below zero in most countries. I argued that such a situation is inconsistent with the existence of capitalism in the traditional (say, pre-1970s) sense of the term. Then there’s the fact that the biggest contributor to corporate asset values is “intangibles” which is a polite word for monopoly.

An obvious question that arises is: if this is the case, why is the stock market doing so well, holding most of an already high valuation even as the pandemic raises the prospect of a long and deep recession? In one sense, there’s no puzzle at all here. Stocks generally yield higher returns than bonds (this is the “equity premium puzzle” on which I’ve written a lot), but if bonds are paying zero, then investors will be willing to buy stocks with a small (expected) positive return. That implies, for any given expectation of future returns, a higher share price. On this argument, the fact that sharemarket investors have done well in the last ten years or so doesn’t mean that they will do well in the future. Rather, at current stock prices, they will be taking more risk for less return than in the past.

All of this raises more questions about what is going on with corporations. Although corporate profits are increasing at the expense of wages, that masks growing inequality between firms. According to this study from 2017 (abstract over the fold). “Earnings of public firms have become more concentrated – the top 200 firms in profits earn as much as all [other] public firms combined.” Firms are also paying out more in dividends and share buybacks and investing less, implying once again that (at least as regards public markets) the scope for capital investments yielding positive returns has become more limited. I suspect (but haven’t yet got good evidence on this) that a growing share of corporate profits are being captured in privately-held firms (for example, those owned by private equity firms), where there is more scope for various kinds of arbitrage and rent-extraction.

Is the U.S. public corporation in trouble?
Kathleen Kahle and René M. Stulz
NBER Working Paper No. 22857
November 2016, Revised May 2017
JEL No. D22,G24,G30
ABSTRACT
We examine the current state of the U.S. public corporation and how it has evolved over the last 40 years. After falling by 50 percent since its peak in 1997, the number of public corporations is now smaller than 40 years ago. These corporations are now much larger and over the last twenty years have become much older; they invest differently, as the average firm invests more in R&D than it spends on capital expenditures; and compared to the 1990s, the ratio of investment to assets is lower, especially for large firms. Public firms have record high cash holdings and, in most recent years, the average firm has more cash than long-term debt. Measuring profitability by the ratio of earnings to assets, the average firm is less profitable, but that is driven by smaller firms. Earnings of public firms have become more concentrated – the top 200 firms in profits earn as much as all public firms combined. Firms’ total payouts to shareholders as a percent of earnings are at record levels. Possible explanations for the current state of the public corporation include a decrease in the net benefits of being a public company, changes in financial intermediation, technological change, globalization, and consolidation through mergers.

{ 24 comments }

1

Chris Heinz 08.13.20 at 12:46 am

Yes. If we follow the logic of Paul Mason in “Postcapitalism”, the zero-marginal cost modern digital economy has broken the normal 50 year “Kondratiev waves” cycle, and we’re stuck in the end of a cycle, where financialization & all things rentier have taken over the economy.
I predicted ~2 years ago, stock market will never go down for long ever again. The market is the only place on earth that delivers decent ROI.
I think that the fact that the return on raw capital is pretty much non-existent may mean that we have reached the point that Keynes & Marx predicted, where capitalism has done it’s job. Bonds pay ~0% because the world is awash in raw capital. I think we just need to distribute it – as per William Gibson on “the future” – a little more evenly.

2

bad Jim 08.13.20 at 7:40 am

My best guess is that there’s a general expectation that the US will, once again, bless us with massive fiscal stimulus, which more likely than not would work, and might well happen. But the stock market is famously a game of trying to figure out what everyone else is going to do, and an unreliable guide to what is about to happen.

3

Tim Worstall 08.13.20 at 11:44 am

“Although corporate profits are increasing at the expense of wages”

That’s rather something that needs to be proven rather than assumed. A few years back had a look at national income for the UK. The labour share had fallen, yes. But it wasn’t the profit share that had risen, it was subsidiesto production and taxes on consumption – largely VAT going up. Also mixed income rising. Within the labour share the wage share had fallen but that’s higher national insurance payments.

Agreed, labour is getting less – but not in the UK example capitalists getting more. It’s higher taxation.

4

T 08.13.20 at 2:09 pm

Seems like firm ownership and management figure out the best corporate structure for rent extraction. The Kaufman Foundation study several years ago show the returns to private equity were consistently less than public markets. The study used Kaufman’s own foundation returns as a benchmark avoiding the survivor bias and lack of reporting from found in other studies. The lack of oversight in PE has been well documented. No that the Gov’t has ruled that PE investments can be used in retirement accounts, expect matters only to get worse.

