Even McKinsey Gets It: High Wages Improve Economic Performance

By Marshall Auerback, a market analyst and commentator. Originally published at Alternet

After a year-long analysis of seven developed countries and six sectors,” global management consultancy company McKinsey has “concluded that demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies.” Which means—surprise, surprise—higher wages for the workforce. The report by James Manyika, Jaana Remes and Jan Mischke was published in the Harvard Business Review. Their analysis marks a shift from the prevailing paradigm of the past several years in which poor productivity growth was viewed as largely a function of supply-side factors such as excessively “rigid” labor markets (hence the call to make it easier to hire and fire workers, and reduce unionization), insufficiently low tax rates (hence the drive to reduce corporate tax rates), a largely unskilled labor force (hence the push for more H1-B visas for Silicon Valley jobs), and too little global competition (hence the need for more, not less free trade).

If deficient demand (and a concomitant commitment to full employment) is not considered relevant as far as productivity goes, the policy framework is very different. Fiscal policy is diminished because there is little point in “wasting” limited financial resources on fiscal stimulus, higher real wages, or a restructuring of the private debt overhang. And economic inequality doesn’t even factor into the equation at all. Rising inequality, growing polarization and the vanishing middle class have all been seen as unfortunate, but inevitable byproducts of globalization, rather than drivers of slow potential growth.

By contrast, the McKinsey analysis leads to a very different policy outcome—one that places demand management and full employment at the heart of macroeconomic policy-making. In fact, there is a historical basis to support the authors’ view that demand does matter when considering the issue of productivity. The post-WWII period until the OPEC induced recessions of the early-1970s was a time during which wage gains grew in line with productivity increases. The resultantly higher wages thus provided an incentive for firms to invest in labor-saving machinery, with the upshot that productivity growth surged further as a result. That all began to change some 40 years ago, as market fundamentalism and “supply-side” policies began to supersede traditional Keynesian demand management. The link between productivity and wage gains was severed (more national income went to corporate profits) and wage gains were suppressed (because labor was seen simply as a cost input, rather than a source of demand).

This redistribution of national income in favor of corporations away from the workforce removed the incentives businesses had to invest in the modernization of their capital stock (ultimately impacting productivity growth). Even as profits rose, incomes remained stagnant for a large proportion of the population. Globalization and offshoring entrenched this new low wage-growth orientation of businesses, in combination with domestic labor market deregulation and de-unionization. Fiscal policy was gradually de-emphasized in favor of ‘independent’ central bank-led monetary policy, but the problem of deficient demand and wage stagnation was masked for a time as the use of financial engineering pushed ever-increasing debt onto the household sector (as they used borrowing to compensate for stagnant growth in income). As Bill Mitchell wrote in 2012, “Riskier loans were created and eventually the relationship between capacity to pay and the size of the loan was stretched beyond any reasonable limit.” Mitchell also wrote, “The household sector, already squeezed for liquidity” by virtue of non-existent wage growth, was “enticed by the lower interest rates and the vehement marketing strategies of the financial engineers” to take on more debt.

Meanwhile, the increasing financialization of the global economy enabled the rich to have their cake (profits) and eat it (by channeling them to offshore tax havens). Corporate CEOs, the so-called “risk-takers,” increasingly negotiated to have their compensation packages tied to stock price appreciation, which incentivized companies to use cash flow for stock buybacks, rather than invest in plant and equipment. The scale of these buybacks was analyzed by economics professor William Lazonick, who documented that between 2003 and 2012, the 449 companies who comprised the S&P index “used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market.” As stock prices rose, so too did the CEO/directors’ overall compensation packages until the whole system cracked in 2008.

The only real surprise is that it took so long for the likes of McKinsey to recognize what was blindingly obvious to most people for decades. Without a hint of irony, the authors of the report cite the famous example of Henry Ford in the early part of the 20th century. Ford had the rare insight among the entrepreneurs of his day that workers were not simply a cost input, but an important source of demand for the products they were producing: “When other employers followed suit, it became clear that Ford had sparked a chain reaction. Higher pay throughout the industry helped lead to more sales, creating a virtuous cycle of growth and prosperity.”

But Ford was not the originator of this insight. John Atkinson Hobson, a British economist in the latter part of the 19th century and first part of the 20th century, was one of the first to champion a high wage economy. Reflecting the insights of the McKinsey authors some 150 years earlier, Hobson argued that wage suppression was unhealthy and immoral. He advocated redistributing income to low earners—that is, moving toward greater equality—which he argued would reduce the capacity of the wealthy to save and place more spending power into the hands of those with higher consuming propensities. He also supported greater labor unionization and was one of the early advocates of social welfare and public education (providing support, for example, to David Lloyd George’s “People’s Budget” introduced by the future British prime minister when he was chancellor of the exchequer in 1909). Essentially, Hobson promoted the notion of a “high-wage economy” to mitigate the problem of “an accumulation of Capital in excess of that which is required for use, and this excess will exist in the form of general over-production.”

