Free Cash, Capital Accumulation and Inequality

Craig Allan Medlen

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9780367586331
• eBook ISBN: 9781351685498
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Investment is the engine of growth. In consequence, the social welfare of the populace depends on the expectations of uncertain profitability as understood by the agents of a wealthy few who decide upon levels of investment. As private wealth is intimately tied to the investment process, the importance of wealth concentration goes far beyond considerations of equity. In recent years, private economic power has become increasingly concentrated as more of the population has become dependent upon an elite pursuing private ends. In this context, this book examines the role of capital accumulation in various historical contexts.

Over seventy years ago, Michal Kalecki derived the mathematical relationship between government deficits, the external trade account and free cash—defined as the gross profit over and above that portion ploughed back into new investment. Since then, the free cash literature has remained largely within an industrial organizational context where free cash theory has helped to explain mergers. In contrast, this book, revisits Kalecki's free cash construction at the macro and global level and explores the various causes and effects of free cash on the economy. As part of this examination, the author highlights the historical uses of free cash in imperialist adventures, mergers and speculative endeavours. In addition to developing a new relative valuation measure of capital accumulation, he also utilizes a neo-Kaleckian model to help explain the U.S. slowdown in investment since the late 1960s, the increasing inequality of wealth and income and the recent speculative episodes associated with the spillage of free cash. Finally, based on these models the book argues for heightened taxes on the wealthy and an increased role for government investment in health care and energy.

Free Cash, Capital Accumulation and Inequality offers an explanation as to how wealth and income inequalities have fashioned, and been fashioned by, various historical episodes right up to the present. It will be of great interest to those studying and researching in the field of economic analysis.

1 Prologue and preview

Capitalism is a growth system. In the face of ongoing technological advance, and competition by rivals, business firms adapt and expand. The supply of labor, growing both through productivity advance that expands output per head and population growth, requires new outlets for labor absorption. In the absence of planning that would reduce the number of working hours per person and maintain a level of pay that would allow a reasonable standard of living, labor absorption requires growth.

The engine of growth is investment. Businesses are going concerns and need ever-growing markets. New products and modifications of older vintages are part of a cycle of innovation and obsolescence. Saturation of markets is an ever-present threat, particularly for large firms in mature markets. Automobiles need to be replaced. Along with the deterioration of the automobile stock, self-driving and electric cars will provide for the necessary expansion of markets. In addition to new space-related research endeavors, existing weapon systems need to undergo a process of profitable obsolescence to maintain a growing market for defense contractors. In certain industries, such an energy, quantum computing and aircraft development, the future path of product development is quite uncertain and a range of investment options is pursued simultaneously. Often the gestation period for product development is long, requiring a constantly changing investment mix with a corresponding sales effort devoted to market enlargement. Market enlargement, in turn, requires enough new state expenditures and investment across the economy to generate the income necessary to purchase the expanded level of output.

Apart from profit-maximizing pricing requirements, this necessity for ongoing growth pushes aside all other factors that might intercede. The term “sustainable development” is often used to indicate a new ecological awareness. Under present conditions, sustainable development means—first and foremost—investment in the service of profitable growth.

On the productivity front, investment carries productivity advances whereby machines replace labor. Such technological unemployment is quite painful for those displaced. But growth is facilitated by such displacement, as those displaced are available for employment elsewhere. Absorbing the displaced entails expanded markets and a corresponding amount of accompanying investment. Thus, investment enlarges the capital stock and the capacity to produce while simultaneously expanding income. Paralleling the mixed blessing of labor displacement, this expanded capacity requires more income generation so as not to develop excess capacity. Excess capacity is deadly. If generated in sufficient amounts, excess capacity stifles new investment. Such stifling begets the onslaught of economic downturn, instigating a degenerative cycle of more excess capacity, accompanying unemployment and the economy’s inability to recover. Along with increased state expenditures, investment is a main generator of expanded income. In consequence, the necessity for investment growth is imperative. And, in paradoxical fashion, this growth must be in sufficient amount to avoid the idle capacity that the new investment threatens to enlarge.¹

Investment depends on the willingness of the wealthy and their agents to invest in pursuit of profit. In consequence, the social welfare of the populace depends on the expectations of uncertain profitability as understood by the corporate agents of a wealthy few. As will be documented immediately below, investment expenditures are quite concentrated, with a relative handful of major firms carrying forth the lion’s share. This economic power of the few over the many is oftentimes expressed negatively as the power of the giants to engage in monopsony, in the power to leverage financial weight, and in the ability to extract state funds for bailouts and contracts. But more often the power of the giants is simply taken for granted as the natural consequence of an existing social order where the sales of individual firms often exceed the production of nations. These giants are the gravitational center of a business system with radial arms that expand outwards in a network of millions of dependent businesses and individuals. In the nature of the case, this corporate center must remain profitable and growth-driven in order to feed the outer orbits of business and the larger society. Corporate power is thus understood as facilitating power and, by reason of its all-encompassing nature, beyond fundamental change, beyond fundamental challenge.

