The Euthanasia of the Rentier: Will bankers follow miners into the dustbin of history?
Too much money is not necessarily a bad thing. Our problem, rather, is a lack of demand for investment. Today, the aggregate desire to save far exceeds the desire to invest. Even microscopic interest rates cannot balance the two. To stimulate investment and repress savings, rates would actually have to be negative, which is why even the loosest monetary policy in human memory is not enough to overcome our secular stagnation.
Part of the problem, of course, is insufficient consumer demand. If you can’t sell all the widgets in your store, you certainly aren’t going to borrow millions to build another widget factory. This is a cyclical problem which could be solved should the economy ever pick up. But we have a deeper, secular problem not so easily overcome: capital has become too productive.
We all know that technology has made labour more productive and so many workers redundant. It used to take dozens of men to unload a ship. Today one or two can do the same job, faster, more efficiently, with less pilfering. What is not yet as obvious is that technology is doing the same for capital. Mini steel mills require considerably less start up capital than the behemoths of the mid 20th century. You can produce a feature film today with camera and editing equipment that cost under £7,000. When JP Morgan created US Steel, it took billions of dollars and huge capital investment in big factories filled with cutting edge technology. Facebook started with a few servers and a rented house.
Modern financial markets were born with the railroads. Before, businessmen wanting to expand their business generally invested retained profits or found friends and relatives to buy into their firm. Railroads were too voracious of capital for any group of friends to be able to fund by themselves so private bond markets emerged to funnel societal savings into productive investment. Railroads were the dotcoms of the 19th century and many bondholders lost their shirts but the infrastructure they built transformed the planet for the better. 19th and 20th century technologies were capital intensive. 21st century technologies are not. That is why financial markets are no longer doing the job they were designed to do.
According to finance textbooks, capital markets exist to mobilize household savings in order to fund corporate investment. No more. For over 30 years, through stock buybacks and dividends. US equity markets have actually shipped money in the other direction. Corporate profits are returned to shareholders, to fund high-end consumption rather than retained and invested in research and development or expansion. Corporations don’t need to borrow to invest, they are sitting on piles of cash that they can’t find any reason to use.
In the 1970s, the miners were arguably the mightiest force in Britain. Back then, a union card was a guaranteed pass into the middle class, maybe even better. A union cameraman made more money than most stockbrokers. A decade later, miners were irrelevant. Politics and legal changes certainly played a role in their calamitous ride into the dustbin of history but probably more fundamental was economics. Their labour was no longer needed. Inexorable productivity increases, combined with globalization, meant that the supply of labour increased while demand for it did not keep pace. Thus the stagnant wages since Reagan and Thatcher. Productivity gains are beneficial to the economy as a whole, but not necessarily to the laid off worker. The same process is now attacking capital. Thus the low yields for safe investments. We can borrow cheaply because capital is plentiful while demand for it is not.The defeat of capital may not be as swift as the collapse of labour. Capital still has a firm grip on politicians, media and the levers of power. Nonetheless, low yields and low interest rates suggest the marginal utility of capital is heading inexorably down and it is hard to see that changing. All the cultural and political power in the world cannot not trump the deeper economic reality. The labour movement learned that in the 1980s. Low yields are a harbinger of bad times for capital. Rentiers will have to struggle to avoid euthanasia. If 1979 marks the turning of the tide for labour, 2008 may do the same for capital.