Hobson and his co-author, A.F. Mummery, made the case that if productivity growth outstripped real wages growth, you would have “under-consumption,” the upshot being that overproduction would ensue. (Of course, as Bill Mitchell has trenchantly observed, the authors were developing these insights a century before financial deregulation and the democratization of credit facilitated private debt binges, both of which masked and deferred the effects of under-consumption, while simultaneously increasing financial fragility, as the 2008 crisis illustrated.)

In any case, the insights of Hobson, Henry Ford and later Keynes are finding resonance today. We have an economy where workers, who have traditionally relied on real wages growth to fund consumption growth, have found themselves increasingly cut off from the fruits of national prosperity as their wage gains have been suppressed in the interests of securing higher profits. The usual justification for this shift in income away from workers to corporations is that the latter use the resultant profits to stimulate investment, which will ultimately benefit the company as a whole (including its workforce). But another byproduct of overly financialized economies is that corporate profits historically used for productive ventures have instead gone into stock buybacks, fueling the speculative asset bubbles that have percolated across the global economy.

It is also clear that the thrust of policies antithetical to labor continues unabated under Trump and his oligarch supporters, the most recent manifestation being the Janus v. AFSCME, now being heard by the Supreme Court. This is a case that has the potential to strip unions of a major source of income, the latest blow to a movement where only 9 percent of the American workforce is currently unionized. These oligarchs (the Koch brothers, the Mercer family, the Bradley Foundation, etc.) have long buttressed successive federal governments (and a number of “right to work” states), which have supported their agendas via privatization, outsourcing, the removal of any campaign finance restrictions, and welfare-to-work requirements, to list a few of the most pernicious examples.

The substantial redistribution of national income toward capital over the last 30 years has undermined the capacity of households to maintain consumption growth without recourse to debt, and increasingly hindered the economy’s growth capacity. But the “secular stagnation” described by economists such as Lawrence Summers is a phenomenon that is the product of conscious policy choices, not some kind of inevitable fate that afflicts helpless economic actors as in an ancient Greek tragedy. Rather, economic stagnation and sluggish productivity are the outcomes of conscious policy choices. They reflect a profound failure of sensible macroeconomic demand management. McKinsey is the latest to affirm this economic reality. But will policy-makers act on their insights, or do we have to wait for the onset of yet another global economic crisis before the problems they describe are truly addressed?

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  1. Sound of the Suburbs

    They papered over all the cracks with debt and that works for a while.

    Ben Bernanke has the false belief “debt doesn’t matter”, which is prevalent in the West and stops us seeing the problem.

    Ben Bernanke is famous for his study of the Great Depression and here it is discussed in the Wall Street Journal.


    “Theoretically, neither deflation nor inflation ought to affect long-run growth or employment. After a while, people and businesses get used to changing prices. If prices fall, eventually so will wages, and the impact on profits, employment and purchasing power will be neutral. Borrowers suffer during deflation because their debts are fixed in value, but creditors benefit because the dollars they get back will buy more. For the economy as a whole, deflation ought to be a wash.”

    What has Ben Bernanke got wrong?

    The creditors are the banks and the repayments go into the banks reducing the overall debt and money supply.

    It doesn’t go to creditors who then get the money to spend.

    The power of finance is the power of debt and we embarked on a debt fuelled fantasy,

    The ability to bring future spending power into today (you spend the loan today and make the repayments in the future).

    Today is good, the future is impoverished and it’s now here.

    Thatcher bought neoliberalism to the West; it appeared to work as its neoclassical economics didn’t consider debt.


    This real estate and financial speculation fuelled economy always was on a one way trip to a financial crisis and it got there in 2008.

    It never worked in a way that gave it a long term future as it ran on debt. It always relied on bringing future spending power forwards into today with debt. Today we are struggling as the repayments are due and even ultra-low interests rates can barely compensate, this is the future we were borrowing from.
    This debt blindness bought down the US in 2008.


    1929 and 2008 stick out like sore thumbs.

    This debt blindness caused the Euro-zone crisis.


    Australia, Canada, Norway and Sweden are set to blow with silly neoliberal real estate booms.

    The Chinese have worked out the importance of the debt-to-GDP ratio and can see how it led to 2008. It’s obvious when you know where to look.

    It’s time to stop messing about with this silly neoliberal ideology that is destroying the West.

    1. Sound of the Suburbs

      Ben Bernanke is using financial intermediation theory, which is wrong.

      This is why he thinks debt doesn’t matter.

      …banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015.