Upon reflection, this mega-dependency of all upon the giants might appear obvious. But the enormity of the economy renders invisible any detailed picture making up the complex whole. Just a few of the innumerable connections illustrate the point. The non-corporate business sector—comprised in large part by smaller businesses—invests around 20 percent of total business investment.² Such businesses employ millions. In 2012, enterprises with a total workforce of less than five hundred, employed almost half of total business employment; those with less than one hundred employed over one-third (Caruso, 2015, p. 2). Those who work for auto repair shops, local road workers, stop-and-shop gas stations, used car facilities, shopping malls depend directly or indirectly on the great auto and oil firms that collectively employ over a million workers worldwide. In the production of all types of pipe, toys, paint, carpeting, asphalt for roofs and roads, major corporations devoted to the production of oil, rubber, chemical and plastic are omnipresent. In addition to the firms engaged in designing and manufacturing medical equipment, large corporate health facilities and locally owned hospitals, physicians and health workers depend upon the great pharmaceutical companies, insurance firms and drug chains. Metal fabricators of all types and sizes are reliant on firms such as U.S. Steel, Anaconda Copper and International Nickel, who, in their specialty products, require material imports from all over the globe transported by ships that, in turn, embed the very metals whose imports are being transported. Interlocking connectedness of major firms and an extended business network is the rule. A search for exceptions would be futile.

The corporate ecosystem also extends into government expenditures and procurement of revenues. State and local government revenues depend not just on taxes levied on income, property and sales but on the gas tax and assorted fees levied by state departments of motor vehicles, whose redeployment expands the transportation tributaries of roads and highways. Direct investment at the federal level is comparatively small. But its procurement of high-tech weaponry and other outputs reach into large-scale contractors and university facilities whose research and development facilitate and sponsor large amounts of private investment in industries as wide-ranging as defense, space, telecommunications, nuclear power, biotechnology and aircraft procurement. The leasing arrangements of public land areas by timber and mineral companies, together with assorted other subsidies to large firms, buttress the enlargement of aggregate demand which the federal government generates through contracts, transfer payment mechanisms and entitlement programs. The employment of military staff in the U.S.’s 700+ military bases and naval fleets, together with the military and policing aid to various governments, protect the shipping lanes and resource-rich areas from which major U.S. firms profit and to which investment flows. These corporate benefits include not just the procurement of material resources—oil, copper, tropical foodstuffs and the like—but also labor resources which, through U.S. multinational affiliates and others, supply imports into the global distribution channels largely dominated by major firms.

As private wealth is intimately tied to the investment process, the importance of wealth concentration goes far beyond considerations of equity. Unlike a not-too-distant past where a good part of the U.S. population had direct access to the means of livelihood through the ownership of land and artisan shops, the current workforce depends overwhelmingly upon wages and salaries. In recent years, there has developed a new interest in income and wealth disparities. This interest has directed intellectual energy to uncovering the causes of the recent rise in inequalities and to the functional outcomes associated with the rise. But behind this discussion lies the larger social question of investment as a primary driver of social consequence and its use for private ends.

This larger question is not new. Robert Heilbroner describes the over-arching theme of capital accumulation and the quest for profit as the “great drama” underlying the works of major forbearers such as Adam Smith, J.S. Mill, Marx and Keynes. Heilbroner might also have mentioned more recent theorists, such as Joseph Schumpeter, Michal Kalecki, Joseph Steindl, Paul Baran and Paul Sweezy. All recognized that the “vital accumulation process hinges on the ability of a capitalist class to extract profit from the system.” All understood the importance of property rights and the division of “functions between the realm of business and that of the state—a division of functions that takes for granted the priority of accumulation as a necessary condition for a stable social order.” All understood capitalism “as a social formation in which the accumulation of capital becomes the organizing basis for sociopolitical life” (Heilbroner, 1985, pp. 142–143).

The importance of the “great drama” of capital accumulation and the private nature of its appropriation remains doubly true when more and more of the populace is dependent on a proportionately smaller elite exempt from public accountability. Investment outlays and wealth ownership are highly concentrated. From the early 1970s to the present, the top 200 publicly listed non-financial firms have put into place approximately 65–70 percent of the total corporate investment of those listed, with the top 50 generating approximately 40 percent and the top 25 generating one-third (Grullon, Hund and Weston, 2018, p. 5). These megafirms sit on top of over a million corporations that collectively put into being about 80 percent of total business investment.³ In 2007, approximately 6 percent of households owned over 80 percent of the outstanding stock, with the top 1 percent owning over 50 percent (Kennickell, 2009, p. 63). From 1929—the first year in which the U.S. government records gross saving—until the present, gross corporate profits in the United States have generated the largest part of gross saving, with some part of personal saving derivable from such profits.⁴ As will be discussed in Chapter 2, these aggregate profits derive primarily from aggregate investment expenditures.