5

ffrancis 08.13.20 at 2:21 pm

I think it’s past time to start acknowledging that the stock market is a giant gambling operation; “investors” are speculators / gamblers, not interested in normal returns in the form of dividends / corporate profits, but essentially only in changes in share value, often minute changes over even more minute time intervals. This is, in my view, a symptom of a vastly over-capitalized global economy. But then, I’m not an economist so I probably don’t know what I’m talking about.

6

Peter Dorman 08.13.20 at 5:50 pm

One small thought on equity prices: we are accustomed to thinking about equities as the capitalized value of future earnings from the assets tied to a particular corporation, its physical assets and intangibles (JQ’s previous post). But as this further post points out, corporations are now also financial intermediaries, holding portfolios of mostly very liquid financial assets whose return is not primarily tied to their own operations. There is absolutely no question that these assets are backstopped by the central bank and will always be.

I don’t think this is a big deal compared to other factors, but it’s not nothing.

7

snow_watcher 08.13.20 at 7:55 pm

@ Chris Heinz

That’s a really interesting take on what’s going on. I also read the ~2 year old post you linked. Instinctively and intuitively I still don’t trust what’s happening in the market, something doesn’t seem right but your analysis is thought provoking and may provide at least a partial explanation.

Thanks for sharing.

8

hix 08.13.20 at 9:40 pm

The biggest group of companies missing from the stock market that comes to my mind are all those technology startups that would have gone public much earlier before. Not a group with a particular stellar record on profitability. After investors have seen just how profitable internet monopolies can become, they seem to be willing to spent such insane amounts in the fight over who gets the next monopoly that even the sucesfull companies don´t look like a particular good investment anymore. An expectation might be only the earliest investors which represent an ever tinier amount of overall capital rasing. Leverage buyout private equity does not seem to have a particular core competency in monopoly building either. Do they even have much competency besides cheating the investors in their funds by chargeing them an arm and a leg for their management services ? They might be a notch better at cheating taxes and takeing away from the labour share, maybe also from bondholders, than public companies, but not obviously in ways that moves the needle in such a significant way.

9

Alan White 08.13.20 at 11:24 pm

Thanks so much for this. Intuitively there should be at least a loose connection between the overall health the US economy and the markets. But anecdatum time: one private but substantial retirement account I have (and untapped because so far in retirement I don’t need it) started the year well, returning near-%100 return of interest on investment. It is one that is diversified among stocks, real estate, and some other sources, though (I gather) the first two are the most influential on return. Then the C19 economy hit, and with it huge unemployment and substantial increases of national debt, and my account lost around %25. Just checking yesterday, it has completely recovered its prior value, and I can’t understand that at all–economically we’re like that famous reply to Bruce Willis’ Pulp Fiction inquiry about being ok from Ving Rhames: “pretty fuckin’ far from okay”. So I depend on Quiggin and company to tell me how such madness can be, and grateful for these posts.

10

Bob 08.14.20 at 1:27 am

Two questions:

Was Marx right then, that there is a long term decline in the rate of profit?
Is one of the problems that, as capital sees diminishing returns in the developed world, it is not able to seek better opportunities in the developing world because of corruption, weak infrastructure, arbitrary legal systems and other factors? Capital is so scarce, in, say, Afghanistan, that you would think that almost anything you did–nothing fancy, just cheap, simple, well-understood stuff, like farming with more fertilizer–would yield huge returns. But who would risk their money in Afghanistan? Only those patsies, the American tax payer!

11

Hugh Mann 08.14.20 at 7:47 am

“I suspect (but haven’t yet got good evidence on this) that a growing share of corporate profits are being captured in privately-held firms (for example, those owned by private equity firms)”

Don’t PE guys still only pay 10% tax “Entrepreneurs Relief” when selling on a company? I’d call that a pretty big incentive.

Tim Worstall – “Agreed, labour is getting less – but not in the UK example capitalists getting more. It’s higher taxation.”

Riddle me this – if you look at the Annual Survey of Hours and Earning for 1997 and 2017, you’ll see that median male weekly earnings were £357.60 in 1997, and £594.10 in 2017, but factor in inflation (from the BoE site) and our median male would need to earn £619 to stand still, so male wages have actually fallen over 20 years (in that same timeframe real house prices have doubled).