      Paul Krugman, a Nobel prize winning economist, is using financial intermediation theory, which is wrong.
      This is why he thinks debt doesn’t matter.

      “This Time is Different, Eight Centuries of Financial Folly” by Reinhart and Rogoff brings together an enormous amount of data for analysis, but misses the critical graph.


      They didn’t look at private debt as they don’t think it’s important.

      Monetary theory has been regressing since 1856, when someone worked out how the system really worked.

      Credit creation theory -> fractional reserve theory -> financial intermediation theory

      “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner


      They need the credit creation theory to understand how banks work.

      You always need to build up from solid foundations.

      Little problems at the bottom become big problems at the top.

      The architects of globalisation built on bad foundations.

  2. Sound of the Suburbs

    Keynes’s ideas were a solution to the problems of the Great Depression, but we forgot why he did, what he did.

    They tried running an economy on debt in the 1920s.

    The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.

    Keynes looked at the problems of the debt based economy and came up with redistribution through taxation to keep the system running in a sustainable way.

    The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living

    Disposable income = wages – (taxes + the cost of living)

    High taxation funded a low cost economy with subsidised housing, healthcare, education and other services to give more disposable income on lower wages.

    Keynesian ideas went wrong in the 1970s and everyone had forgotten the problem of the debt based economy that he originally solved.

    1. synoia

      Keynesian ideas went wrong in the 1970s and everyone had forgotten the problem of the debt based economy that he originally solved.

      I beg to differ.

      Cost of energy, oil Tripled.
      Vietnam war spending Ended.

      Our elites took advantage of the crisis to advance the interests of the rich incrementally for the next 40 years.

      We also know the root cause, and have for over 2000 years: The Love of Money is the Root of All Evil.

      1. Sound of the Suburbs

        In 1947, Albert Hunold, a senior Credit Suisse official, looked to fight back against Keynesian ideas and bought right wing thinkers together to form the Mont Pelerin Society.

        Neoliberalism started to take shape.

        The Keynesian era had barely started when they started plotting against it.

  3. Steve H.

    > But will policy-makers act on their insights, or do we have to wait for the onset of yet another global economic crisis before the problems they describe are truly addressed?

    Invalid exclusive-OR. Makes assumptions not in evidence.

  4. Dean

    Costco is known for paying its employees higher wages (much to the chagrin of Wall $treet analysts) than its peers.

    If you look closely at each employee’s badge you’ll see “Since (year)”, which is that employee’s starting year with the company. It’s not uncommon for me to see someone with a decade or more of tenure. I’ve seen the same employees at my local store in the same job for as long as I can remember. For a retail company this is unheard of and for a shopper, refreshing.

    Costco’s strategy of paying their employees well has -from my own experience as a loyal shopper- kept turnover low, morale high, service top notch, all the while allowing the company to remain competitive in an increasingly tough sector.

    While properly compensated employees aren’t the entire reason for Costco’s success, it’s certainly a core part of their corporate strategy.

    There’s a lesson here.

    1. Eric377

      Yes but their wage increases do not track aggregate productivity. Much the same is going on at Costco, just from relatively high base. The lesson is that if turnover is a significant risk you mitigate that risk. But trust me on this: an awful lot of very productive process changes specifically reduce the consequences of employee turnover. And that’s very intentional.

    2. Larry

      It’s important to note that about 10% of Costco’s workforce is unionized. I bet you anything even that small percentage of union presence has a net positive impact on Costco’s employee compensation plans.

    3. JBird

      If you look closely at each employee’s badge you’ll see “Since (year)”, which is that employee’s starting year with the company. It’s not uncommon for me to see someone with a decade or more of tenure. I’ve seen the same employees at my local store in the same job for as long as I can remember. For a retail company this is unheard of and for a shopper, refreshing.

      This use to be very common among old line department stores, Sears, Macy’s, JCPenney’s, Woolworth’s, and even some of the bookstores that use to exist. Funny that paying above minimum wage, and giving decent benefits with a focus on treating employees as assets, even crucial assets, instead of an annoying fugal infection can make a difference.

  5. Eric377

    People hiring and paying workers don’t really think about aggregate measures of productivity. Dry cleaners are an example. Dry cleaning is more productive than 40 years ago. But that productivity is focused on processes that have generally been deskilled due to automation. They do not want turnover but can tolerate it easier than they could decades ago. They ask “could I lose an employee with 6 years experience but hire somebody from Chick-Fil-A and be okay?” So the 6 year employee only gets a bit more than less experienced workers and general productivity is not really a factor.

  6. SufferinSuccotash

    The trouble with Hobson was that he also proposed a theory of late 19th century European imperialism (capital seeking new markets) which was later taken up by Lenin. Of course that meant that Hobson had to be wrong about wages too.

