Capitalism sucks when you haven’t just blown up the entire world’s capital stock
All I want to do in this post is present the reader with some charts that demonstrate the absurd magnitude of America’s commanding lead in industrial production after WWII. The reason I think it is important to understand these facts is that many people look at this time as an example of a desirable settlement between capital and labor in which both groups comfortably enjoyed an expanding pie rather than squabbling about how to slice it up.
Some explanations for why this period of economic history was so great include:
- more aggressive government intervention in the economy, such as protections for unions and limits on permissible financial transactions
- the superior labor economics of industrial production vs a financialized service economy
- it’s time to build: we used to have more of a patriotic can-do spirit whereas now we have a bunch of dour anti-growth bureaucrats who won’t let you run pump-and-dump crypto scams on your gullible internet followers
Depending on which of these explanations one believes in, and they are by no means mutually exclusive, policy recommendations for the present might include reviving certain midcentury economic regulations, pursuing an “industrial policy” of protective tariffs and subsidies for labor-intensive industrial production processes, and exhorting (from the comfort of your air-conditioned VC office in Palo Alto) twitter users to get their hands dirty on a factory floor. This last one works best if you complain about bureaucrats while working for a VC fund controlled by a lawyer.
I think the idea that any or all of these prescriptions can bring back the attractive elements of the midcentury American economy look less compelling when we understand how much of it was based on monopoly rents.
Consider GDP shares by country after WWII:
Let’s also look at capital per worker levels:
Once the worst-affected countries in WWII recovered their prewar levels of capital investment, they began to cut into American industrial market share:
Take Japan as an example:
The intuitive story for this would be as follows. Japan’s capital stock gets destroyed in the fighting of WWII. After that happens, they have no choice but to import industrial products from the United States. But once they recover enough to start rebuilding capital equipment, they start to compete with us in industries like autos and consumer electronics, cutting into our market share and eliminating monopoly rents which were previously shared between American labor and capital. The exact same thing happens with Europe too.
A good contemporary example of these economics is the firm Google. Google has one of the highest average wages of the S&P 500. It is also one of best performing stocks of the last decades. So, both Google’s labor and capital are making lots of money. But it is important to understand that Google has a practical monopoly over search, one of the most important products on the internet. A lot of their profits are monopoly rents and not compensation for the capital and labor costs of producing the product. When a firm can enjoy these monopoly rents and distribute them to both its workers and investors, everyone is happy.
I think Google basically represents what the American economy was like in the midcentury. It’s great to enjoy monopoly rents, but now that rest of the world has enough capital stock to compete with us, we can’t do so anymore. That requires us to carefully target industries in which we actually enjoy a comparative advantage and can become competitive. Industrial policy may be somewhat useful in getting such industries off the ground, but it can never bring back a world of abundant monopoly rents. The same goes for midcentury economic regulations and exhorting people to build stuff.
A lot of people have responded to these ideas by pointing out that America still has great GDP growth. None of what I’m saying should be interpreted as predicting that America can’t grow anymore or that there aren’t forms of wealth we can’t enjoy in a post-industrial-monopoly world. But the disappearance of monopoly rents for industrial production does mean that this growth occurs at a lower magnitude (GDP growth is lower now than it was in 1950) and that it gets initially distributed in ways that may make redistribution more challenging (attaining a high labor share is easier within a highly-profitable firm than it is within an entire economy).
There are still many other sources of growth available to us, some rent-based (like financialization) and some legitimate, but we should not expect them to yield the same kind of easy and massive returns that near-monopolistic control of industrial production did. Similarly-monopolistic control of financial markets and internet advertising platforms may in fact be enough to power the U.S. economy indefinitely, though we have not yet found a way to cut most American labor into these rent streams.