Also in that time real GDP has risen 50% (St Louis Fed site)- but none of the benefits of that have accrued to median male wage earners. Have they gone to women? Have they really all gone in taxes? Seems unlikely.

12

bad Jim 08.14.20 at 8:06 am

Keynes wrote, in 1930,

This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life … and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time.

Our present situation is quite a bit different. It isn’t a market failure, a bursting bubble like the last two disasters that brought the world’s economies to its knees. What Keynes said about the Great Depression was also true of the other two, but the present problem, which is certainly the result of mindless blundering, has little to do with the financial system. Perhaps this explains the market’s relentless optimism.

The pandemic is not a nightmare from which we can suddenly awaken. There is no cure, the prospect of a vaccine is uncertain, and too many of our fellow citizens have made it clear that they are vehemently opposed to taking any measures to limit the spread of infection. (I’m writing as an American, of course.)

Let me put it more succinctly: I suspect that stock market traders have a weak grasp of science. I doubt that they have priced in the months of misery to come.

13

John Quiggin 08.14.20 at 10:44 am

Tim W @3 In the Australian case, the decline in the labour share shows up when you allocate mixed economic across labour and profits.

On tax, as I read it, the situation in the UK is the same as here – a regressive shift from income tax to VAT with no change in the ratio of tax to GDP>

14

MisterMr 08.14.20 at 12:26 pm

In my understanding, when we speak of the division of income between capital and labor we are really speaking of the division of net output (NDP) not gross output (GDP) and taxes are by definition not part of NDP so the increase in the tax share is not relevant (although for example the increase of public sector wages or pensions paid for by taxes is relevant).

The problem as far as I can understand is that nobody has a good way to calculate NDP instead than GDP and also nobody has a serious way to calculate the value of the output of public stuff like police or street building, so if say 100$ in taxes are used to pay the wage of a policemen:

1) it is incorrect to calculate these 100$ as a share of NDP because they will show up again as wages, but

2) the value of the product of the work of the policeman either doesn’t show up in NDP or is attributed a more or less arbitrary value;

3) this output furthermore should be divided also between capitalists and workers (and others) but there is no paricular way to divide it meaningfully, for example I remember that Shaik just divided this value in the same proportion of the private economy, but this is quite arbitrary.

However as the actual output of government products cannot be calculated and divided, and as the money taxed from the private economy cannot be counted in NDP because it comes again in wages for public workers (or profits for businesses that work for the government) I think the correct thing to do is to ignore taxes (but not public sector wages) when one looks at the division of output.

15

reason 08.14.20 at 12:49 pm

John Quiggin @13
Not only has there been a shift from progressive taxes to regressive taxes, but there has also been a reduction in the level of transfer and a reduction in the provision of free public services. The net progressivity of the government sector has fallen massively.

I’m sure you know that, but it can’t be said enough. I’m not in principle against moving some taxation from income taxes to VAT (for the non-rich) provided that regressive component were offset by say a universal basic income. It is the net impact that counts.

16

MisterMr 08.14.20 at 12:55 pm

A follow up to my previous comment:

Suppose that contry X every year produces 50$ of manure, and 100$ of carrots; however the production of carrots uses 50$ of manure.

The GDP of X is of 150$, but the NDP (net output) obviously is only 100$. When we look at the distribuition of income in X we only look at the 100$ of carrots, we ignore the manure because it would be a double counting, as the value of the manure is already accounted for in the price of the carrots.

If we ignore (a) net investiment (b) import/export (c) debt it follows that NDP is equal to the sum of final consumption goods yearly produced or consumed, and ignores intermediate goods (the manure).

Now when we look at taxes, it is obvious that in many cases (such as for example police) what is paid for by taxes are intermediate goods, so the taxes themselves are not part of the NDP, whereas the final consumption goods bought by the policeman with his wage are, so it is correct to count the policeman’s wage for the distribuition but not the taxes from which that wage comes from.

However in many situations this is ambiguous: for example in the case of a NHS the output of the NHS should be probably counted as final consumption (but by whom?), the school system is ambiguous, streets and other public goods are also ambiguous etc.

On the whole though it is wrong to count taxes in the subdivision of output because said taxes then go to pay public workers wages (already accounted for as wages), social security pensions (already accouted for) and payment for private businesses who work for the government (already accounted for).

So the increase of taxes on GDP in itself is irrelevant for the calculation of distribution, although the value of some final consumer services like the NHS isn’t ( but we don’t know how to divide it between classes of consumers).
This is because in term of distribution we are only interested in the final output (the carrots) and not in the intermediate ones (the manure).