  7. Tony Wikrent


    There once was a Doctrine of High Wages in USA, wjich can be traced to Benjamin Franklin’s 1783 essay “Reflections on the Augmentation of Wages, Which Will Be Occasioned in Europe by the American Revolution,” which was published in Paris in the Journal d Economie Publique. It is a deliberate and comprehensive attack on the “free trade” ideas of the house economists of the British East India Co., such as Adam Smith and Thomas Malthus.

    In Securing the Fruits of Labor: The American Concept of Wealth Distribution, 1765-1900, (Louisiana State University Press, 1998), Oklahoma State University history professor James L. Huston writes:

    The republicanism that American leaders came to advocate held sacred the ideals of individual liberty, the equality of the citizens before the law, distrust of governmental power and of political demagogues, simplicity and frugality in the behaviors of the people, and public exhibition of virtue–the willingness of citizens to sacrifice their individual self-interest to obtain the common good. An important economic corollary of republicanism established primarily by Englishman James Harrington (1611-77) during the Puritan Commonwealth was widely acknowledged by American revolutionaries: to endure, a republic had to possess an equal or nearly equal distribution of land wealth among its citizens.
    As the United States began to industrialize and urbanize, increasing number of citizens no longer lived and worked on the land, let alone owned land. The great failure of Thomas Jefferson and his Democratic-Republican Party (which later became the Democratic Party) was their inability to conceive of a way in which workers and the propertyless could be just a virtuous as agrarians and pastoralists, and also be accorded a full voice in public affairs. Instead, they sought to stymie and retard the progress of industrialization in the hope of prolonging their idyll of a republic dominated and ruled by agriculturalists.

    The problems of that approach should be obvious. To lift propertyless workers to the exalted station of citizens of the republic, while preserving the republican notion of an equitable distribution of wealth, a theory of wage income began to develop which certain American economists came to call, by the last quarter of the nineteenth century, the Doctrine of High Wages:

    Essay on the Rate of Wages: With an Examination of the Causes of the Differences in the Condition of the Labouring Population Throughout the World, by Henry C. Carey, 1835

    The Rights of Labor, by Calvin Colton, 1847

    Manual of Political Economy, by Erasmus Peshine Smith, 1853

    Essays on the Progress of Nations: In Civilization, Productive Economy, Wealth, and Population, by Ezra Champion Seaman, 1869

    Wages and Trade in Manufacturing Industries in America and in Europe, by Jacob Schoenhof, 1884

    Propenents of the Doctrine of High Wages argued that not only were American workers better paid than their counterparts in England and Europe, but they were far more productive as well. In fact, American economists argued that high wages created a virtuous circle: the superior productivity of American workers allowed them to be paid much higher wages than anywhere else in the world, while those high wages provided American workers a much higher standard living, which, in turn, enabled them to be more productive.

    This uniquely American Doctrine of High Wages has been almost entirely driven out of the professions of economics and history over the past century, and replaced by the idea that high wages will create terrible problems of inflation.

    1. Yves Smith Post author

      Thanks SO MUCH for making that point. I have to confess not to making it regularly on this topic. While it has become a staple of economic commentary to say something like “Conservatives/opponents of the New Deal succeeded in ushering in a new economic policy model that started being implemented in the Carter Administration and really took hold under Reagan, that emphasized deregulation, financialization, hostility to labor, and in particular, reliance on increased consumer borrowing to mask for stagnant worker wages,” that patter omits to say explicitly that the former model saw wage increases to workers as the driver of growth and prosperity and thus made it a key, if not the key, measure of policy success. It is similarly often not mentioned that Kennedy threatened to pass legislation that would require companies to share the benefits of productivity gains with workers; the few really union-hostile big corps backed down over that (I should Google their names, this was a high profile fight back in the day…..)

      1. The Rev Kev

        Is that Kennedy’s Fair Labor Standards Amendments that you were talking about here? Got interested and found a speech by him on this subject back in 1960 at http://www.presidency.ucsb.edu/ws/index.php?pid=25746 which describes a completely different economy to what we have now.
        Big take away from the first part is that the minimum wage was $1.10 back then and when I went into it further, found a chart of minimum wages (https://www.dol.gov/whd/minwage/chart.htm) listed from 1938 to 2009. Don’t know how close it is to real world values though.

        1. hemeantwell

          A history of presidential social democratic maneuvering would be very useful. I can’t recall the details, but last year Michael McCarthy published a book on pension systems, Dismantling Solidarity, in which he recalls how the Truman administration selectively used antistrike injunctions to pressure corporations to support pensions, a salient demand of the labor movement in the late 40s.

