Is the radical 19th-century economist's dire prediction finally beginning to come true?
Last fall I managed to watch a wonderful three-part BBC documentary, hosted by Stephanie Flanders, titled MASTERS OF MONEY. Originally aired a year before in fall 2012, it covers the lives and ideas of three of history's greatest economic thinkers: John Maynard Keynes, Friedrich A. Hayek, and Karl Marx. The purpose of the series was to show how these three men's ideas were relevant to the recent era of economic crisis from which we have yet to emerge.
While all three episodes were excellently done, the third and final episode on Marx was by far the most eye-opening. In the introduction to the episode, Flanders notes "You know what? If you're looking for an explanation of the global economic crisis, he's a surprisingly good place to start. With everything going so wrong, you have to wonder: Is Karl Marx turning out to be right?"
=
=
=
=
=
=
Those who have studied Marx know that he wrote far, far more about capitalism than he ever did about communism. And most of the talk on communism came when he was quite young - before he took up the hard economic theory used to write Das Kapital. Unfortunately, the history of 20th century 'Marxist-Leninist' political regimes (and their ultimate economic failures) served to tarnish the 19th-century thinker's reputation, causing most economists to ignore the Marxian analysis of capitalism altogether.
But then along comes 2008 - and with it, the Marxist critique of capitalism once again came out into the open. And this time, the focus was on the capitalist part of Marx's work. The reason? Marx long held capitalism to be a fundamentally unstable economic system, prone to boom-and-bust cycles, unemployment and inflation - and occasionally, a big crisis that caused the system to fall apart completely for an extended period of time.
About halfway through Flanders' documentary we get an introduction to two elements of Marxian crisis theory: the "profit squeeze" scenario and the "underconsumption" scenario. Profit squeezes are caused when there is a shortage of labor that drives up wages and cuts into profit margins. This most commonly occurs when the economy overheats and creates "too many" job openings for the labor force to fill. As employers chase a dwindling pool of workers, wages rise faster than productivity, causing capital's total share of the pie to fall.
On the other hand, if you have a "loose" labor market with too many workers chasing too few jobs, it puts downward pressure on wages. While employers may appreciate the extra profit margins from the lower wages, there is a problem they will ultimately encounter: Workers also are consumers, whose wages form most of the basis for aggregate demand in the economy. When the entire working class (by "working class" I am including salaried middle-class professional workers, too!) experiences a wage squeeze, the result is that products go unsold because the average consumer's paycheck is too small. That leads businesses to scale back production, which also causes a recession. (The classical term for an underconsumption crisis is "overproduction.")
There is one important difference between a profit-squeeze scenario and an underconsumption scenario, though. Profit squeezes have a self-correcting mechanism: falling investment rates and slowing growth rates eventually loosen the labor market and cool wage growth down, OR the employers recoup the extra revenue through higher inflation. On the other hand, an underconsumption glut instead involves a vicious feedback loop, that Keynes would later recognize as the "Paradox of Thrift": as companies lay off workers due to underconsumption, that further undercuts consumer demand because now the newly unemployed have no paychecks to spend. And furthermore, as long as the labor market remains loose, wages will stay low - depressing demand and further delaying a return to full employment.
However, there is a little trick that the capitalist system can use in order to temporarily mask over the underconsumption problem caused by stagnating wages: greater and greater levels of personal debt by consumers. And that's exactly what happened in the years leading up to the Great Recession: in order to maintain the façade of middle-class prosperity in the face of a wage squeeze, households were encouraged to borrow more and more, and even use their own home equity as a credit card. It allowed employers to pay low wages while workers would spend as though they were being paid high wages - which had the effect of artificially inflating both profitability and economic growth.
The trouble is, once the bubble burst and consumers were forced to pull way back on their spending, it turned what had been a "normal" recession into a huge tailspin in the fall of 2008. That, in turn, dried up the credit markets to businesses, and everything came quickly spiraling down.
When I first finished watching Flanders' summary of the Marxian theory for the crisis, my immediate reaction was "Whoa! That sounds EXACTLY like what I'd logically expect to happen!" Somehow, the "broken clock" of an economist named Karl Marx happened to be right about the economy this time. What can he say about other stuff that might be correct as well?
=
=
=
=
=
Marxists and other "radical political economists" like to talk about the history of U.S. capitalism by breaking it into different eras, each of them ranging from one or two decades to a half-century or more. Each era has its own set of institutions and norms under which capital accumulation occurs, and these periods are called "social structures of accumulation" or SSAs.
