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 import 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.
I’ll be at Cafe Buchhandlung this evening at around 9pm, please join us. http://bit.ly/buchhandlung
 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.