          1. nonsense factory

            Those inflation calculators are somewhat unreliable; it’s better to look at the cost of goods. For example, the average new car in 1960 was around $2,800 and in 2015, was about $34,000. In those terms, $1.10 in 1960 would be the equivalent of $13.00 today.

            In addition, the top tier income tax rate in 1960 was 91% (tier entered at $400,000 per year income level); top corporate tax rate was 50%, top capital gains rate was $25%. This top personal tier translates to about $5 million a year in salary; after the 91% income tax applied (with plenty of deductions, no doubt), the take-home yearly salary would still be $500,000, which seems like plenty (this would also encourage less profit taking and more corporate investment in productivity, R&D etc.)

            Higher relative wages than today, higher tax rates than today, higher economic productivity and general standard of living than today.

            1. Procopius

              Are you taking into account the fact that 91% is not applied to the whole Adjusted Gross Income? It only applies to income above the entry level, so I would bet the take-home on $5,000,000 would be more like $3,000,000. I haven’t tried to look up the different brackets and percentages, but lower income people were not facing confiscatory rates. I’ve seen this oversight a lot. There were people in John F. Kennedy’s time who refused a raise on the grounds that it would put then in a higher bracket so it would actually cost them more in taxes than the nominal increase in income. Not true. Of course the wealthy always promote this misunderstanding so they can claim their income is being confiscated.

  8. Ken

    Unfortunately McKinsey do not consider the massive private debt overhang that will still be there if a shift to wages happens. Most likely the increased incomes will be used to pay off all that debt hence diverting spending away from goods and services.

    Also, its high time Mckinsey is pushed off its pedestal. They will write anything as long as they are seen as going with the wind.

    1. tegnost

      some of us don’t care about or feel a real responsibility to the organizations who have saddled us with unpayable debt, and simply paying us a few more pennies isn’t going to structurally change that reality. The hurdle you need to overcome is that people can just stop caring about the massive debt, it’s too much to pay. This is the basis behind making the gov the bill collector because the irs can collect your aca mandate for instance, or goldman sachs can sell a security that garnishes your social security such that every loan has that as a baseline. The whole system is a joke. #juststopaying.
      And Mckinsey needing to be knocked off their high horse I can’t comment on that, but you’re on one side or another of this particular equation…fta
      The only real surprise is that it took so long for the likes of McKinsey to recognize what was blindingly obvious to most people for decades.

  9. RepubAnon

    I’d be interested in whether any economists have considered the effect the physical laws of the universe have on their models of limitless growth – specifically the First Law of Thermodynamics: “matter/energy cannot be created or destroyed, only its form can be changed.” Most economic models I’m familiar with assume endless growth and infinite resources. Were this true, both Ponzi schemes and perpetual motion machines would work. Instead, we get issues such as the water crisis in South Africa’s Cape Town. This means that both the high wage and low wage models have a fatal flaw: they rely on constant expansion of production.

    We’re beginning to see the issues that the “Limits to Growth” folks tried to point out back in he 1970s affect our daily lives. These issues will start having a greater effect on our lives in the coming years.

    1. The Rev Kev

      Good point that. We have lived in a growth economy now for a few short centuries and now we cannot conceive what it will be like when we go over the curve due to factors like diminishing resources and have an economy that constantly contracts over time.

      1. Procopius

        It’s a conundrum. We’ve seen diminishing resources for quite a long time. Greeks in the time of Pericles were aware that the land they farmed had become less productive since their ancestors invaded and seized it. Actually, Malthus fought hard against empirical data that over history the standard of living had increased. People starved during famines because of bad political policies, and in between famines (due mostly to natural disasters, usually either drought or flooding or years of unusual cold weather) they lived better. I know this does not prove that your scenario isn’t going to happen, but it’s not so certain as you seem to believe.

        1. The Rev Kev

          Actually resources are being diminished due to an ever increasing demand. Everybody here thinks of oil but there is arable land, potable water, sand, rare earth minerals as well as others. The mathematics is getting pretty brutal here and they say that our society has to be radically altered in the ways that things get done. You can kiss the disposable society goodbye for a start so can you imagine the effect on world trade alone when this happens?

        2. RepubAnon

          Think of the economy as a giant Ponzi scheme – it works well until one runs out of new customers. Yes, standards of living have increased over time – that’s because historically, there were new raw material sources to exploit.

          My thought model is Ali Baba’s cave after the 40 thieves met with their unfortunate industrial accident. The cave is full of treasure – but nobody’s putting in more treasure. Ali Baba doesn’t know how much treasure is in the cave – and may find more treasure in unexplored nooks of the cave. Ali Baba can’t be sure when the treasure will all be gone – but can be sure that one day the last bit of treasure will be pulled out of the cave.

          Some areas are running out of fresh water. Mining towns are running out of commercial-grade ores to dig up. Yes, some new technology may extend things for a time, but unless we find a way around the physical laws of the universe – at some point we’re going to run out of some critical materials.

