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Introduction and acknowledgement
In this article I take a close look at what’s been happening in Australia with profits and investment. I have done this out of some frustration with the way in which the economy in general and specific parts of it are reported without any meaningful connection to bosses and their profits. I stress that I am an amateur economist, that is with no formal training. I thank Jim Stanford (Centre for Future Work) for his helpful comments on an earlier draft of this article. Of course, this version is my responsibility alone. It is a work in progress and I welcome comment and criticism.
In brief, why are profits and investment important?
In a nutshell this story is about the Australian private sector going on strike. Rather than being the dynamos of the Australian economy they are its laggards; even having been gifted workplace and industrial relations laws that are heavily stacked in their favour.
Successive Liberal – National Party governments, using their “good economic management” perspective, have (until recently) let this strike of capital go merrily along. In their DNA , employer control of the investment decision is the natural order of things.
There are two big reasons why profits and investment are important. First, the private sector’s failure or refusal to invest usually means a recession is not far away. Recessions are really bad for working people (the 90%), those with jobs and those trying to get one. It usually means more people out of work, and those in work agreeing to fewer working hours and associated pay cuts. Workers’ bargaining power declines at the enterprise, industrial and social level, and with that weaker wages, conditions and safety.
Second, against the trend, massive investment is necessary – and still possible – to ensure that global warming is reduced, stopped and reversed, and that must happen in the next ten years.
Union members and environment activists must come together to jointly understand why investment, including from the private sector, is very much their business, and that both should not trust the private sector to deliver.
Remember as we go that the Labor government under Rudd started in late 2007, the global economic crisis started around mid to late 2008, and the LNP’s self styled “good economic management” started in late 2013.
I use data from the Australian Bureau of Statistics to tell the story.
What’s been happening with profits?
Let’s start with total profits, focusing on the economy in general.
The first chart comes from the Australian National Accounts (ANA’s) that are released quarterly. There are other data sets for profits, but these are commonly used.
Profits: non-financial corporations
A quick detour: profits and wages … the rate of exploitation
Before digging more into the profits and investment story, let’s check the profits – wages relationship. Here we look at the profits made relative to the wages paid to the workers who have produced them. This is called the rate of exploitation and across the whole economy here it is.
We can see generally high rates of exploitation but driven upwards vigorously since the LNP government of 2013.
Rate of exploitation – recent
Why “generally high rates of exploitation”? Because here is what has been happening since 1973.
Rate of exploitation – long term
On this occasion I leave aside further discussion about how to understand exploitation. However, check previous posts, here for example.
Profits are extra healthy, what about productive investment that should come from those profits?
First, new business investment in general. Again, there are other data sets, but I stick with the commonly used one.
New business investment
Total investment includes several different types. 3 types of investment, in particular, are commonly accepted as critical for the productive capacity of the Australian economy. These are non-dwelling construction including new engineering, new equipment and machinery, and research and development.
So, let’s take a closer a look at the critical new investment in productive capacity, first in non-dwelling and engineering construction and engineering, and new machinery and equipment.
New private business investment – productive types
The very flat new investment in machinery and equipment is a serious problem: it shows a weak commitment to modernisation.
When we turn to new business investment in research and development, we see another sorry tale.
New private business investment – research and development
However, these totals don’t tell us anything about the rate of investment.
The rate of investment: growth, profits and investment
To start we look at new business investment as a proportion of GDP (i.e. all new value produced in the economy. Again, there other data sets but these tell a very similar story.) Comparing new business investment against the total new value (GDP) in the economy is the common method used by mainstream economists. The picture tells the story.
Rate of business investment : GDP
Digging into the same critical types of productive investment we see a very poor situation.
Rate of productive business investment : GDP
Rate of productive business investment : GDP – research and development
However, this approach does not tell us about productive investment relative to the profits that have been earned. Private sector productive (and other) investment comes from the profits part of GDP.
Productive investment and profits
I have not been able to find any ABS data that directly helps us with that. Therefore, I have taken data from one ABS data set and joined it to another. (GOS means gross operating surplus, i.e. gross profits.)
Rate of private business investment profits – recent
In particular, we have serious falls in productive investment during the years of recovery since the last economic downturn. Thus we see Australian capital on strike.
And, this has been happening over the longer term.
Rate of private business investment – long term
The situation is even more serious when we look at those key types of investment that are all about a modern, broad based economy.
Rate of private productive business investment types : profit
So, the years of profits increases coincides with a steady fall in the rate of new productive investment. Employers are not investing productively, anywhere near to the level required for a healthy economy.
And this coincides with the LNP’s so-called “good economic management”
“What have they been investing in, instead?” and “Why?”
These are two of the big questions that arise from this description of what has been going on.
It is certainly true that the failure to invest coincides very much with the LNP governments we have had since 2013.
LNP governments have knowingly supervised this situation because they fully believe that bosses should be allowed to spend their expropriated profits as they decide. Similarly, Labor governments have accepted that they should not interfere with this employer “right”.
Neither governments nor unions nor environmentalists should be allowed to interfere with employer’s control of investment. It is core LNP business to protect that.
However, quite recently, the Treasurer has woken up that this is a problem.
He worked out that employers were not spending the profits productively but in share buybacks and other forms of gambling in the local and global money markets, that is in “finance”, not in production. And, oh so softly, he criticised them for it.
Not surprisingly, he made his corporate supporters quite angry.
On behalf of Australian capitalists, Mike Kane (CEO of Boral), replied:
“I don’t wait to be told by politicians as to what we’re supposed to do,” he said. “What we’re doing is what’s in the best interests of Boral and its shareholders in the long run.”
Kane is also a leading figure driving the government to attack workers and union rights, especially construction workers and their unions, and is the recipient of big bonuses on top of his CEO base salary.
Summing Up
The question still remains. Why has employer productive investment been so weak when profits have been growing in the years of “recovery” since the global financial crisis of 2008-10, especially when, relatively speaking, the Rudd Labor government acted quickly and somewhat effectively to prevent its worst effects.
In a conceptual sense the answer seems clear: corporations will only invest productively if productive enterprises deliver more profits relative to that investment and the cost of workers needed to make it happen.
The “why” is another part of the story of profits and investment, the dynamic of economic and ecological crisis, and, continued downward pressure on wages and conditions.
It’s actually a big deal if you are fighting inequality and global warming, or both.
We can see that there is no shortage of money available to create skilled and safe jobs in the urgently needed renewable energy systems and associated technologies and industries to control and reverse global warming. Much of its is being gambled and frittered for private gain. The private sector as a whole, and those in government and institutions like the Reserve Bank and the Productivity Commission who support them, simply cannot be trusted to invest for the social and ecological good.
How should society as a whole gain control of that socially produced wealth for reproduction and improvement of life as we know it?
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