Like many other people, when I listen to the economists interviewed on CNN, MSNBC and the like, I frequently come away thinking that either they don't know why our economy is in crisis or, if they know, are deliberately lying about it. Some Republican-prone babblers would have us believe that the poor, largely the poor of color, bought houses they couldn't afford and thus did in our whole economy. Nobel winning economist, Paul Krugman, is the welcome exception to mindless talking heads; he unabashedly tells it like it is. Krugman effectively smashed "the poor caused the crisis" meme.
I was dissatisfied, not only with the TV's talking heads, but also with President Obama's appointments of those who contributed to the financial crisis by pushing for deregulation,to "fix" the economic problems they helped to create. So, I began googling for explanations of our economic woes.
What popped up was beautiful in its simplicity: librivox.org audio book recording of a pamphlet entitled "Wage-Labour and Capital" by Karl Marx and Frederick Engels. In 8 short segments I learned why this crisis is not "a bug" in our economic system, "but a feature" as the techies would say.
The information simply and compelling explained in "Wage-Labour and Capital", clarified my understanding of the factors that have caused our crisis. I highly recommend it to other searchers for explanations.
My understanding of the current crisis, as discussed below, is based on these audio tapes. My analysis may contain many simplifications, even distortions, for which I would appreciate your comments:
The current economic crisis, as with previous ones since the industrial revolution, is part and parcel of the life-cycle of our capitalist economic system, based as it is on the ever-increasing need for greater and greater profits. These profits are derived from the labor of the workers who produce. The workers who produce the profits are kept barely alive, but well crushed, by the economic forces that control their lives.
To survive, capitalist businesses constantly strive to keep their costs low while keeping their prices low enough to undercut their competition. Their competitors, on the other hand, are constantly striving to lower their production costs similarly so as to gain more of market share than anyone else. To do this, they invest in more sophisticated machines and thus strive to decrease their labor costs.
But it is from living labor that the capitalist can extract a surplus value, not from the machines, which have a fixed cost and a fixed life of production. A widget machine will produce X number of widgets and no more before being worn out or supplanted by a ever more efficient machine. Living labor is critical to capitalism.
The capitalist needs a sufficient supply of workers to run his machines, so he must pay workers enough to survive and reproduce. When there are more than enough workers from the army of the unemployed to compete with other workers for the available jobs, then the capitalist can pay them the lowest wages, so long as he keeps them alive. Given an over-supply of potential workers, the workers are in competition with those who will accept the lower wages, they are the ones who will get the jobs.
The successful capitalist can extract value from his laborer's work far above that which is sufficient to pay the worker's wages and the cost of the materials needed for production. It is from that "surplus value" that the owner realizes his profit and the ability to re-invest in more capital. The sum total of the "dead" labor now embodied in the owner's machines and assets is the accumulated capital needed to keep the owner in the competitive game with other owners in the same industry.
Unless a given company has a virtual monopoly in an industry (read Microsoft), it must keep both its costs and its prices competitively low or it will be bested by a more successful competitor.
In a competitive industry, to keep its business alive, the owner must constantly work to lower his costs and increase his market share or he will lose sales to his competitors. If, however, a company is able to establish a virtual monopoly, it is comparatively free of the need to reduce costs and increase profits (again, read Microsoft) in order to have the capital to stay ahead in the field.
The obvious answer is to strive to monopolize the industry by either buying or bankrupting the competition. Thus, Lehman Brothers was bankrupted while Merrill Lynch was bought out by Bank of America.
This absorption of relatively smaller companies by larger companies is patiently obvious in the computer and banking business, indeed, one of the first thing the banks who received bail-out money from taxpayers did was attempt to use it to buy out other banks.
The danger of leaving competitors on the playing field is that they might, in the future, devise some new means of lowering costs and increasing efficiency as to put the larger owner out of business. Thus the need to constantly absorb the competition is an operant fact of life
in the capitalist system.
Why has the U.S. lost its manufacturing jobs to other countries?
Clearly, it is because it cost much less to keep a worker alive in China, Korea or India than it does in the United States. Thanks to the union movement, the standard of living -- and expectations for a standard of living -- for workers in the U.S. is much, much higher than in southeast Asia. Workers, desperate for food and shelter,will work for pennies a day for 12 to 15 hour days, even while locked inside factories.
Companies who export their production to areas where there are plenty of unemployed workers who will work for next to nothing are thus have a competitive advantage, they can lower their costs and compete in their industry -- until such time as all other companies move their factories to places where similar low cost conditions obtain and the playing field is once again leveled.
The problem for American workers is that they are now competing for jobs internationally with workers who don't have unions or enforced health and safety conditions. American workers have been losing that fight and are being increasingly absorbed into the large army of the unemployed or the under-employed in the service industries. In effect, the pay of the lowest paid worker in the world is determining not only the pay of every other worker in the world, but whether a worker has a job at all.
