United States of America, European economy and inequality: a perspective from the economic history, 1910-20101.

• Author: Manera, Carles
• Position: Report

1. Introduction

   The Great Recession has opened up a new panorama in analysis of the economic crisis, with economic approaches that are less conventional. The more conventional arguments are based primarily on financial, stock-market and monetary factors, but the ongoing recession is forcing social scientists--with holistic views of their disciplines--to work with parameters that are more permeable. They offer perspectives that, though rejected by most of academia, could help to establish a different analysis of the economic crisis. Reviving the concept of the business cycle is one of the key ideas. Although the very existence of the business cycle had been called into question by the staunchest proponents of equilibrium economics, it is very much present in real-world economics, and is beginning to be accepted by its main detractors. Historically, the "industrial cycle" was identified and was linked to fluctuations in investment demand in the form of inventory restocking or fixed capital, the two variables most closely tied to the short-run cycle or industrial cycle, which spans no more than ten years (Sylos Labini 1988). However, there were also analyses of long-run cycles driven by technological developments (Fagerberg and Verspacen 2009; Castro-Fernandez de Lucio 2013). It is in this long-term perspective that the hypothesis on the law of the tendency of the rate of profit to fall (LTRPF) and the severe crisis of capitalism was developed (Marx 1894).

   These long-term hypotheses are especially fascinating for analysis of capitalist behaviour. However, it is these hypotheses that are most prone to errors resulting from a lack of rigorously constructed supporting statistical data with which to contrast the hypotheses with reality. In this type of analysis, the prevailing idea is that the capitalist economy fluctuates around long-term positions. These positions can either be stable, as in the classical equilibrium hypothesis supported by Adam Smith and David Ricardo; unstable, due to technological progress (examples include Karl Marx and the LTRPF, and Joseph Schumpeter and the hypothesis of technological revolutions [Schumpeter 1942]); or due to a lack of aggregate demand (Keynes 1936), which in the Cambridge school variety (Kalecky 1937; Kaldor 1940; Robinson 1956) is reinterpreted, in terms of income distribution, as a recurring bias in favour of profit and to the detriment of wages.

   These basic assumptions about US are guiding our research on the Great Recession, which has already offered some results (Manera, 2013, 2015; Manera, Navines, Franconetti, 2015). These results constitute the main platform to provide a clear roadmap for economic research. Our arguments focus on selected economies in Europe (the UK, Germany, France, Italy and Spain), which may be representative of what is happening in northern and southern Europe. Greece is excluded as it is considered an extreme example of the very conclusions we initially reached.

   The first section of this paper details the methodology followed, using the United States as a benchmark, as mentioned above. In the second section the case of the United States serves as an essential reference for our new methodological analysis. The third section presents four fundamental lines of research related to the US and the European economies considered. The final section presents some initial conclusions, which are still under development and need further research to be validated. This paper is therefore more a document for provoking research than a project with a closed perspective. Our aim is to analyse the points put forward in this paper in greater depth and make a modest contribution to a better understanding of the Great Recession and its contribution to the analysis of the economic crisis.

2. Methodological lines

   The methodological lines used are as follows:

   Paolo Sylos Labini's contribution (Sylos Labini 1988), who establishes an income distribution range within which aggregate demand will remain sustainable. It remains sustainable either because wages are sufficient to maintain acceptable levels of consumption, or because the "animal spirits" of business consider the consumption levels sufficient to ensure profits that will maintain the investment and capital accumulation process, thus reaffirming the sustainability of the economic growth process. (2)

   A historical approach, as advocated by Joseph Schumpeter (Schumpeter 1942) and, more recently, Thomas Piketty (Piketty 2014; also Atkinson et al. 2009, Coase, 2012), which is supported by better access to the national statistical services of the main OECD countries. This approach includes original contributions covering aspects related to wages, inequality and growth, including works based on applied analysis in France (Dumenil and Levy 2000, 2012, 2014); works looking at the US economy (Shaikh 1983, 1992, 2010; Stiglitz 2012; Galbraith 2014; Galbraith and Ferguson 1999; Galbraith and Travis Hale 2014); and contributions looking at the global economy, published by international bodies such as the OECD (2011, 2014) and the IMF (2014; including the research by IMF technical staff members Ostry, Berg and Tsangarides [2014]). (3) The research by Piketty (2014) stands out. He analyses changes in inequality by consulting US tax records and using as a reference variable the changes in the share of the national income of the wealthiest 10% or 1% of the American population.

