Market Power, Minimum Wages, and the Sins of Friedmania

by Linda beale

Market Power, Minimum Wages, and the Sins of Friedmania

Two items caught my attention in today’s (June 22) newspapers and they represent diametrically opposed positions on what matters in society. One, by Paul Krugman, deals with the problems of monopoly rents–especially in industries in which there is very little production in this country combined with mostly profit-taking from some kind of intellectual property–think Apple and the financial industry. The other, by Richard Posner, talks about the importance of national security and minimizes the need for a minimum wage.

Krugman notes the “growing importance of monopoly rents,” which are “profits that do not represent returns on investment but instead reflect the value ofmarket dominance.” Krugman, Profits without Production, New York Times (June 21, 2013), at A19. He suggests that the growing importance of these rents from markiet dominance represent a “disconnect between profitsd and production” that may factor into our continued lack of robust economic growth. He contrasts GM in its heyday, when it owned hundreds of factories and employed about 1% of the total nonfarm workforce in this country, with Apple today, when it “seems barely tethered to the material world, employing fewer than 0.05% of US workers, with most work outsourced to China and “charg[ing] what the traffic will bear” for its i-products. And this story is part of a bigger story–the impact of rent-seeking corporate profits on the overall economy. It is driving rising inequality, as there is a “sharp shift in the distribution of income away from wages in general and toward profits.” Id. Since the profits reflect market dominance rents, not returns on investment, a monopolist can be profitable without expanding its production capacity–as Apple is, sitting on “a giant pile of cash, which it evidently sees no need to reinvest in its business.” Id. The effect of monopoly profit-taking is that wages are depressed. With household spending down as “labor gets an ever-smaller share of national income while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand.”

The second item was a small blurb on the editorial page inthe Wall Street Journal, in which they pick out quotes from famous people worth noting. This time it’s Richard Epstein writing for the Hoover Institution. See Notable & Quotable, Wall Street Journal (June 21, 2013), at A13. Epstein suggests that “[a]ll government actions should be examined under a presumption of distrust” which is why, he says, he has supported “constitutional regimes that afford strong protections to economic liberties and private properties.” Now, folks, you have to ask, what does “economic liberty” –or even “private property” mean. For Epstein, it is a “natural right” kind of idea–the misguided, Friedman-derived notion that markets can run themselves, letting the powerful who own considerable private property succeed and the weak who don’t fail. That kind of brute force capitalism encourages corruption, rentier profits (see Krugman, above), and a depressed, highly unequal society in which them that have gets and everybody else is either a peon or some kind of low wage earner in thrall to the titans of Big Business. Epstein goes on to give an example of his belief in “economic liberty”–the veiw that “there is no coherent case for state intervention” to maintain a minimum wage. This is the view of someone who might say “let them die” of a poor person unable to afford health care, or “let them eat cake” of a poor person unable to afford bread. This is not “compassionate conservatism” but brute force capitalism. It is the view that the wage will find its bottom based on the “neutral” market forces. But neutral market forces don’t exist. They are shaped by the powerful and if you let the powerful take wages from ordinary workers to puff up their own profits, they will do so to the full extent of their market power.

Epstein then contrasts the lack of a need for the state to ensure a minimum wage, which would “degrade the efficiency of private markets” with the need for the state to “put in place institutions that limit aggression in both domestic and foreign affairs. Unlike protecting the livelihood of ordinary Americans, “national security is an area where government may be appropriately feared, but is still desperately needed.” We shouldn’t be so uptight about the FISA court’s allowing the government to grab all kinds of privacy data, because Epstein is confident that the NSA data grab is not “an intolerable invasion of privacy.”

I for one remain unconvinced that the incredible data-grab by all the federal spy agencies is an acceptable intrusion on individual liberties in the name of “national security.” And I am quite sure that the establishment of a minimum wage to prevent the huge imbalance of power in the work place from allowing owners to grab all the gains from production at the cost of workers is a very good kind of state intervention on behalf of ordinary folk. Epstein has it backwards–his ideological blinders from Chicago School economic “theory” are showing and his “economic liberty” arguments translate into the same old class warfare approach of protecting the profits of the elite at whatever cost they may bring to the rest.

If an increasing share of the economy driven by monopoly profits and increasing inequality from depressed wages and the impact of rent-seeking profits on business expansion are bad things, what might be considered reasonable policy steps to take to deal with this problem Krugman has pointed out and Posner has disregarded? It seems to me there are several policy positions that noticing the damaging effect of rent profits should push for: 1) increase minimum wages, 2) enact “Medicare for all” so that all those who lose out in a monopoly-driven corporate environment have an opportunity for decent health care (and the monopoly power of insurers is removed), 3) reinvigorate anti-trust legal actions to break up huge corporate empires like Big Oil, Big Banks, Big Pharma, etc., and 4) reinvigorate labor law to protect workers and ensure that those who want to organize can do so easily (with card-check and similar provisions, similar to motor vehicle registration of voters.

Paul Krugman: Profits Without Production

Friday Musings on Profits, Production, Trade, and Inequality