Naturally, the low pay rate differs from industry to industry, but the principle holds: in the global economy, the lowest paid worker sets the global standard for pay and conditions of labor for all workers.
The drive to improve technology to make each human worker produce more surplus value in any given day also serves to lower the skill levels needed for the labor force, adding to the ease of off-shoring. Skilled, experienced workers are no longer needed; skill and experience having been eliminated by the machines, thus making the world work force even more globally fungible: an unschooled worker in Taiwan can push a button just as efficiently as a worker with a community college degree in Detroit, at much cheaper wages.
The result of increasing automation is that the actual production of goods becomes increasingly mindless and alienating. Deprived of the need to exercise skill, judgment and creativity, the worker is reduced to a cog in a wheel.
Thus, the worker is not only selling his labor hours for a relative pittance, but selling off the opportunity to use his waking hours for creative, productive activity. After 8 to 15 hours of repetitive, mindless labor, who has the energy left for creative thinking, let alone writing poetry,painting a picture or even being actively involved in raising one's children?
A key struggle between workers and company owners in the past century has been the fight for the 8 hour day. It is cheaper for a company to force one worker to work 12 or 14 hours rather than hiring two workers to each work 6 or 7 hours. Thus, even at relatively high auto industry wages, forced over-time was a horrendous burden on the health and well being of the work force and was, for years, a key bargaining issue.
[Indeed, this is one of the revolutionary improvements that Venezuela's president, Hugo Chavez, is making in the lives of Venezuelan workers. Chavez is passing laws to require a 6 hour work day for 8 hours pay. Chavez is doing so expressly to provide workers with the time for self-education, creative projects, community events and interaction with the family. This generates problems for Venezuelan capitalists who must compete globally with companies whose workers are forced to work 15 hour days. Little wonder that U.S. and Venezuelan capitalists with companies in Venezuela are so aggressively opposing Chavez and his labor policies.]
But the efficiency gained by producing goods with cheap Third World labor and ever-improved technology has its own limits; with increasing automation, companies are put in the position of inevitably producing more goods than the markets wants or can absorb.
The criss of over-production, can now be seen in China. With the down- of the U.S. economy, all the goods which Asia can manufacture are no longer needed. The Asian workers are then kicked off into the army of the unemployed until such time as demand increases.
With the off-shoring of production, the capitalist owners and even nation states have realized huge, huge profits that they must re-invest to keep increasing their profits. Thus China's investments in the U.S., long the bastion of investment security.
Our U.S. and international financial companies have taken advantage of the need to invest these surplus funds, to the extent of creating phony investments to attract them: sub-prime mortgages bundled into investment
securities, duly approved by the credit rating agencies that got premium pay for their imprimaturs, along with credit default swaps, a new investment creation designed to avoid the government regulations, however minimal, of the insurance industry.
Other creative bankers simply went with low tech Ponzi schemes, such as that of Bernie Madoff. The financial industry became parasites on the off-shore production industry, blood-sucking equally from the rich and poor, but subject to the same laws of financial competition: the big fish had to swallow the little fish in order to survive, thus Bank of America buys Merrill-Lynch.
When the global economy crashed into the inevitable wall of over-pro- production, the cyclical internal contradiction within capitalism -- the push to ever more efficient and profitable production hits the wall of over-supply; the confluence of too many goods chasing too few consumers as unemployed U.S. workers cannot buy cars, even with the zero interest loans some car companies have been hawking; unemployed workers cannot make their mortgage payments, especially if they were sold as ARMS whose interest rates readjust up, not down, after the initial low interest rate bait.
The economy took an additional hit when investors discovered that their investments in bundled mortgages were not based on accurately rated risk and collateral, but were difficult to value at all. The rating companies
were in competition with other rating companies. To retain business, they gave all the dubious security paper AAA ratings.
As many mortgage applicants were not properly vetted for the ability to repay their mortgages, and given the rapidly falling value of real estate due to foreclosures, financial institutions have no accurate data on which to value the paper investments; investors have no accurate data on which to calculate the actual value of their investments: who knows how many mortgages will foreclose? Who knows, in a rapidly falling real estate market, even what the value of the houses underlying the loans as collateral really is? That is why the government is not even in a position to guess at how many "bad assets" are out there. With so many unknowns, it is little wonder that the banks are paralyzed and are sitting on their bail-out funds, fearful of making any loans at all.
How ironic that a political economist and a journalist, writing in 1891, could so accurately describe and predict the inherent, integral crisis in the capitalist economic system which is so devastatingly wrecking the lives of millions of Americans in 2009. It is, indeed, time, as Marx and Engels suggested in the late 1800's, to consign the capitalist economic system to the dustbin of history, and begin creating a system which actually serves the needs of human beings, rather than destroying them.