   This paper focuses on these detailed aspects of the US economy between 1910 and 2010, with two specific objectives:

   To analyse inequality using the share of gross operating surplus (E) in national income (Y) as the reference variable, where the reference variable q = E / Y. E includes the benefits accrued by defined benefit pension plan participants through services to employers in the period, which are recorded as income as part of business profits. The data are taken from national macroeconomic accounts (see Appendix, where we explain: Figure 1). The line of argument is consistent with that put forward by Robert Brenner, though he replaces the definition of gross operating surplus (E) with net profits (P), i.e. net value added minus the sum of compensation of employees and indirect business taxes (Brenner 2006).

   To address the analysis of income distribution by observing the rate of profit (r) based on the previous objective. The rate of profit (r) is the share of corporate profits of nonfinancial corporate business (P) in the stock of capital (K), where r = P / K. Meanwhile, the rate of profit (r) can be expressed as the product of three factors: the share (a) of corporate profits of nonfinancial corporate business (P) in gross operating surplus (E), where a = P/E, the share of gross operating surplus in national income (E / Y = q) and capital productivity (Y / K = [[pi].sub.k]). Therefore: r = P / E x E / Y x Y / K = a x q x [[pi].sub.k]. The value of a can be interpreted as a reverse estimating variable of the degree of financialization of the economy. If R is the capital ownership income not accounted for as P and included in E, then E = P + R, and 1 = a + R / E. Therefore, higher values of a indicate less financialization of the economy and lower values indicate more financialization.

   This research applies the United States model to selected European economies, but does not include analysis explained above in paragraph a), which is already in our previous paper (Manera, Navines, Franconetti, 2015), to define the accrual of the US economy (1910-2010) from the databases of the Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS). Another difference to note is that this time we used the AMECO database (4) for both the European economies and the United States (for a description of the AMECO database and the differences between it and the BEA and LSB databases, see the Appendix 2). We therefore could not define the rate of profit as corporate profits of non-financial companies over capital stock (r = P / K), so we defined it as the ratio of total business profits (including profit of financial firms) to capital stock (r = E / K). This also forced us to redefine the profit rate as r = E/K = E / Y x Y / K = q x [[pi].sub.k]. With this new definition of the rate, we could no longer analyse changes in the rate of financialization of the economy.

   To use the new definition, we had to model two behaviour patterns for the United States that explain the dynamics of the rate of profit. This is summarized in Figures 4 and 6. The two models produce very different results. Under the first, there is a sharp drop in the rate of profit between the Keynesian and the neo-liberal phase, but under the second model, the rate of profit increases. This is due to the financialization effect of the economy, with q having remined stable and [[pi].sub.k] having fallen since 2000.

   It should also be noted that the analysis presented here gives greater weight to the variable Unit Labour Costs (ULC), which we introduced from q, given that if Y = E + W, then: 1 = E / Y + W / Y = q + W / Y = q + W / L / Y / L = q+[w.sup.*]/ [[pi].sub.1], y, 1-q = W/Y = [w.sup.*]/ [[pi].sub.l] = ULC; where [w.sup.*] = W / L, the labour costs per worker and [[pi].sub.l] = Y / L, the productivity of labour.

   Finally, it should be noted that for Germany, AMECO publishes two series: the first for 1960-1991, under the title "West Germany", and another for 1991-2015, under the name "Germany", covering the post-unification era. For 1991 there are data for both series, so we took the arithmetic mean of the two.

3. Business cycle, distribution of income and rate of profit in us

   Economic growth is measured as the compound annual growth rate of an economy's real GDP (g(Y)). Changes in income distribution were calculated from changes in the share of gross operating surplus in national income (q). We argue that this variable q can predict GDP falls and recoveries based on whether its...