Paul Krugman: Profits Without Production

The growing importance of monopoly rents:

Profits Without Production, by Paul Krugman, Commentary, NY Times: One lesson from recent economic troubles has been the usefulness of history. ... Yet economies do change over time, and sometimes in fundamental ways. So what’s really different about America in the 21st century?

The most significant answer, I’d suggest, is the growing importance of monopoly rents: profits that ... reflect the value of market dominance. ...

To see what I’m talking about, consider the differences between ... General Motors in the 1950s and 1960s, and Apple today.

Obviously, 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..., it employs less than 0.05 percent of our workers. ... 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 ... the traffic will bear a lot. ...

I’m not making a moral judgment here. You can argue that Apple earned its special position — although I’m not sure how many would make a similar claim for ... the financial industry... But here’s the puzzle: Since profits are high while borrowing costs are low, why aren’t we seeing a boom in business investment? ...

Well, there’s no puzzle here if rising profits reflect rents, not returns on investment. A monopolist can, after all, be highly profitable yet see no good reason to expand its productive capacity. ...

You might suspect that this can’t be good for the broader economy, and you’d be right. If household income and hence household spending is held down because labor gets an ever-smaller share of national income, while corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand. I don’t think this is the only reason our recovery has been so weak — weak recoveries are normal after financial crises — but it’s probably a contributory factor.

Just to be clear, nothing I’ve said here makes the lessons of history irrelevant. In particular, 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.