Andrew Fisher on understanding modern capitalism
Profits flow"Now the lessons of the past were all learned with workers' blood,
The mistakes of the bosses we must pay for" - Billy Bragg, There is Power in a Union
New ONS data today shows the profitability of UK companies has reached new highs.
Service sector companies (not including the finance sector) had a net rate of return of 16.8% in Q3 2014, the highest rate on record (this data has been published since 1997). So the service sector is booming again.
If we look across the economy, the overall 'private non-financial corporations’ profitability' measure is estimated at 12.0% in Q3 2014 (the best since the last quarter of 1998).
|(Green line QonQ figures; black line rolling 4Q trend)|
This is because - like vampires of lore - it's not the done thing to proclaim your bloodlust. It scares the villagers, and ruins the benign image you have carefully crafted for yourself.
We know from multiple reports that retail - a large part of the service sector - claims to be experiencing tough conditions with profit expectations downgraded (we noted this for Tesco earlier this month). The ONS itself notes that 69 profit warnings were issued by UK companies - the highest level since 2008.
These figures are also another indicator that the service sector is performing more strongly than other sectors - hammering another nail into the coffin of George Osborne's rebalancing.
So it seems a mixed picture that profits are on the one hand at record levels, but on the other lower than expected in a large number of companies.There is also retail price deflation occurring in many sectors as retailers compete for the consumer pounds of squeezed households.
Mixed pictures tend to suggest that trends are not sustainable and this one clearly is not. So have we reached peak-profitability? To answer that we need to understand what has caused this rise in UK profitability.
Looking at the chart, the unabated rise of profits under the coalition government might be assumed to be due to the slashing of corporation tax, from 28% in 2010 to 21% today, but the profit figures are pre-tax.
With sales volumes relatively stable and consumer demand still suppressed, we must look elsewhere.
"The blood is the life!"
But if the profits are back, why aren't the wages? Economists will point to historical models showing that as the economy picks up and profitability returns you get real wage growth. But these models assume an automaticity and that other factors still endure today.
My theory - and it is only that (alternatives are welcome in the comments) - is that wages have not recovered because there is little real pressure on employers for them to do so. If they can get away without doing so they will - and if there are stronger countervailing pressures (e.g. demands of shareholders for higher dividends or senior management for higher wages or bonuses, or pressure from competition) then workers will be squeezed.
Trade union membership in the private sector remains incredibly low - with just 14.4% of workers organised in unions. Although the number of unionised private sector workers has increased in recent years, that is only in line with a growing private sector labour market.
By comparison in the early-mid 1990s trade union membership in the private sector was around 3.4 million compared to around 2.5 million today. In percentage terms density has fallen from 21% in 1995 to one-third less today.
But the decline in trade union membership is only one factor - alongside it, perhaps because of it - has come the deregulated labour market with temporary agency workers, zero hour contracts, bogus self-employment, low skill apprenticeships, and workfare.
Even before the post-crash recession hit, workers were not sharing in the proceeds of growth - their share of the national income was declining. In Marxist terms, the rate of exploitation was increasing - and that trend is now intensifying.
"Capital comes dripping from head to foot, from every pore, with blood and dirt" - Karl MarxThis vampiric capitalism though is not only sucking the lifeblood of the workers, but its own lifeblood since those workers are consumers. The theory fits: wages are suppressed; as are retail sales; and more competitive markets as a result of consumers becoming more judicious (e.g. see the supermarket sector where shifting consumer habits are clear). Higher profits from lower wages are creating a shift in consumer behaviour that is also impacting on some established corporate players.
The solution sounds Blairite - stakeholder capitalism - one in which the workers have a stake ... that they drive through the cold heart of corporate culture. I'll put some meat on the bones of that proposal in a future post.
Andrew Fisher is author of The Failed Experiment ... and how to build an economy that works. See also: