Re-post: How capitalism has become too successful for its own good

Given that the Guardian newspaper has belatedly cottoned on to the idea that stagnating wages, rather than reckless banks, are the ultimate cause of our never- ending economic troubles (and started quoting David Schweickart), I thought I'd repost an article from January 2012.

I think it encapsulates an integral part of the impasse we are now facing. Good that other people are now catching up, albeit two years late ....

"There are many kinds of capitalism. Free market capitalism, which easily morphs into the dominance of corporations. Or social market capitalism, in which there is a larger role for the state and workers are represented on company boards. There is even state capitalism, in which everybody works for state enterprises, which pass themselves off as socialist, but exploit people just the same.

But now perhaps there are only two kinds of capitalism which count. Successful capitalism and capitalism which is too successful for its own good. The consequences of each are different but equally horrible in their own way.

Back in the roaring nineties successful capitalism was thought to be the only game in town. In Britain, Tony Blair’s New Labour exemplified the social democratic acceptance of capitalism. The “market” would hum along unmolested in the background and the government would skim off the tax revenue. Labour spokespeople waxed lyrical about the wealth-creating genius of the private sector and spent the proceeds on tax credits for the working poor, the National Health Service – health spending went up by 30 per cent – and relieving child poverty. It was, in essence, a deal.

But, said Left and green critics of capitalism, this was a myopic accommodation, trading short-term advantages for long-term disaster. Growth – the social ecologist Murray Bookchin said expecting capitalism not to grow was like expecting a lion to become vegetarian – might support enlarged public spending but would eventually make the planet unliveable.

In 2007, a British professor of engineering worked out that, based on an economy growing at three per cent a year, we would consume resources equivalent to all those we have consumed since humanity began as a species by 2040. In 33 years. I think the word you are grasping for is unsustainable.

As the writer Mark Fisher has said, successful capitalism was based on a fantasy: “A presupposition that resources are infinite, that the earth itself is merely a husk which capital can at a certain point slough off like a used skin, and that any problem can be solved by the market”.

To believe in successful capitalism you had to stick your index fingers in your ears and sing “la, la, la” very loudly. But both celebrators and critics agreed that capitalism worked.

Oh shit

But just as capitalism was swaggering around the globe, assured in its invincibility, disaster struck.

The global economic meltdown happened, the worst economic contraction since the Great Depression. $14.5 trillion of value was wiped from global companies.

The former masters of the universe, who meet at Davos, now speak of a “dystopian future” destroying the gains of globalization.“For the first time in generations, many people no longer believe that their children will grow up to enjoy a higher standard of living than theirs,” they warn.

Something had gone badly wrong.

The conventional explanation was that investment banks were too reckless, financial speculation overreached itself and the economy became dangerously skewed. But, in truth, capitalism had become too successful for its own good.

In the US, where the crisis was hatched, wages had stagnated since the mid-70s, while productivity – worker ouput that the employer benefits from – raced ahead. The result was not only spiralling inequality (the US was actually more equal than many western European countries in early ‘70s) and burgeoning corporate profits, but an orgy of personal borrowing so that consumption could be maintained despite the fact that earnings weren’t going up.

A cursory look at recent US economic history shows a series of bubbles. A massive stock market crash struck in 2000. The price of shares is dependent on the expectation of future corporate profits so crashes occur when there is a realisation of total over-optimism about profits. The crash was stopped from turning into a recession by reducing interest rates to below the rate of inflation for three years. Borrowing doubled – the house price and house building bubble ensued – but when that burst so spectacularly in 2007 there were no more bubbles left. Reality – the reality of stagnating earnings – could be evaded no longer.

A dusty old critique of capitalism suddenly became remarkably persuasive. That held that capitalism was inherently self-destructive. Each employer tries to keep wages, which are just another cost, as low as possible. But if they are too successful in that endeavour, the same workers with the low wages won’t be able to play their other vital role in capitalism, that of consumers of goods. Economic health depends upon the employer impulse to keep wages down being frustrated by another countervailing power. Capitalism can be too successful for its own good.

Flatliners

Worryingly for economic health, the US capacity for stagnating earnings has proved a very effective export. In the UK, earnings grew strongly throughout the ’80s and ‘90s but have flat-lined since 2003, four years before the onset of the ‘great recession’. Worker productivity, meanwhile, has kept on steaming ahead. Post-downturn wages rises in Britain are currently half the rate of inflation. Average wages are forecast to be no higher in 2015 than they were in 2001. France and Germany have followed a similar trajectory. Researchers describe an acute “decoupling”of earnings from growth.

