En 1817, the English economist David Ricardo (1772-1823) considered that the distribution of income between profits and wages was the main problem of political economy. In reality, Ricardo was very marked by Adam Smith (1723-1790) who, as early as 1776, observed that the Dutch had better wages than the English, while the profits of their companies were lower! Nowadays, it seems that profits do not trickle down to the economy and that a distribution of income favorable to wage earners can stimulate economic growth.
Thus, these two economists, the fathers of economic liberalism, had questions about the wage-profit sharing that their successors forgot! Indeed, the latter have been lost for too long in the idea that profits would cancel out with competition, or that they would be illegitimate, or finally that they would depend on the balance of power between the social classes.
Two hundred and six years later, we are convinced of the need to take up Ricardo’s challenge and understand the “laws” of income distribution in contemporary capitalist economies. This is the first conclusion we draw from observing the performance of advanced economies over several decades.
The American economy illustrates this in an exemplary way. From 1875 to 2000, during an exceptional period of prosperity, as a trend, the share of profit in income over the long term averaged close to one third. For example, it was 34.3% from 1961 to 2000, associated with strong and regular growth, with an annual average of 3.5%. Since the turn of the 2000s, the profit share has steadily increased to 39% in recent years, while economic growth was halved after the “Great Recession” of 2008.
No trace of a “runoff” effect
Japan has seen its macroeconomic performance deteriorate continuously since the stock market crash of 1991, with near stagnation since 2008; here too, the share of profit breaks all records and reaches up to 40%. Italy, with a profit share of at least 39% since the 1990s, sank into economic depression after 2008.
Clearly, in the advanced economies of the early 21ste century, the significant increase in the share of profit is associated with a severe economic slowdown, even with stagnation, but also with a decline in investments. Ultimately, there is no trace anywhere of a supposed “trickle down” effect on economies!
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