The popular struggles that occured here in the 1930s gave rise to a system of stronger labor unions, tougher regulation of big business, the creation of Social Security, the minimum wage, unemployment insurance, and highly progressive taxation (the top bracket for income taxes was above 90% throughout the 1940s and 1950s). The more regulated, worker-friendly capitalism of postwar America prospered for 30 years, until troubles began to appear around 1973.
But there were several factors pointing toward capitalist anxiety by the 1970s: oil shocks and food shocks were causing stagflation to set in. A prolonged period of low unemployment beginning around 1964-65 seemed to be giving workers "too much" bargaining power, resulting in excessive wage demands and even deteriorating discipline on the job. The combination of Vietnam war spending and new domestic social programs had to be paid for somehow. And rapid economic growth in Western Europe and Japan was beginning to challenge American dominance in the global marketplace.
This is when major business and financial interests went on the offensive, using their money and influence to pull politics rightward and also taking a more hostile stance toward organized labor. After Reagan's election in 1980 the minimum wage was allowed to erode with ongoing inflation. The early 1980s recession gave the bosses the weak labor bargaining position it needed to begin a ruthless assault on unions. Taxes on the rich and on capital-based income were slashed. Financial markets were gradually deregulated, culminating in the Clinton-approved repeal of Glass-Steagall in 1999.
This, combined with a similar shift in many other countries toward "freer markets" and more capital-friendly economic policies, has been called the neoliberal SSA by many radical economists. It has gone on for nearly 40 years now, and has brought ever-greater inequality and increasing concentrated corporate and financial power. They have increasingly wrapped their tentacles around the political process - a phenomenon aided along by the most "pro-corporate" Supreme Court in modern history.
But now, capitalism has had a deep systemic crisis once again - and people are asking some more fundamental questions about our economic future, about inequality and fairness, and about the sustainability of the planet. As some modern economists, like Thomas Piketty, have pointed out: Nothing can be expected to change for the better until or unless the external pressures for change can truly bust through and confront the establishment.
Or, alternatively: could this be the golden time to once again look for a fundamental alternative to capitalism? Something that would solve the root problem of one class exploiting another?
=
=
=
=
=
The history of Cold War politics in the West, as well as the eventual total failure of Soviet-style 'Communism', has had an obvious chilling effect on efforts to criticize capitalism and suggest a systemic alternative. Yet the issue has come up again over the past few years, given how horrendous the state of both the national and global economy has become.
While the BBC documentary suggested that no known practical alternative to traditional capitalism exists at this point, I have always found the notion to be a bit silly. The fact is that there is a rich history of non-corporate, non-state cooperative enterprises in practically every nation of the world, including the U.S. These businesses are owned and managed by the people who work in them everyday. Decisions about what to produce, what technologies to use, how to market products and how to allocate business profits are voted upon by every member of the co-op.
It is common to trumpet worker co-ops as an "alternative to capitalism." However, the historical fact is that the most successful self-managed cooperative enterprises are usually operated in a way that makes them look rather like an alternative version of capitalism! Indeed this is how the world's most famous worker-owned economy - the Mondragon Cooperatives in Basque Spain - ultimately operates: There is a substantial pay differential within the company, but NOTHING like the crazy inequality of U.S. corporations. Typically the highest-paid member makes about four or five times as much as the lowest-paid member - while a ratio of more than 1,000 to 1 is quite commonplace in the biggest American companies today.
When it comes to running the business, the workers must think sort of like capitalists and make careful, prudent decisions about how much pay to take home. Remember: the business needs to make enough profit to maintain and upgrade its capital stock - plus a share that typically goes into the employees' pensions. The various businesses in Mondragon coordinate their finance and personnel to a significant degree, and no company is allowed to compete against another Mondragon company. While the system has hit some roadbumps along the way (its home appliance manufacturer, Fagor, went bust in late 2013), the fact is that Mondragon has weathered the European crisis far better than the rest of Spain. So the idea of (an alternative to OR a fairer and democratic form of) capitalism is not as quixotic as many would tend to assume.
The idea of a "worker-managed capitalism" seems to be perhaps the most powerful tool we have available today when it comes to building a fairer economic system that truly rewards hard work and contribution - and where everyone plays a role in making decisions over the means of production. It offers hope of a productive economy that finally begins to overcome the classic Marxian conflict between bosses and workers. And it extends the principle of democracy to the place where we spend the majority of our active adult lives: our jobs.