Capitalism Hits the Fan

A documentary film entitled “Capitalism Hits the Fan” was shown at this year’s IPA annual meeting. It begins by explaining why today’s global economic meltdown is no mere financial crisis. It is rather a systemic crisis rooted in the conflicted relation between employers and employees across all capitalist enterprises in the US. It flows from Main Street as much as from Wall Street. It engulfs households, enterprises, and the government. It is a crisis of capitalism and not merely of finance.
 
To show this, let’s take a brief look at US history. For the 150 years from 1820 to around 1970, workers’ average productivity rose every decade. The hourly output of commodities rose because workers were better trained, had more and better machines, were more closely supervised, and had to work harder and faster. Over those same years, workers’ real wages (what their money wages actually afforded) also rose every decade. Because productivity rose faster than real wages, capitalists’ profits also rose faster than wages.
Thus our working class enjoyed 150 years of rising consumption as our capitalists enjoyed rising profits. No wonder US workers would come to define individual self-worth and to measure success in life according to the standard of consumption: it kept rising. Successive generations of parents promised their children better standards of living and proudly kept those promises. Capitalists and workers could join in celebrating American exceptionalism since no other capitalism had such a long history of rising consumption.
 
But all that changed in the 1970s and never returned. Real wages stopped rising as U.S. corporations (1) moved operations abroad to pay lower wages and make higher profits, (2) replaced workers with machines (especially computers), and (3) hired ever more US women and immigrants at lower wages than men received. Real wages in the later 1970s exceeded real wages today.
 
Meanwhile, productivity—led by computerization—kept rising. Simply put, since the 1970s, what employers got from each worker kept rising while the real wages paid to each worker stagnated. The difference between rising outputs and stagnant wages—the source of capitalists’ profits—grew bigger and bigger. As employers’ profits exploded, those entitled to portions of those profits have done well: the managers they hire, the shareholders who get dividends, and so on. The specialists who literally handled each employer’s mushrooming profit—the finance industry that invested it, lent and borrowed it, managed it, etc.—thereby got growing portions of the rising profits.
 
What happened to a working class that measured individual success by rising consumption when it no longer had rising wages to pay for it? It could not and did not forego rising consumption. It found two other ways to cope and thereby laid the groundwork for one part of the current crisis. First, if individuals’ real wages per hour stagnate, earnings can rise if each household does more hours of paid labor. Thus, millions of American housewives entered the paid labor force over the last 30 years while their husbands took second jobs and both teenagers and retirees found paid work too. Today, we work on average 20 per cent more hours per year than workers in France, Germany and Italy.  (see attached pdf for graph)
 
With more household members out working, new costs and problems beset American families. Women wage-earners needed new clothes, a second car, and services like daycare, prepared food, psychotherapy, and drugs to handle new pressures and demands. Such extra costs soaked up women’s extra income; not enough remained to fund rising household consumption.
 
Moreover, households were badly strained by the exhaustion and stress of overworked spouses, alienated children, and growing rates of divorce, alcoholism, and drug dependency. In such conditions, the American working class took another step to maintain rising consumption levels. It borrowed money in quantities unequaled by any working class anywhere ever. Soaring household debts proved another part of the groundwork of today’s crisis.
 
The US business community then grasped a fantastic double opportunity. First, it could reap huge profits from the combination of flat wages and rising productivity. Second, it could lend a portion of those profits back to a working class traumatized by stagnant wages to enable it to consume more. Instead of paying their workers rising wages (as in the 18201970 period), employers (directly or through the banks) flooded very profitable loans onto desperate but also often financially naive workers. For employers generally, and especially for financial corporations, this seemed truly a golden age, the validation of capitalism’s celebrated magic.
 
Underneath the magic, however, workers were increasingly exhausted, their families were disintegrating, and their anxieties were deepened by unsustainable debt levels. At the same time, banks, insurance companies and other financial enterprises profited by taking ever greater risks and by designing and selling ever more questionable securities to systematically misinformed investors. In those heady times, non-financial industries also took bigger risks believing that “the new economy” touted by Alan Greenspan would only ever expand. Before long, workers by the millions would begin to default on their debts; then, too, corporations did—the credit house of cards would then collapse, housing prices would tank, and recession would descend. The system had long celebrated the idea that this could not happen and so it would not happen. When it did, nobody was prepared.
 
