Review of Capitalism Hits the Fan, by Richard Wolff, part two
Reading this book leads inexorably to a conflict with a common sense assumption of everyday life: that you live in a market economy.
“The market” has become a synonym for the private sector of small firms, privately-owned companies and corporations owned by shareholders. It is frequently said, for example, that public services should be delivered by “the market” because it is more efficient. When things go drastically wrong – spiralling CO2 emissions or worldwide economic recession – “market failure” is blamed.
But the term “market” is fundamentally misleading. The “free market” never sold anything. The organisations that populate the private sector are nothing to do with markets.
To take the example of the most dominant of organisations, corporations. Decisions about their affairs are taken by boards of directors, a tiny elite of 15 or 20 people, who are themselves responsible for maximising financial returns to the corporation’s owners, the shareholders. The immensely more numerous workforce have no say in the decisions, but have to implement them.
In its relations, with other companies, the corporation will try to achieve a monopoly position, destroying competition, and thereby markets. Often it is, ironically, the state that introduces anti-monopoly legislation, and tries, through outside interference, to make sure market competition happens.
The distinction between how production is organised and markets was vividly illustrated by Herbert Simon, the 1978 Nobel laureate in economics. He said that if firms were represented by the colour green and markets by red, the economy would consist of “large green areas interconnected by red lines” rather than “a network of red lines connecting green spots”. We live in an “organizational economy”, not a “market economy”.
That “the market economy” is a myth does not mean that markets don’t exist. The 2007/8 credit crunch was spread around the world by markets. Prices for mortgage-backed securities collapsed, the wealth of banks and others took a huge jolt. Credit was withdrawn from individuals and businesses, and so the disaster was spread. Markets are important, but they are only one part of the story.
The Simon analogy was recounted by Ha-Joon Chang and it shows the convergence, as well as the point of departure, between Keynesianism and Socialism. To a Keynesian like Chang, the realisation that the economy is largely planned within corporations, validates state economic planning. “The question, then is not whether to plan or not,” he writes. “It is what the appropriate levels of and forms of planning are for different activities.”
But to a Socialist like Wolff, it replaces or augments a debate about how free the market should be, with a new debate about how production should be organised. He agrees that we live in an “organizational economy” but wants to change that organisation.
“Our economic system organizes production in ways that do more damage than markets,” writes Wolff.
Boards of directors of corporations receive, and decide what to do with, the profits from the goods and services produced by workers. The workers themselves – the majority in each enterprise – do not get the profits that their labour produces or any say in what is done with that profit.
As noted in Part One, the soaring profits of corporations lay at the root the economic crisis. But those soaring profits were the result, in part, of stagnating wages for the majority. And the stagnating wages were not a consequence of markets – they didn’t stagnate because productivity stagnated – but because of the inequality of power between corporations and those whose livelihood depends on working for them.
And, as Wolff maintains, boards of directors, as a normal part of their job, will evade and try to destroy government regulations designed to limit corporations’ freedom to do as they want. Corporate lobbying behind laws which legalised speculation in commodities and the creation of instruments like credit default swaps, is a blatant example. All this has no relation to markets, but how the economy is organised.
This leads to Wolff’s answer. Change the profoundly undemocratic way that the economy is organised. Make employers and employees the same people. Alter job descriptions so that employees would work Mondays until Thursdays on their job, while on Friday, everyone would assemble to take decisions for their firm as their collective board of directors. In short, get rid of capitalists.
With this economic democracy, Wolff believes, the economic slump we are living through wouldn’t have happened. Worker-run companies wouldn’t have stopped wages rising, as actually happened since the ‘70s. Without stagnating wages, neither corporate profits nor household debt, vital causes of the financial meltdown, would have skyrocketed.
Enterprises run by their workers would also be less likely to fire workers, repossess homes or outsource production overseas, says Wolff. They would also not be irresistibly hostile to government regulations because the worker-directors are also citizens and residents.
