Zeitgeist: The Economics of Overripe Capitalism

The last (for today) in what will probably be an ongoing series.
From Counterpunch:

Against Investment-Driven Growth

“We have now grown used to the idea that most ordinary or natural growth processes (the growth of organisms, or populations of organisms or, for example, of cities) is not merely limited, but self-limited, i.e. is slowed down or eventually brought to a standstill as a consequence of the act of growth itself. For one reason or another, but always for some reason, organisms cannot grow indefinitely, just as beyond a certain level of size or density a population defeats its own capacity for further growth.”
– Nobel geneticist Sir Peter Medawar, The Hope of Progress

There is a consensus across the entire political spectrum that renewed net investment -costs incurred for the purpose of making net additions to capital, i.e. additions over and above what it costs to maintain or replace existing capital stock- in productive capital is necessary if we are to come out of the current depression, restore employment and provide working people with the standard of living they deserve. Radical analysts lament the relative decline of productive investment and the skyrocketing of financial-speculative investment that marked the end of the Golden Age of postwar growth. We are to believe that the surplus that is currently channeled into financial speculation in derivatives and foreign exchange markets, or sitting idle in the coffers of giant private enterprises, should be diverted back to productive investment, which in turn would make possible economic restoration. And how could the resumption of robust rates of productive investment not be the major priority? After all, private investment is the Let There Be Light of the world of material production. It initiates production, employment, profits and wages. But don’t be fooled; this story is nowhere near as compelling as it may seem. And its implications for wage growth are, as we shall see, grim.

It is essential to this story that we are talking about private investment. The surplus that is to be diverted from finance to production and employment is privately held, by financial and non-financial corporations. What is suggested is that if the financial manipulation of the surplus were discouraged, either by restoring Glass-Steagall and/or by imposing a heavy tax on financial transactions, these private funds would naturally seek the only alternative,  productive investment.

This argument depends entirely on a key assumption which the historical development of capitalism has rendered obsolete. The pivotal premiss is that sustaining production and employment under capitalism hinges on perpetually commiting additional portions of the private surplus to additional investment in new kinds of capital goods, for example green technologies, or more efficient versions of existing equipment. ‘Additional’ or ‘net’ here means ‘investment funds over and above what is required to replace existing equipment’, that is, funds in excess of depreciation allowances. The latter are set aside by firms for the purpose of maintaining, repairing or replacing equipment already in place. These funds intended to cover capital consumption are not counted as profits and are accordingly not taxed. Hence, net investment is supposed to exceed depreciation charges and is therefore financed from profits, as are outlays to pay wages and salaries and to reward mere ownership, e.g. dividend payouts. The alleged ongoing need for net investment is in fact a major element in the justification of profit as necessary to fund investment. Should it turn out that the maturation of industrial capitalism has rendered net investment over and above depreciation set-asides unnecessary to sustain production and employment, then not only must we radically alter the way we think about the exit strategy from the current depression, but we are also led to question the most fundamental rationale for the existence of private profit itself.

The prevailing myth about the indispensability of net investment is a casualty of failing to understand the major transformations of the role of investment in the historical development of twentieth-century capitalism.  As we shall see, the myth of investment involves the very odd notion that mature capitalism exhibits precisely the same investment-driven growth dynamic that characterized capitalism  during its period of industrialization, or basic capital formation, from roughly 1860 to 1899. An historical overview of the function of investment in the maturation process of industrial capitalism should make this clear....MORE

Earlier: 
Zeitgeist: Universal Basic Income
Here Come the Anarchists: Pete Kropotkin


In "TAXES, CAPITAL AND JOBS" we linked to an astonishingly prescient econ paper:

Over the last few years I've come to believe that all income, earned and unearned, should be taxed at the same rate, that preferential taxation of capital no longer leads to the intended policy effects of job creation and increasing capital investment in plant, property and equipment but rather is a bought-and-paid-for scam perpetrated by the financier class.

On a related point, it's time to get rid of the carried interest loophole which taxes income at cap gains rates for private equity and hedge funds.
That carried interest should not be treated as a capital gain can be proven quite easily.
Show me one tax return where a carried interest capital loss was allowed.
[you won't be invited to any of the meetings ever again -ed]

At the lower end of the income scale there should be some minimum tax. Everyone should have some skin in the game.
I'll be coming back to all these topics throughout 2012, in the meantime here's the granddaddy of Econ papers for folks interested in this stuff, sincere thanks to the reader who turned my vague recollection of the thesis into an actual PDF copy. It is as pertinent and fresh today as the day it was written, 34 years ago.

TAXES, CAPITAL AND JOBS
By Mason Gaffney
A paper delivered to the National Tax Association, Chicago, August, 1978.
Adapted for use in a course in Macro-economics, Winter, 1996.

INTRODUCTION
We hear a lot these days about the need for more capital to make jobs. Some of what we hear and read we may discount as self-serving, lobbying for more preferential tax treatment of profits. Yet there is a case argued by sincere and public-minded people on objective grounds which we must take seriously.

It had better be a good case, because it goes far toward destroying the progressivity case, the one on which the American public has bought the income tax concept. Preferential income tax treatment of property income cuts off the top brackets of income receivers from tax liability, especially when we exempt capital gains. Preferential treatment exempts or favors the unearned increment to land values, especially again when we favor capital gains. The thrust of proposals being seriously advanced today is to convert the income tax into simply another payroll tax, socializing a large share of personal effort while eliminating the public equity in the land and capital resources of the nation.

Preferential tax treatment for property also destroys the neutrality or uniformity argument for income taxation. It encourages substituting capital and land for labor. It forces higher rates on personal effort, thus weakening the incentive to work while maximizing the incentive to lobby in legislatures and the Congress for public works and other federal outlays which create unearned increments to land values....MUCH, MUCH MORE