Since mid-2008 the crisis has deprived millions of their jobs, income, homes, and wealth in the trillions. A desperate population demanded explanations and solutions, changes that would fix the economic disaster. It dumped Republicans and hoped for an economic revival from Obama.
 
Bush and then Obama poured trillions into the finance industry (guaranteeing the debts of and/or investing in the nation’s biggest banks and insurance companies). Obama then did likewise in organizing the bankruptcies of Chrysler and General Motors. The steps aimed to “kick-start the economy” or to “get the economy moving again” or to “fix the credit markets”—in short to resume the happy state of the economy before the crisis hit in 2008.
 
This strategy is absurd because were such resumption to succeed (far from certain), it would only return the economy to the web of problems that produced the crisis. This strategy fails to take account of those problems and their historical depth. Workers in the US are now retrenching on expenditures as they try to hunker down for what they fear will be a long period of unemployment, lost pensions and decimated retirement accounts, and insecure jobs and incomes. As they spend less, economic recovery is undermined. The Obama program hopes to turn them around so they resume borrowing and spending, but that cannot happen. They are all tapped out; that’s why they defaulted on all those loans that set off the crisis. If they somehow resume borrowing and spending, they will surely again default and we will be back to where we are now.
 
An exhausted, anxious, and over-indebted working class cannot sustain (1) a corporate sector facing reduced mass spending, struggling with its own excessive debts, and unable to get credit as in the past and (2) a government now adding trillions to its national debt that will require more taxes or less provision of government services to that same working class. This is a serious crisis that requires basic structural change. No superficial, back-tobusiness-as-usual program of throwing trillions at big banks, big insurers, and large auto companies to boost the stock markets, get every happy and spending again, will likely work. Short-term upswings just like that produced repeated crashes during the FDR years in the 1930s. Painfully, people then learned just how deep and serious that depression was. Will we need to rerun that tragic scenario and pay its heavy price in extended suffering again now?
 
Another Obama strategy favors re-regulating banks, the credit derivatives markets, executive pay packages, and so on. Blaming the crisis on deregulation since the 1970s, these strategists think reregulation is the solution. This strategy makes little sense once we examine why and how it failed in the past. In the 1930s, the last time capitalism hit the fan, regulation was part of FDR’s New Deal. Social Security, unemployment insurance, restrictions on bank and insurance company activities, and business tax rules all limited what corporate boards of directors could and could not do. The regulations did not seem to work; the Great Depression lasted a decade and only World War II finally overcame it. More importantly, the regulations angered boards of directors because they impeded profitability and growth. The boards thus had strong incentives to evade, undermine, and, if possible, destroy the regulations. From the beginning of regulations, many of those boards spent lavishly to buy Presidents and Congresses, to fund think tanks, and to shape the mass media in ultimately successful campaigns to undo almost all of them.
 
The crucial fact about the 1930s regulations is that they never took from boards of directors the freedom, incentives, or opportunities to undo those regulations. The regulations left in place an institution devoted to their undoing: boards of directors who, as the first appropriators of enterprises’ profits, had the resources to realize their projects. The regulations then had, like those proposed now, have a built-in self-destruct button.
 
A reasonable solution now must learn the lessons of past capitalist crises. Today’s government bailouts, regulations, etc. must not reproduce that self-destruct button. Boards of directors must be deprived of the incentives and resources they have always used to negate the rules and controls that aim to make economic activity serve social needs. This requires a basic change: the workers in every enterprise should become collectively their own board of directors. For the first time in American history, the workers who depend on a socially regulated economy would then occupy the position of receiving enterprise profits and using them to make regulations succeed rather than sabotaging them.
 
This proposal for workers to collectively become their own board of directors also democratizes the enterprise. It gives the majority in every enterprise the power to decide what is produced, how and where it is produced, and what is done with the proceeds. Such economic democracy inside enterprises is not only a necessary crisis response; it also fosters real democracy across society as workers will demand similar democracy in the communities where they live. Finally, the desire of the mass of people to hold meaningful and decently paid jobs, to live and also work democratically, would then no longer be undone by their conflict of interests inside enterprises with the minority of boards of directors and major shareholders. In the capitalist system, those boards and shareholders have the power, incentives, and resources to both generate crises and resist effective means to prevent them. That system is the underlying cause of and problem for today’s global crisis. It’s long overdue for a basic change.
 

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