Review of Capitalist Hits the Fan: The Global Economic Meltdown and What to Do About it
By Richard Wolff
There is a word that recurs repeatedly throughout this collection of 60 or so essays by the American economist Richard Wolff:systemic. Wolff is a Marxist economist and the Monthly Review on whose website the essays first appeared, is a Marxist journal (founded in 1949 with help from Albert Einstein). Systemic, you might say, is a typical Marxist word.
But the book is not a journey into impenetrable forest of Marx-speak. Wolff’s language belies his background both as a Marxist and an economist. The book is lucid, readable and jargon-free.
Here is Wolff speaking:
Systemic sounds forbidding but its meaning is not complicated. It means that the economic crisis we are in the middle of, that began in the US but spread throughout the world, is not the result of human weakness. But of people rationally pursuing the aims of the organisations they work for.
You can discard greed, gullibility, recklessness and raging testosterone. What you can’t discard is capitalism.
As Wolff says, the Right and the Centre in politics will blame human weakness because they cannot blame the economic system. If they did, they would cease to be right-wing or centrist. Their explanation is pre-determined by what they believe. You can’t blame something you want to preserve.
The unique contribution of the Left could and should be to insist on systemic explanations and solutions. The Left could not and should not be hamstrung in its thinking by any commitment to preserve the economic system
But blaming human weakness is like a magnet to which everyone is drawn. Even a critical group outside the UK political consensus, like UK Uncut, will attribute our plight to “reckless banks”.
This, to Wolff, is finger pointing. Because capitalism is not just big banks, or big business but a “system that ties together all streets, businesses, workers, householders and the government”.
The economic crisis is merely the symptom. The disease is capitalism.
Wolff’s explanation starts from the class conflict inevitable in capitalism. You don’t have to believe in this class conflict for it to exist. Employers, naturally, want to keep wages down as they do every type of cost. Employees, equally naturally, want wages and other benefits, to rise. That’s a conflict.
In the US this conflict has erupted sometimes into open struggle but a lid was kept on it by the fact that wage keeping rising for 150 years. However, after the mid-1970s, wages stopped rising. This momentous fact, says Wolff, is rarely appreciated.
The statistics are startling. From 1947 to 1972, average US wages rose by 75 per cent. After 1975 they stopped rising, actually dropping by 6.5 per cent if a shorter working week is taken into account. The average US consumer could buy less with their wages in 2005 than they could 40 years before.
While wages stopped rising, productivity – output per worker – went speeding on ahead. It rose by 75 per cent between 1973 and 2005. US employers got 75 per cent more goods and services per worker, while the wage bill hardly rose at all.
Oscar Wilde said that the only thing worse than not getting what you want, is getting it.
Well, US employers got what they wanted, soaring profits. But there lies the roots of the current economic crisis.
US workers responded to the abrupt ceasing of rising wages but borrowing at a rate unprecedented in history. They ran up enormous credit cards bills and mortgages, often selling part of their houses back to lenders, to live on the proceeds, so-called reverse mortgages.
This process was positively encouraged by the US government, which cut interest rates to below inflation for three years after 2000, in order to avert a recession.
The soaring profits made by corporations were partly deposited in banks, which make money from loaning out their deposits. The banks, also profit-making corporations operating in a competitive market, invented new financial instruments to profit from these surpluses.
For the banks, profits were the carrot and markets, other competing banks, were the stick.
In this way, workers were squeezed twice. Once as their wages stagnated as productivity rose, and then by the interest on the loans that enabled their consumption.
Mortgage-backed securities, collaterized debt obligations (comprising mortgage, credit card, corporate, and student-loan debt) and credit default swaps were created. All kinds of organisations – including governments and charities – invested in these securities on the stock market because they offered high returns but were thought to be low risk.
“The financial profits depended on the rising surpluses that depended on the stagnant wages,” says Wolff. “Financial profits also depended on the flip side of stagnant wages, namely massive worker borrowing. Because rising consumption had become the measure of personal success in life, wage stagnation since the 1970s rendered most US workers extraordinarily vulnerable to new consumer credit offers. Enter the banks relentlessly pushing credit cards, home equity loans, student loans and so on. Workers undertook a record-breaking debt binge.”
Rising interest rates increased defaults on loans that caused the financial instruments, based on debt, to lose value in the market. And so began the bust that followed the boom. The “credit crunch” was spread all over the world by the organisations that had invested in the MBSs and CDOs.
Note that the only possible point at which greed enters the picture is in the behaviour of American consumers. They could have responded to stagnating wages by cutting back on consumption (which thereby would have precipitated a different kind of economic crisis). Perhaps they were “greedy” not to. But in Wolff words, consumption “had become the measure of personal success in life”. Consumption was the constant message of advertisers, of lifestyle coaches, of business ideologies, and even trade unions. If greed is to blame, there are an awful lot of people out there telling you to be greedy.
But if you reject the systemic explanation for the economic crisis, what are you left with? You are back to human weakness and recklessness, whether of bankers or misguided consumers. Then the answer is either to replace the bad, reckless people with good, sensible people or hope for a general cultural renaissance.
Either is conservative. And the definition of a conservative explanation is that economic problems are not caused by the economic system.
“The basic conservative message holds that the current explanation is NOT connected to the underlying economic system,” says Wolff. “The crisis does NOT emerge from the structure of the corporate system of production. It is NOT connected to the fact that corporate boards of directors, responsible to the minority that owns most of their shares, make all the key economic decisions while the enterprise’s employees and the vast majority of the citizenry have to live with the consequences. The very undemocratic nature of the capitalist system of production is NOT related to crisis in the conservative view”.
So for conservatives the search is for an explanation that doesn’t blame what they hold most precious, namely corporations and markets. Step forward, human beings who have always been, it has to be said, a bit flaky.
The real reason for the economic crash, says British Conservative MP Jesse Norman, is that people and markets did not behave as economic textbooks said they should. Banks hyped 125 per cent mortgages on a credulous public. Politicians, regulators and bankers were not aware of how hard how “humans” find it to assess risk and their well-known (though apparently not well-known enough) tendency to prefer a biscuit now and not think about how their tooth will ache in the future.
Consumerism – the drive to excessively buy goods in the here and now – is what Norman is lamenting. But it is a little late for regrets. Consumerism has been the reason for working for decades. Rising wages that make possible more consumption is the reward for tolerating the work discipline of capitalism and its profoundly undemocratic method of production. It made taking orders and serving purposes that are not your own, bearable.
Consumerism, as Wolff says, is not some strange quirk or fatal flaw in the human race. It was the glue that held together capitalism in the US and in other countries. In economic terms, labour was the burden for which consumption enabled by wages was the compensation. Almost everybody, the media, economists and trade unions accepted, and trumpeted, this deal. Rising house prices in the US and UK were just another form the glue took.
But the economic crisis has exposed how this glue has lost its stickiness. US employers haven’t needed the deal for three decades and now US workers have exhausted ways – such as borrowing - to postpone the results of its dissolution.
In a strange twist of history, what is becoming more apparent is something that was supposed to have been banished when Marxism was practically and intellectually defeated: exploitation. Back in the 1970s, when neoliberalism was becoming predominant, first in Britain, the idea gained currency that the basic problem was that trade unions were too powerful. That power, or interference, meant that workers automatically got pay increases even when productivity went down. What they were paid was arbitrary.
One of Margaret Thatcher’s key advisers was on trade union law was a union negotiator called Leonard Neal who had pioneered the practice, in the oil industry, of making pay increases dependent on productivity increases.
Thatcher (and Reagan) won. Unions were vanquished. Theoretically, the result should have been that, without trade unions interfering in the market, pay was inextricably linked to productivity. But that wasn’t what happened.
Here is Wolff talking about the fact that hourly wages in the US fell between 2005 and 2006 at the same time as productivity rose. “Workers were not only denied any of the extra output they produced, but their reward for increased productivity was to get even less than they did before they became more productive.”
Britain follows a similar pattern to the US. A 2009 Trades Union Congress Report, found that Britain was suffering from a “wage squeeze”, in contrast the “profits squeeze” of the 1970s. As in the US, the share of national income going to profits has shot up, while personal debt has exploded. Average personal debt was 45 per cent of income in 1980. In 2007, it was 157 per cent. And after 2000, wages in Britain have risen by 0.9 per cent while productivity has averaged 1.6 per cent.
There’s a word for the gap between the value of what workers produce and what they get paid. It is exploitation. And, as Wolff says, it is getting worse.
The problem is not just that some people get millions of pounds for “socially useless” activities. More than that, people are not even paid according to their contribution to profit, their productivity. In economic jargon, their “marginal revenue product”.
The fact that the average pay of FTSE 100 chief executives went up by 13 per cent in 2004/5, 28 per cent in 2005/6 and 37 per cent in 2006/7 says nothing about the profitability of their companies, or their own productivity.
What it reflects, as the International Labour Organization concluded in 2008, is their “dominant bargaining position”
The book Rich Britain, shows what that bargaining position is. Theoretically independent remuneration committees that set chief executive salaries are stuffed full of former chief executives of the same company or current chief executives of other companies. “How about a 35 per cent pay increase? Oh, go on then”. Adam Smith’s invisible hand is nowhere to seen, unless it’s scratching backs. Their pay is as “arbitrary” as any Sheffield steel worker in 1978. Only it’s a lot more
This is not “market failure”. It is not, as the Korean economist Ha-Joon Chang claims, due to market manipulation. It is not a product of what Jesse Norman’s desperate imagination calls, “rigor mortis economics”. It is simpler. Markets don’t determine wages, power does.
The lesson for ordinary people should surely be ‘get what you can’ because you aren’t going to get what you deserve. But, in practice, the bargaining position, or power, of organized labour that enabled the relative equality of the post-war era up to mid-70s to happen, is not likely to return. That’s why Wolff’s answer to the fact that the inevitable class conflict of capitalism is seemingly permanently tilted in the employer’s favour, is to radically change the rules of the game.
He wants to make workers their own bosses. We will consider this solution is the second part of this review. But saying what’s wrong with capitalism is far easier than putting a workable alternative in its stead. As the placard said, “Abolish capitalism, and replace it with something nice".