17

John Quiggin 08.15.20 at 3:24 am

@16 This is a misunderstanding. The system of national accounts that generates GDP is designed to avoid such double counting. The GDP in your example is $100 and the same as NDP. The difference between the two is that NDP excludes capital depreciation. For welfare purposes, NDP is the better measure, but the difference isn’t large most of the time. More on this here https://johnquiggin.com/2003/04/29/gross-out/

18

John Quiggin 08.15.20 at 3:28 am

Bob @10 “Was Marx right then, that there is a long term decline in the rate of profit?” This is a big issue, and still unresolved. It’s related to the second point – what about investing in less developed countries, which share many characteristics with pre-capitalist European economies. Are the high rates apparently on offer just an arithmetically fair reflection of the fact that investors and lenders may not get their money back.

19

Fake Dave 08.15.20 at 4:26 am

I also think this pandemic has exposed the underlying pathologies of extreme short-term planning coupled with the assumption of a normal/natural marketplace that will continue indefinitely. Being a day-trader means embracing short fluctuations as part of the game and the key to quick profits, while still believing that the market will eventually bounce back from any adversity.

The stock market is a self-selecting subculture that requires both attitudes at a level of faith. People who are terrified of getting wiped out by short-term market churn (pessimists and poor people) don’t buy stocks. Long term investors looking for security tend to put a little money everywhere and ignore the day-to-day noise. Actually “playing” the stock market is strictly for the true believers who think the market will always be there. Otherwise they’d probably buy bonds or bury gold in the backyard.

I suspect that both assumptions have held throughout the pandemic with the skittish investors from March either filtering back in or getting replaced by a new mini-bubble of people betting on a strong recovery sooner or later (mostly sooner). I think it’s impossible to understand this phenomenon without thinking of the stock market as a game for rich old people. Like most working people under about 50, I don’t own any stocks or have any plans to buy any. Most of my friends are in the same boat (except a couple annoying rich kids). Even most of our parents are only invested through 401(k)s or equity and other illiquid funds that are hard to cash out by design.

The yuppy gospel of the 80s and 90s rings hollow to anyone who hasn’t (literally) invested years their lives into it and nothing has replaced it. The illusion of perpetual growth had to be sustained among the faithful by letting them gobble up ever bigger piles of other people’s money. The right wing still thinks enough tax breaks and deregulation will make people want to be capitalists (only game in town, if you can’t beat em, etc.) and the center left has various schemes to save capitalism from itself by getting young people to invest in “innovation” and “conscious consumption” through exotic new assets like micro-loans and carbon credits (or just throwing free money at tech monopolies). Tying healthcare, housing, and retirement to employment and/or making them yet another thing to sell shares in is also part of this brave new world where we’re forced to participate in a financial system we want nothing to do with.

The problem with all of this is that my whole generation has been systematically impoverished by predatory capitalism and we’re not blind. The stock market is like a religious institution (or casino). The people running it can be corrupt and faithless (and often are), and dabblers and dilettantes come and go, but you need a hard core of true believers to keep coming back week after week win or lose (mostly lose) or the whole enterprise collapses. Forcing middle class professionals to put their retirement savings and home equity into “the marketplace” probably seemed like a great way to win a new generation of converts to the cause 40 years ago, but it hasn’t worked that way lately.

My first conscious exposure to the “free” market was my grandparents getting fleeced by WorldCom and that was three crises ago. The people who still believe in the enduring health of the stock market are all either profiteers themselves or so rich and hedged that it literally doesn’t matter if they lose a few thousand here and there. For everyone else, these “market-based” solutions are just one more form of workplace coercion and the smoldering resentment and sense of precarity only grows as more people are ruined by bad investments they never wanted to make in the first place.

Meanwhile, my generation (except a small minority of infuriating rich kids) are pretty much stuck living paycheck to paycheck and just keep getting poorer relative to cost of living. Even if we could still be sold on the dream of joining the leisure class through entrepreneurship or shrewd investment, the older generations have all the wealth and aren’t sharing. No wonder people are aiming low with podcasts and Etsy shops, and $1000 kickstarters. We don’t have the time, savings, or credit to start “real” businesses. For most of us, just paying down debt is a much better ROI than entrepreneurship or playing the market and we aren’t winning there either.

20

MisterMr 08.15.20 at 6:00 am

@JQ 17 and 18

I did read your link but I think you misunderstood my point (I’m not sure tough), I’ll restate it using marxian terminology wich I will also later use to make a point about the falling rate of profit (because some years ago I spent a lot of time thinking about it so now I have to show off a bit).

Suppose that country X starts the year with an amount of capital goods of 500$, of wich 460$ of factories and 40$ of raw materials.
During one year, 100 xian workers produce a total gross output of 150$, but they do this by consuming 40$ of raw materials, and furthermore there is a wear and tear on the factories of 10$, so that the actual net output is 100$.

Let’s assume a situation of simple reproduction, which means 0 net investiment. Then if we look at the total gross output of 150$ we will see that:
– 40$ will physically be made of raw materials that will be used the following year, this is actually accounted for in GDP;
– 10$ will physically be made of replacements or repairs of factories, this is the part that makes the difference between GDP and NDP and that is difficult to account for;
– the remaining 100$ are the net output and are what Marx calls “revenue”. Both wages and profits come from this revenue, and in a situation of simple reproduction (0 net investiment) all the revenue by necessity will be physically composed of final consumption goods (in the real world part of the revenue is reinvested in additional capital goods, but this is because in the real world we are never in simple reproduction and allways either booming or busting).

Of this revenue, if for example the wage share is 70%, 70$ go to workers and 30$ to capital and this is what we are interested in terms of distributional analysis.

Now, in this scheme government production and consumption does not exist, however suppose that the government puts on a VAT of 20% and uses it to pay for unemployment benefits, suppose also that wages stay fixed.

Then we will have a total revenue of 70$ of wages, 20$ of benefits, and 10$ of profits. We see the benefits as such in the distribution, but not the taxes: because we are already accounting for them as benefits; in there is no government consuption because the government is not a final consumer. Counting the taxes in addition to the benefits would be the same error of counting the gross output instead than the net one; however on distributional breakdowns of GDP I often see government consuption.
The same logic applies to the wages of government workers, however government workers also have an output, that logically should either be accounted for as consumption for someone else or should be considered as an input in the private economy. However this output is difficult to quantify, it is difficult to say who is the beneficiary of stuff like streets, and it is difficult to know how much of this stuff is actually final consumption and how much is an intermediate output, but for example the depreciation of streets should be partly counted of final consumption and partly an intermediate output for the private economy. This is a different problem from the double counting I referred to above.

Going to the falling rate of profit, in the above example in the country of X the labor value of one year of work is the total revenue/total workers so 1$. The rate of profit depends both on the wage share of 70% and on the capital to revenue ratio of 5/1, and is of 30/(500+70)= approx 5%/year (note that the capital/revenue ratio is a stock/flow ratio so it is time dependent).
This capital/output ratio is more or less what Marx called the organic composition of capital (some old economists misunderstood the problen and thought that Marx referred to the gross/net distinction, but this is not the case).

Now Marx’s ipothesis is that, with the development of technology, this capital/revenue ratio worsens, that ceteris paribus depresses the rate of profit even if the wage share is unchanged.

This is different from the ipothesis that you make about investing in non developed countries. Your argument is about having an outlet for investiment, that makes sense in the context of keynesian theory or in the context of marxian cyclical crises, but has nothing to do with the secular fall in the rate of profit.

Now for clarity I think that the “investiment outlet” theory makes more sense than the “worsening organic composition” theory, I just wanted to point out that these are two different theories.

21

John Quiggin 08.15.20 at 6:14 am

@19 GDP is made up of $40 value added in the primary sector (note that there are workers here too) and $110 added in the manufacturing sector, for a total of $150. Depreciation of $10 makes NDP $140. Workers get 70 per cent of final output worth $105, while capital gets $45 from which depreciation must be deducted. The carryover between years is just an unnecessary complication here (I get the impression it was a big deal for Marx, but I don’t find his analysis here useful, unlike his discussion of crises).

You are exactly right that, if some output is collected by government through VAT and paid out as unemployment benefits, there is no change in GDP or NDP, just in distribution. If instead, governments use taxes to hire workers away from the private sector, then private sector output is reduced, and public sector output is increased. Ideally we would be able to measure these and see which was larger. In practice, since public sector output isn’t marketed, it’s assumed to be worth whatever it costs to produce.
I hope this helps to clarify things.

22

Hidari 08.15.20 at 7:52 am

@18

Another question is: does it really matter? As a few people have pointed out (I can’t find a link so you will just have to trust me) Piketty and Marx have diametrically opposed views on the future of capitalism. Marx, as we know, saw the tendency of the profit rate was to fall (which was not his idea, but was, instead, a key assumption of almost every economist in his time, although his reason why it ‘had to’ fall was different).

