Grasping Reality on TypePad, by Brad DeLong

Although related to Paul Samuelson's 2004 JEP paper: Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization, it was different in that Samuelson just had EME development of the technology to make manufactured exports lower the equilibrium real wage in America, while the idea was to capture not just that but a host of other phenomena as well.

As Paul points out, such a setup holds the possibility of explaining not just (c ) a rise in inequality, (d) an extraordinary growth in the share of firms that have no visible support in production, (e) falling unionization, and (f) falling median wages, but also (g) high average Q but also (h) low marginal Q, hence depressed investment.

I, however, am not sure that investment is depressed--housing investment is depressed, but the rest of investment does not look terribly weak to me…

Paul Krugman: Profits Without Production

Consider the differences between the iconic companies of two different eras: General Motors in the 1950s and 1960s, and Apple today.... G.M. in its heyday had a lot of market power. Nonetheless, the company’s value came largely from its productive capacity: it owned hundreds of factories and employed around 1 percent of the total nonfarm work force. Apple, by contrast, seems barely tethered to the material world... employs less than 0.05 percent of our workers... the Chinese aren’t making that much money from Apple sales either. To a large extent, the price you pay for an iWhatever is disconnected from the cost of producing the gadget. Apple simply charges what the traffic will bear, and given the strength of its market position, the traffic will bear a lot.... Anyway, whether corporations deserve their privileged status or not, the economy is affected, and not in a good way, when profits increasingly reflect market power rather than production....

Since around 2000, the big story has, instead, been one of a sharp shift in the distribution of income away from wages in general, and toward profits. But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment? And, no, investment isn’t depressed because President Obama has hurt the feelings of business leaders or because they’re terrified by the prospect of universal health insurance. Well, there’s no puzzle here if rising profits reflect rents, not returns on investment... rising monopoly rents can and arguably have had the effect of simultaneously depressing both wages and the perceived return on investment.... The widening disconnect between profits and production does nothing to weaken the case for expansionary monetary and fiscal policy as long as the economy stays depressed. But the economy is changing, and in future columns I’ll try to say something about what that means for policy.

Paul Krugman: A Maker of Shrubberies

I started out in professional life as a maker of shrubberies an economic modeler, specializing — like my mentor Rudi Dornbusch — in cute little models that one hoped yielded surprising insights..... So there’s a... sketch of a model... lurking behind today’s column....

Two factors of production, labor and capital... a Cobb-Douglas production function to produce a general input that, in turn, can be used to produce a large variety of differentiated products. We let a be the labor share.... The differentiated products, in turn, enter into utility symmetrically with a constant elasticity of substitution function, a la Dixit-Stiglitz... constant returns, with no set-up cost. Let e be the elasticity of substitution; it’s a familiar result that in that case, and once again assuming that the number of differentiated products is large, e is the elasticity of demand for any individual product.

Two possible market structures... perfect competition... [or] each differentiated product... produced by a single monopolist....

With perfect competition, labor receives a share a of income, capital a share 1-a, end of story.

If products are monopolized... the labor share falls to a(1-1/e)... the rental rate on capital — the amount someone who is trying to lease the use of capital to one of those monopolists receives — actually falls, by the same proportion as the real wage rate. In national income accounts, of course, we don’t get to see pure capital rentals; we see profits, which combine capital rents and monopoly rents. So what we would see is rising profits and falling wages. However, the rental rate on capital, and presumably the rate of return on investment, would actually fall. What you have to imagine, then, is that some factor or combination of factors — a change in the intellectual property regime, the rise of too-big-to-fail financial institutions, a general shift toward winner-take-all markets in which network externalities give first movers a big advantage, etc. — has moved us from something like version I to version II, raising the profit share while actually reducing returns to both capital and labor.

Am I sure that this is the right story? No, of course not. But something is clearly going on, and I don’t think simple capital bias in technology is enough.