Demand determines income. It does so through investment

Chris Dillow loves the idea that there is nothing in industrialised economies worth investing in, and there hasn’t been for years. As far as I can see, the evidence for this is a quote from Ben Bernanke in 2005 that might have been included in his speech by heaven knows what PR flack. But I have a more substantial point.

That point is that “a dearth of domestic investment opportunities” and “stagnant real wages for the 99%” are the same thing, both in the sense Chris means it – if there is nothing that looks interesting to invest in, there won’t be much investment, and therefore no growth and no wage growth – and in the opposite sense.

In an economy where the biggest component of national income is wages and the biggest component of national expenditure is consumption – to put it another way, where the biggest flow is from wages into consumption – how many investment opportunities can there possibly be if real wages are stagnating?

The only way your investment could pay off would be by grabbing market share from competitors, or by leading the way in grinding down margins. Alternatively, there’s the option of an investment that won’t pay off if you look at it in a normal fashion, i.e. moving ahead with the Minsky cycle towards Ponzi finance. I think it’s defensible that precisely these things happened in the 2000s. Free Google searches and very expensive houses.

(Distribution is also an issue – growing inequality might lead to a higher marginal propensity to save across the economy, which would suggest a third option, selling luxuries to the rich, and also that it wouldn’t be enough.)

The interesting point here is that the same principle is at work however you cut it, which is the basic Keynesian insight that demand determines income. Further, the mechanism is the same, and is just as Keynesian – demand determines income, and it does so through investment. The entrepreneur’s assessment of an investment necessarily involves an estimate of demand for whatever it produces. This is evidently influenced by the macro-environment. Nobody ever said “My customers have no money. Time to buy!” Only an economist could think otherwise.

But the way we look at this is an ideological question. You can stand at the slot marked “management” and you’ll see that wages seem too high. You can stand at the one marked “entrepreneur” and you’ll see there are no investment opportunities. You can stand at the one marked “labour” and you’ll see that wages are too low. All three are observing the same phenomenon.

You can also stand at the one marked “contrarian” and you’ll see that there is no solution except, perhaps, for listening to your good self.

Of course it’s possible that there is something wrong; we’ve finally arrived at the great Marxist crisis of the falling rate of profit, we mean it this time, or we’ve finally invented everything there is to invent and therefore it’s not my problem, or we’ve reached Peak Concrete and only ineluctable metaphysical decline that somehow teaches all my enemies a lesson remains. But you can’t reject the hypothesis that the problem is the bastards from this data – a hypothesis well discussed here.