Piketty on the other hand sees the tendency is for capitalists to make more and more and more profits over time, and to be able to ‘get money’ from other sources such that inequality inevitably spirals ever upwards. You could of course argue that these predictions, ostensibly opposites, are not really that different. Marx, after all, predicted that there would be intense pressures towards monopoly (or at least oligopoly) as capitalists merge to ‘cope with’ the the falling rate of profit. He also predicted increased automation, de facto (if not de jure) cuts in wages and ‘worse’ working conditions (i.e. more hours) as capitalists attempted to ‘repair’ the machine. Of course we have seen that, but it has led to ‘super-profits’ for the de facto tech monopolies: Apple, Amazon, Google (Alphabet) etc. Does this prove Marx was wrong? Or would he just say: ‘ ah well, this is exactly what one would expect, give it another century?’

But in any case, even in this diametrically opposed predictions, the key point is that the system, ceteris paribus, tends to become more and more unstable over time.

Another thing is: even if Marx was wrong about the ‘mechanism’….does it really matter? According to climate scientists, in the second half of the 21st century, assuming we don’t solve the problem, it will be climate change that will be a steady (and increasing) drag on profits, and might, in the end, end ‘growth’ as we have known it since the Renaissance. So a very different mechanism from Marx, but, again, does it really matter?

The key point is this: if profits and growth can continue indefinitely (and infinitely) then ‘revolutionary’ Marxism is definitely wrong: Marx might be an interesting post-Hegelian thinker and analyst but that’s all.

But if growth and profits have a tendency to lower over time (and it might be a very long time) then Marxism might be viable as a theoretical construct even if he is wrong about the mechanism by which growth and profits lower (or maybe not….do you get ‘brownie points’ for being right for the wrong reasons?).

Doubtless we will have much clearer answers to these questions by the end of the century (that’s not irony btw…I think it will take that long for these things to ‘work themselves out’).

23

steven t johnson 08.15.20 at 2:18 pm

Before covid, at the end of last year, the stock market took a major dive towards matching up its price with underlying asset book values. The Federal Reserve, in line with previous pressure by Trump, stopped sales of assets from its balance sheet and resumed easy credit to financial firms. I suggest the stock market is as high as it is because it is government policy to keep it high. The Fed has since taken up openly purchasing corporate bonds, not just non-performing financial instruments held by troubled banks, as I understand it.

So, the biggest reason for the stock market’s performance is policy. The decline in profit rates at this point in the business cycle, plus the likelihood of a long term decline in profit rates coupled with the speculative profits available from government support of stocks seems to me to account for a great deal of inflow of funds, which means even higher stock evaluations, especially uneven ones.

In addition, the world crisis means the US stock market is a world safe harbor; stock are an indirect way of trying to purchase real assets, taking advantage of having money in a depression to buy cheap on easy credit; inflating stock prices is profit taking for the highest level of managers; churning the stock market not only produces fees for the churners but careful management in principle can leave the some stockholders etc. losers, especially entities like pension funds, which are supposedly less flexible. Evaluating how important any of these factors are requires a detailed knowledge of proprietary information, though, as near as I can tell, which I suppose is why the information is not widely disseminated, especially not for free.

Peter Dorman seemed to hint at something along these lines only to dismiss the train of thought for some reason.

24

MisterMr 08.16.20 at 4:38 pm

@John Quiggin 21

Thanks for the clarification but:

“GDP is made up of $40 value added in the primary sector (note that there are workers here too) and $110 added in the manufacturing sector, for a total of $150.”

there is only 70$ of added value in the manufacturing sector, because you have to subtract the cost of the primary product consumed. You can add the primary sector output and subtract the manufacturing sector consumption of raw materials, or as I did simplify with the assumption that the amount of raw materials cionsumed is the same of the raw materials produced in the same time span, you still end up with a total added value of 110$.

@Hidari 22
Actually Piketty’s view is quite similar to Marx: In Marx the profit share increases, but the profit rate falls anyway because of the increasing value of capital goods.
It is the same thing that we see now with very high stocks and very low interest rate, so that the total profits are not falling but the rate of profit (interest) is falling because of the high valuation of principal.
The big difference is that Marx assumed that the high cost of principal reflected the value of material capital (he assumed that Tobin’s Q hovered around 1) so he assumed that this was due to a technological trend, whereas we can see that Tobin’s Q is not 1 so we see clearly that it is a financial effect, not a technological one.

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