This is Wolff speaking. Look out for line about 12 sculptors in a brick building
But Wolff’s commitment to economic democracy does not make him hostile to markets per se. “I am not saying that markets must never be used as ways to distribute some products and some productive resources,” he writes. “That would simply be a reverse fundamentalism. Rather, let’s recognise that markets have strengths and weaknesses and act accordingly.”
There is an unmistakable similarity between Wolff’s proposals and the recommendations of Richard Wilkinson and Kate Pickett in their book The Spirit Level. Both sets of ideas are about expanding employee ownership and control throughout the economy with the help of financial incentives, a gradual approach to a fundamental transformation. Wolff thinks that worker-run enterprises should compete with traditional capitalist enterprises, giving consumers and workers a real choice.
It is interesting that Wolff, a self-proclaimed Marxist economist, and Wilkinson and Pickett, both epidemiologists who are empirically looking for ways to reduce the effects of economic inequality, should come to very similar conclusions.
Two questions arise from Wolff’s plan for economic democracy. Firstly, would it reduce social problems in ways he says it would? Secondly, would it deal with the chronic capitalist instability – boom, followed by bust – which has, as Wolff says, seen thinkers who are by no means its enemies, question capitalism’s long-term future.
In The Spirit Level there is a list of companies, that already now, are worker-run. The London Symphony Orchestra, United Airlines, the Polaroid Corporation, and the John Lewis Partnership, (incorporating Waitrose), are among them. So it’s hardly unheard of.
It seems axiomatic that a worker-run company would be better than a capitalist enterprise, run for the benefit of its shareholders, in at least one respect – the way it treats its workforce.
If you want to use Marxist terms, there is no longer a surplus gleaned from labour to be distributed to shareholders. That surplus, or profit, goes direct to the workforce. So they should be paid more. A worker-run enterprise is unlikely to pay astronomical executive salaries because wage levels will have to be agreed by the workforce, and so these enterprises will lean towards far greater economic equality (which is why The Spirit Level authors are in favour of them). They would put more attention into staff training and wouldn’t resort to outsourcing to developing countries because the labour cost is so much cheaper.
Thus, to Wolff, one major cause of capitalist instability – the conflict between employer and employee – is removed by worker-run companies.
Had they existed throughout the economy, “US history since the 1970s would have differed greatly,” writes Wolff. “Workers appropriating their own surpluses would likely NOT [Wolff likes capitals for emphasis] have frozen their real wages (hence no exploding consumer debt). Workers who collectively appropriated their own surpluses would likely NOT have given immense new payouts to top managers. The distribution of personal income would thus NOT have become so unequal across the last thirty years. Workers appropriating their own surpluses would likely NOT have devoted huge portions of them to move their jobs overseas. And so on.”
It’s important not to minimise this, it’s a significant difference with capitalist “business as usual”. It’s an end to exploitation for one thing. But, at the same time, it’s NOT (sorry) all the difference in the world. This is because the way production is organised takes place, in this economy, through a market. The market economy may be a myth, but markets do condition behaviour in significant ways.
Worker-run or non-profit enterprises are not immune from this conditioning. They have to make a surplus, they have to pay wages, they have to survive, even if they don’t cream off profit for shareholders. It’s when Wolff says that worker-run enterprises would be far more aware of the consequences of what they do, environmentally and socially, that you have reason to be doubtful. “Workers who were also their own board of directors would be less likely to disregard the effects of workplace decisions on surrounding communities (where the workers and their families themselves live),” writes Wolff. “Such workers would aim more for securer jobs and rising wages than for rising profits or market shares.”
But why this greater sensitivity? Is there any empirical reason to think it would happen? To take an example from the real world, consider the behaviour of Waitrose, the UK upmarket food retailer, which is part of the employee-run John Lewis Partnership. There is no evidence that it is more sensitive to the plight of competing small businesses like greengrocers or butchers, than a capitalist retailer. They are competition, and in a market, competition should be destroyed. The resultant increase in market share would lead to greater salaries for the partners in John Lewis, which trumps any sentiment that may exist from those “partners” living in local communities which may be diminished by small shopkeepers being put out of business.