  10. Chauncey Gardiner

    Pivotal development. IMO McKinsey is one of a few consulting and arms of large accounting and IT firms who have broad influence within the policy elite and to whom CEOs and boards of directors turn for advice. They provide cover for potentially controversial initiatives that deviate from the “conventional wisdom”, both internally within large organizations, and externally among the broader policy elite. I view this as a constructive policy development that will increase the acceptability of wage hikes for labor at major employers.

  11. societax

    The assertion that the US Supreme Court Janus v AFSCME case “has the potential to strip unions of a major source of income” is inaccurate. Janus is a First Amendment case about public-sector unions. It is true that public-sector unions are essentially the last powerhouse of unionized labor. But nothing in the case would prevent, e.g., GM and the UAW from including in their contract the same fair-share fee requirement that the Court likely will strike down as unconstitutional in Janus.

  12. Webstir

    Yves, or anyone else sufficiently more economically educated than I —
    I read articles like this with ambivalence. Yes, I fully support decreasing economic inequality. But at the same time, why does it always come back to economic growth? Why can’t the discussion about reducing inequality proceed from an economic perspective other than “growth.”
    We know economic growth cannot proceed infinitely while bounded by a finite resource base. The returns on future investment will always diminish (unless one has drunk the technological myth Kool-Aid).

    Is anyone aware of theories for reducing economic inequality that proceed from a steady state economic foundation?

    1. KPL


      “Is anyone aware of theories for reducing economic inequality that proceed from a steady state economic foundation?”

      No, but common sense would tell you that steady state economic foundation would result from:

      1. Reducing inequality. By this I mean instead of the CEOs and other Top management simply scooping up all the profits into their own kitty, if they spread it around the employees, this in itself will create more demand. But no, this does not happen and instead the media will go to town saying this CEO and that CEO has earned $50 million, instead of even questioning the earnings the CEO has abrogated to himself (via a compensation committee filled with ‘you scratch my back, I scratch yours’ types). That the fact that this scooping up the earnings (and leaving crumbs to the employees who have also toiled) is morally and ethically a cheap trick to pull goes almost unnoticed. Imagine what happens to demand and velocity of money when the $50 million spread around 1000 employees.

      2. Organic demand (by family formation and entrepreneurship) By constantly trying to bring forward the demand by the central banksters via lowering of interest rates, the central banksters have destroyed society. Common sense would again tell you that pulling forward the demand would increase the asset price. While it would feel good to have an asset bought at $100000 shooting up to $10 million (say a house), imagine the plight of the next generation, who cannot afford it (with cascading effect like not marrying, not having children etc. on society) due to this but would have been able to afford it if the demand had been organic. In short, meddling by the central banksters who want growth at any cost ONLY leads to asset inflation and is detrimental to society in the long run. Also the central banksters manipulation leads to wealth destruction through mal-investment in the long run.

      In short, distribution of wealth (reducing inequality) and organic growth in demand would help achieve a steady state economic foundation. To achieve this we should not have politicians and central banksters because as long as you have meddlers like the politicians and central banksters you will never ever achieve it!

      1. Yves Smith Post author

        No, this is absolutely incorrect. See Kalecki, who laid this all out in 1943. This is, bar none, the single best essay in the history of economics:


        The source of inequality is not central banks. It is private businessmen not creating full employment and actively impeding government from stepping into the breach because they don’t want labor to have that much power. It creates too much work for them plus they want to have a greater gap in status and power.

        The central bank action is a result of private business conduct and preferences.

        1. KPL


          Thanks for the link. I will go through it.

          I did not say the source of inequality is not central banks. The source of inequality is top management simply skimming the profits and leaving the crumbs to their employees.

          I said the central banks do not allow organic growth to happen through their meddlings to create growth.

        2. KPL


          My error is in the last para in which I did not mention the corporate chieftains who are also responsible for not being able to acheive the steady state economic foundation.

  13. Altandmain

    It’s been argued that the real power of innovation is high wages. In other words, the wage suppression of neoliberalism might prove counterproductive to innovation. Plus the monopolies like the ones in tech will have less incentive to innovate.

    The Industrial Revolution occurred in the UK due to high wages:

    Even the neoliberal FT (Paywalled) and the neoliberal Noah Smith are forced to concede this, even if they don’t agree with the left.

    The key reason why is because high wages incentivize labour saving technologies more. That’s one of the reasons why slavery societies don’t become technology centres. Their elites extract all the gains for themselves – and they want more slaves rather than trying to improve the output per slave and improve the livelihoods of their slaves. Well – we are fast becoming a wage slave society.

    Our extractive elites – the billionaires, high finance, CEOs, and shareholder class (ex: the upper 10%) see the labour of the bottom 10% as something to be paid as little as possible – preferably lower than survival wages while they skim off the gains for themselves.

    It’s noteworthy that Costco, arguably the closest we have to efficiency wages in retail is frequently attacked by Wall Street.


    Mr. Sinegal begs to differ. He rejects Wall Street’s assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street’s profit demands.

    Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco’s customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers’ expense. “This is not altruistic,” he said. “This is good business.”

    Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco’s workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.

    “He has been too benevolent,” she said. “He’s right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden.”

    Mr. Sinegal says he pays attention to analysts’ advice because it enforces a healthy discipline, but he has largely shunned Wall Street pressure to be less generous to his workers.

    Efficiency wages can work, but it needs senior management and indeed society as a whole to be oriented to the wellbeing of the rest of society. Wall Street right now is a parasite on society. That’s the brutal reality. So are our elites.

  14. JBird

    That all began to change some 40 years ago, as market fundamentalism and “supply-side” policies began to supersede traditional Keynesian demand management. The link between productivity and wage gains was severed (more national income went to corporate profits) and wage gains were suppressed (because labor was seen simply as a cost input, rather than a source of demand).

    A change from thoughtful prudent long-term Us to short-term parasitical Me, me, me thinking. I read somewhere that the reason the Greeks became economically stagnant after the Roman conquest was that the focus and trade and development amongst the city-states and even the kingdoms was a virtuous cycle, but the Romans were like the current elites. Pillaging and extracting instead of trade and development with all the surplus going to a small class.

  15. PhilK

    A few years ago, the CryptoQuote cryptogram feature in my local newspaper quoted the 19th-century German industrialist Robert Bosch:

    I do not pay high wages because I am rich. I am rich because I pay high wages.

  16. Scott1

    Thanks to SP, for mentioning IATSE

    I could never afford the life I lived. My actual careers were in Aviation Ground Services & Motion Picture & Television Production. For the last decade of my working life I was forced to take work I did when I was young & strong in my 20s by forces beyond my control. In my 30s till my 40s things were looking up, till forces beyond my control put me out of business & I was returned to working for others. (IATSE the union I joined did help me get by using skills I had gained that were somewhat exclusive, and meant I did have access to work wherever I went between stage work & film work.)
    “My past is your future.” I have said to youth which is demonstrated by
    Sara Horowitz “Freelancers Union”.

    In leu of a great for networking with rich people I went to one of the best Community Colleges.

    In 1978 I determined that the US could not be reformed.
    I began modeling a nation of airports finished when I created for it its own currency.

    I based my currency completely on human capital and the whole nation
    as a company. The numbers come from insurance actuary tables. I eliminate a “Fed” & combine the National Insurance Company & Treasury.
    In correspondence with Duke’s Economist William Darrity whose “Baby Bond” is similar I said that while “Reparations” may well be just to pursue, somehow a part of his & his colleague Hamilton’s Economic theories, my set up
    obviates the need.
    My critique of the reparations pursuit is only that for his people it risks
    creating another set of special people since for the majority of Labor
    before the turn of the century and for a long time into it,
    records for contributions to Corporations or the operations of
    the wealthy capitalists in control of the means of production
    are scant.

    Race as a dividing feature of Labor is a gift to the power structure.
    The past exerts great power over the present and the future.

    Company, Country & Work of Art is what I said it was.
    What if you could reform the US? How would you do that?
    My studies indicate you’d write down & write off individual debt.
    You’d write off State debts to the US Treasury.

    Reinvention would be based on “Best Practices” which in large
    part exist in the Netherlands, Denmark, Sweden, or other
    nations we hear & read about with well educated healthy populations
    that operate with fine ports & transportation systems.
    Without the emphasis on Assimilation that was part of
    the ambition of immigrants the US does not achieve the virtual
    homogeneity that has given the Social Democracies of the West
    the ability to pull together so the entire nation becomes
    Strong, healthy & able to have for the majority mobility
    & a life of the mind.

    I am myself particularly impressed with Uruguay that out of
    decades of military dictatorship & hell ended up with a Parliamentary
    Democracy, Separation of Church & State, & legal pot.
    It is what old hippies expected to achieve from their “Revolution”
    that devolved into nothing much more than fashions
    & individual adherence to hedonism & nihilism.
    It has a fine port. I noticed Uruguay when they were reported
    in the news to have kicked out the TPP salesmen.
    The landlocked nations experience John Common’s “Cultural Lag”
    in that they often cannot overcome the lack of a sea or river port
    by not making up for the lack of waterways with airports.

    (Too bad I’m old & ill & can’t speak Spanish, and am for now very
    trapped in the small & wonderfully boring town I live in.)

