Corporate Profits and Wages: Karl Marx Would Be Smiling

An article in The Economist provides us with this astonishing chart.

Corporate profits in the US are hovering at 15% of GDP! This is at a time when corporations resist hiring and refuse to raise wages. What the article focuses on is the fact that these corporations are rolling in cash and they seem intent on sitting on it. Not only do they resist hiring and raising wages, they also resist investing their money in their own corporations.

Why are they hoarding their funds?

"Andrew Smithers of Smithers & Co, a consultancy, suggests incentives may be to blame. Managers are motivated by share options and share prices are driven by changes in earnings per share. Spending cash on share buy-backs boosts earnings per share immediately, whereas a capital-investment programme may actually reduce earnings in the short term."

"Capital expenditure may have a pay-off in the long run but, given the ever-shortening career span of the average chief executive, few may be willing to take a chance that they will be around for the long term. A recent paper from the Federal Reserve Bank of New York suggests that executive incentives may even be driving the business cycle by their effects on investment."

Can it be that we have become so focused on short-term stock performance that there is little motivation left for long-term considerations? As was discussed in The Legal Basis for Corporate Irresponsibility, radical, free-market economists have successfully promulgated the notion that corporate executives have only one motivation: to increase the wealth of the shareholders. Share price is foolishly chosen as the measure of shareholder wealth, and, more pertinently, the measure of executive performance. Could this perversion of the concept of a corporation become a destabilizing factor for the economy and for society?

The author suggests another reason why corporations hesitate to invest: no one but they has any money to spend.

"....firms are reluctant to invest in the face of weak demand. Domestic consumers have been under pressure from austerity and higher commodity prices; the euro-zone crisis and a slowdown in developing economies is weighing on export prospects. Companies may have milked all they can from productivity improvements. The irony here is that a high share of GDP for profits automatically results in a low share for wages and thus may eventually be self-limiting—a positively Marxist outcome."

Let’s see if we have this straight: if no one has money to spend then they can’t justify capital investments; and they can’t distribute money to people by increasing wages or making capital investments because that would lower share price. Is this one of those internal inconsistencies that is supposed to eventually bring capitalism down?

One could easily conjure up an image of Karl Marx with a smug smile upon his face.