The Spirit Level authors are aware of this weakness. “It might also be said in opposition to employee-ownership,” they concede, “that it does nothing about the basic amorality of the market. The desire to earn a bigger profit would still lead companies to act in anti-social ways, however they were controlled.”
Their answer, that in employee-owned firms people have more control over their work, and can raise awkward questions, is not convincing. We are not talking about whistle-blowing on blatantly unethical activities, but unavoidable survival techniques in a market. Eat or be eaten.
Wolff does address this issue, though only it seems implicitly. Implicitly because in the picture of the new economy he sketches, the market is circumvented by what he calls “democratic social decisions”.
Worker-directors would share power to decide how much work should be done, and how the profits will be used across society with several other “stakeholders”. These groups would comprise workers not directly responsible for production but enabling it to happen. Sales staff, secretaries, bank workers etc. Then public sector workers would have a say. “Besides such workers, local, state and national communities, would also join in democratically co-determining job conditions, the sizes of profits and their disposition,” says Wolff.
Woof! That’s a lot of groups. There’s nothing, in theory, impossible about this, but it does place you squarely in the quicksand territory of what precisely do you replace capitalism with? If you don’t any more rely on the consumer voting with their feet to indicate preference – I don’t like this product, I really like that – how are tastes and desires to be communicated and acted upon? By endless meetings? This is not to argue that desires aren’t influenced, or even created, by advertising and the mass media, or that the production of goods isn’t impelled by capital and its insatiable need for profit. But it does mean that in a post-capitalist society, the desires of the consumer are not going to disappear and have to be articulated. Unless we all want to live in a Soviet central planning nightmare?
The other question is whether Wolff’s changes would remedy capitalism’s chronic instability, its recurring tendency to go into recession. He argues that the conflict inherent in capitalist production, between employer and employee, would be solved by the conversion to worker control. Another reason for instability, that corporate boards of directors undermine and destroy government regulations, would also be dealt with by employee ownership.
But it does deeper than that. Wolff says that university economics courses used to, up to the mid-1970s, teach about the business cycle. The idea that, under capitalism, the profit from production has to be reinvested, creating more goods and services, which eventually cannot be absorbed by the consumer. This leads to recession, the destruction of jobs and share values. And then, once the destruction had happened, the process can begin again. But the idea of the business cycle – the polite name for capitalism’s instability says Wolff – was forgotten as Milton Friedman became the economic guru, and neoliberalism became dominant.
Now the business cycle is back in vogue. In the draft speech that David Miliband would have given had he won the Labour party leadership, he was due to say, “We did not abolish the business cycle. We should never have claimed it. You can’t in a market economy.”
You can’t abolish it, but you can try to evade it. Which is exactly what Alan Greenspan of the US Federal Reserve did in 2001 when, in response, to a stock market crash (which should, if things were allowed to take their natural course, have led to recession) he cut interest rates below the rate of inflation and increased the money supply. Thus creating the house price bubble which led to you know what. All by trying to avoid the downside of the business cycle, through government action. David Miliband had the wrong mea culpa.
So the business cycle is real and relevant. The question is whether the destruction of jobs and profits it entails was completed by the recession of 2007/8 or whether we are still in the middle of that destruction.
If the business cycle is a fact of capitalist life, would the changes envisaged by Wolff bring an end to the business cycle? Perhaps, but if the worker-run enterprises he cherishes see their role as accumulating profits, increasing market share, and expanding, as for example John Lewis does now, then you have all the ingredients for the continuation of the business cycle.
You can have sympathy for what Wolff is trying to do in Capitalism Hits the Fan. The Left is rudderless and ambivalent. It offers ineffectual opposition that fails to convince, partly going along with changes proposed from the Right, but complaining the changes are too quick or too brutal. It is in intellectual disarray. Wolff’s idea of worker-run enterprises spreading throughout the economy, would give the Left something to grasp, something that would have to be implacably opposed by the Right. It is also a creditable attempt to sketch how we get from Here to There. But there are questions which Capitalism Hits the Fan alludes to, but does not convincingly answer.