At the level of wealth taken as a totality, wealth has become increasingly more concentrated. In 2013, the top 1 percent of family units held between 36 and 42 percent of total wealth,⁵ with the largest gains over the preceding decades going to those at the very top of the wealth pyramid. The hierarchical concentration narrows as if dictated by a mathematical fractal. From 1978 until 2012, the top 1 percent roughly doubled its share of total wealth. The top one-tenth of 1 percent tripled its wealth share to claim half of the top 1 percent’s share, with the top one-hundredth of 1 percent claiming half of that (Saez and Zucman, 2016, pp. 552–553).

Examining the quest for gross profits provides us with a wide window to inquire into the distribution of income and wealth. The window also invites inquiry into the historical framework of capital accumulation and alternations in government policy. The distribution of income and wealth is both cause and effect of the saving-investment process. In the absence of explicit planning, demand for product and investment ultimately derives from the class arrangements that determine income and wealth. In contrast to wealthier families where savings make up a much larger portion of their income than others, most working-class families consume the vast portion of their income with some substantial portion consuming more than their income (Medlen, 2008, p. 859). Correspondingly, alternations in income distribution alter consumption, investment and growth. A tilt in income distribution towards working-class families, for example, would bolster aggregate consumption, induce larger amounts of investment and additional employment. It might also, by reason of expanded production, enlarge aggregate profits.

Despite the fact that the main saving-investment process surrounds the corporate form of profit-plowback, elementary mainstream economics—as exemplified in modern textbooks—still retains the tautological but now archaic understanding that saving is simply the reverse side of consumption. In understanding saving as a “residual,” this portrayal of saving reflects a much earlier period of artisan and mercantile accumulation where “abstinence” from consumption allowed an embryonic accumulation of capital. Profit seeking and abstinence were part of the same artisan framework.⁶ As tautology, saving-as-residual is true by definition. But in the modern period of (say) the last 150 years when the very rich could not possibly consume their income—even if they single-mindedly attempted to try—and where the bulk of saving is generated through corporate gross profits, understanding saving as a residual is to substitute tautology for understanding.

Modern government policy operates in the service of expanding investment and so underpins the quest for private gain. It does so through assorted subsidies and subventions, tax breaks and government contracts, and a monetary policy designed to facilitate the financing of private investment opportunities whose availability—apart from significant downturn—is simply assumed. This availability assumption is largely predicated on faith, which boom times heavily reinforce. This facilitation of investment is unconsciously founded on the assumption that the pursuit of profit through investment is the only way—or, at least the only way meriting discussion—in which employment and income can be dispensed to the underlying population. The social goal of high employment and income generation is tied inexorably to the private pursuit of profit. The institutional arrangements for profit-seeking investment are simply taken for granted as a boundary line that is not to be violated.

The boundary line dictating that investment be undertaken by private parties is tantamount to understanding that direct government production and investment—as opposed to government expenditure—be shrunk to an irreducible minimum. The boundary line requires that government should not produce goods and services that could otherwise be provided through private markets. The widest possible area for profit-making should be preserved. This understanding is rarely expressed explicitly. Rather, prevailing discussion concerns government interference with private markets, as opposed to the possibility of direct government production, a possibility that only rarely materializes. Economists of conservative persuasion are the main carriers of this markets-only ideology. Societal maintenance, a strong defense budget and sufficient policing to maintain civilized society are to be supported by government. And that is all. Regarding public policy, this triad constitutes the limits of conservative imagination. Government services, such as educational services, might well be modified to allow private initiative through vouchers; regulations tailored to protect the environment and workers should be minimized so as to allow maximum growth; any and all measures in support of self-reliance—particularly the reduction of entitlements that might interfere with such r...

Table of contents

• Cover Page
• Free Cash, Capital Accumulation and Inequality
• Routledge Frontiers of Political Economy
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• Acknowledgments
• 1 Prologue and Preview
• 2 Michal Kalecki’s Derivation of Free Cash
• 3 Hobson’s Choice: Free Cash Export or Domestic Redistribution
• 4 Free Cash and the Stock Bubble of the 1920s
• 5 Veblen’s Q-Tobin’s Q and Relative Valuation
• Appendix 1 Expansion of Cash Through New Investment
• 6 Stagnation and Free Cash: A Neo-Kaleckian Model
• 7 The Multinational Escape
• Appendix 2 Multinational Deficits and Parents’ Embeddedness
• 8 Free Cash, Relative Valuation and Inequality
• 9 Crossing the Boundary Line
• Index