    From there when starting over the banks would be regulated
    as utilities.
    The major function of banks would be to invest in “industry”.

    I theorize that were London to establish the Marxist “Industrial Service
    Bank” EU nations, Industry, would want to know London
    better than the ECB.

    Far as “Best Practices” Michael Hudson says what they are
    in “Killing the Host”.

    My goal is that my people can afford their lives & get
    to live with as much mobility as any jet setter.

    My modeled nation must be a nation that is one
    people want to be a part of,
    As Was America.

    1. JBird

      I am myself particularly impressed with Uruguay that out of
      decades of military dictatorship & hell ended up with a Parliamentary

      People assume too often that it is a country’s resources and location that determines its fate; it is how wisely the society uses what it has. I had to do a comparison between South Africa and Peru. South Africa has a developed mining industry with a variety of minerals, heavy and light manufacturing, farming and fishing. It’s broadly similar to the United States. Peru? Well, it has fish, which is its main export, along with some a little copper, small scale organic farming, and light industries that’s mainly manufacturing finished goods using components from other countries.

      Which country is doing better? South Africa does have a much higher GDP and a much higher a average income. Peru is the country that has the better stats in quality of life. Higher life expectancy, much much less crime, better general health, rising living standards, increasing better education and healthcare. Its wealth inequality is also decreasing. Now take all those positive stats reversed them and apply them to South Africa. In some ways, South Africa is like the United States only much much worse. It’s kinda dystopic actually.

      Do not think that Peru is a paradise as it was a corrupt, violent, oligarchy for about five centuries, isolated by the Andess, and weather patterns that made sailing there somewhat difficult. It has had an actual real democracy for something like forty years with honest government and reformers. The political economy has radically change. What resources it has are developed to sustainable profitability. The government’s budget is used to give the most improvement to the most people. The country is still poor but it can finally give its children an education and there is free although limited healthcare.

      South Africa has used a neoliberal approach and gone one way, while Peru has taken what can be considered a more radical approach of what the United States government used to take.

      One caveat. This is a very simplified description and leaves out a lot like the centuries of colonial oppression that South Africa has just got out of and also has a much more varied ethnicities, tribes, polities and especially languages, or that Peru not only has been a officially independent country for two centuries, it has sort of been unofficially independent for five centuries due to its isolation. It has had more time to deal with its colonization both by the Inca and the Spanish.

      It’s been a couple of years. I think I’ll do a recomparison soon.

      One last thing. America can be considered a self created colony, the South especially, as the mass importation of blacks as slaves kinda moved the East African societies here albeit heavily fragmented. And the Indians are still here in the millions. The American nation just ignores that part of itself. It took Peru centuries to decolonize and I wonder if we have the time to do it ourselves.

  17. Demented chimp

    We haven’t even begun to use the resources (on this planet, even before we consider out there) liberated by the knowledge we are creating. From an inventory level perspective resources are practically infinite with the right knowledge.

    Limits to growth only apllies if we don’t continue to create new knowledge to manipulate reality. Its a dangerous pessimistic fallacy.

    Civilisations fail because they don’t have enough explanatory knowledge to fix their problems not hard by limits in reality.
    Yes Solutions bring further problems to solve. That is always the case. We will surely go extinct if we dont keep pushing for more. Its the fate of all species in fact without explanatory knowledge.

  18. cripes

    Why do they do it?

    Anglo-American culture, economics and politics reverted to a low-wage anti-worker model after a longish period of successful high wage policy, proving once again that elites will eat the last tree.


    Counter revolution to a century of union and socialist expansion which challenged their supremacy

    Flimsy justifications crafted by sycophantic intellectuals and technocrats seeking favor with sub-literate billionaires.

    Because looting.

    Armageddon fantasies.

    It’s not enough to have more than others, but that they must suffer.

    I suppose that’s reasonable.

    1. JBird

      There is strain of contempt of the working class never mind the poor in American society since the very first colonies. First the native “savages,” then the white “waste people,” and after the first two fought, ran away, died, or also in the surviving white indentured “servants” released, the enslaved black replacements. Each used, abused, and excused.

      Reading some of the writings of the wealthy from then, to the Antebellum South to the Gilded Age to today’ ostensibly left/liberal Democrats and right/conservative Republicans is really enlightening. The same pattern of dehumanizing the victims, violent often illegal efforts, excuses for doing it, and actually believing the righteousness of their beliefs and actions.

  19. Fastball

    “Demand” for many things like fossil fuels amd palm oil is what is killing our global civilization. Therefore I think it imperative to define what demand and growth really mean. If growth includes such things as habitat destruction, pollution and environmental waste such things shouldn’t be included in demand or growth targets for cheering them on and requiring them is the demand and growth of a cancer.

    Instead we should be focusing on prosperity without growth.

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