The UK Resolution Foundation, which has produced a series of reports on living standards, worries that a return to growth won’t necessarily mean rising wages. Stagnating earnings also ensure burgeoning inequality (yes, it can get worse).

But there is another larger, elephant in the room, problem. The US experience demonstrates that you can’t, to use the economists’ elegant term, “decouple” growth from earnings forever, without eventually destroying growth as well (in industrialised, western countries at least, the experience of developing, exporting countries like India seems to be different). Earnings are purchasing power, in economics-speak ‘demand’, and growth cannot survive indefinitely without purchasing power.

The economic vista in front of us is that of a tsunami of bank debt inexorably making its way to shore. At the same time, earnings power which could lift countries out of recession, is exhausted. The level of personal borrowing is huge and, as we have seen, earnings stagnated or declined even before the recession.

That last factor cannot be wished away, or undone by governments even if they were inclined to. The reasons for stagnating earnings are analysed by a Resolution Foundation report. Technological change has obviated the need for low-skilled workers, firms have given precedence to share dividends over the pay of ordinary workers, outsourcing has increased, and the bargaining position of workers has been diluted. None of these factors will be reversed given current trends and the balance of power politically and economically.

The globe stops warming

It doesn’t have to be this way, you cry. And you’d be right. The Resolution Foundation report, Painful Separation, finds that in some European countries, namely Finland, Sweden and Denmark, there has been only mild divergence between economic growth and median pay. It is no accident that in Scandinavian countries, they say, “Recession? What recession?”

They haven’t killed the goose that lays the golden egg. They, if it isn’t stretching the metaphor too far, nurture their goose. They have effective countervailing powers like strong trade unions. They haven’t left successful capitalism behind. But there is a catch.

Amid all the deleterious social effects of the great recession – the homelessness, the riots, the suicides, the divorces – there was one undoubtedly progressive, though unintended, result. The sudden drop in economic activity achieved something international protocols and protesters invading airport runways had failed to. The rate of global warming was arrested. For only the fourth time in 50 years, carbon emissions fell.

It is clear that the kind of capitalism that Anglo-Saxon societies have been living through for the past 30 years is an ineffective form of capitalism. Growth rates have been unimpressive, financial crises have become more frequent and earnings have been held down. Too much power has been given to or taken by corporations and the rich. Capitalism has become too successful for its own good.

The South Korean economist, Ha-Joon Chang, in his book 23 Things They Don’t Tell You About Capitalism, argues convincingly that what we call “free market economics” has been shown to fail spectacularly. He puts the case for more assertive government control, different forms of ownership, the outlawing of financial products like derivatives, and the rebalancing of the economy away from finance and into the long-term production of manufactured goods. Capitalism can work if the harnesses are placed back on and it is guided in the public interest.

In other words, a return to successful capitalism, a capitalism that is in rude health. Chang eulogises the “miraculous” performance of South Korea in the ‘80s and ‘90s, which grew at an average of six per cent year. China today, he says, illustrates what can be done if free market prescriptions aren’t followed.

The problem isn’t the economic reasoning. The problem is that the world, ecologically, cannot cope with the replication of the Chinese or South Korean economic success stories. If earnings in the US had continued to track GDP growth, as they had done from 1945 to 1973, the average household would have earned $80,000 a year, not $50,000 as they in fact do. Even accounting for the spike in borrowing, consumption has been suppressed in US as capitalism has become too successful for its own good. It is revealing that Chang mentions the word “environment” just once in his entire book.

Chang, like John Maynard Keynes seventy years ago, wants to save capitalism from itself. 

Post-capitalism

But the truth is that neither successful capitalism, nor capitalism that is too successful for its own good, presents a remotely desirable prospect.

The latter leads, in Ann Pettifor’s words, to “dramatically higher levels of unemployment, the loss of savings, home foreclosures, bankruptcies, emigration, suicides, divorce, social unrest and political upheaval – to name but a few of the consequences.”  The former provides a swifter route to the dystopian future of global warming.

Awareness of the awful consequences of both alternatives leads to the realisation that the only rational option left is some form of post-capitalism. It doesn’t mean, in the caricature of one British government minister, everyone running around in Maoist boiler suits, but it does entail an end to the growth fetish and ensuring a secure standard of living for everyone. What “post-capitalism” is like in detail is what we should be concentrating on now.

Last time it was different. A review of Ken Loach's 'The Spirit of '45'

If you listen, as I do, to the American economist Richard Wolff’s one man alternative news service, you’ll find one historical theme and name referred to with metronomic regularity. That of the New Deal and Franklin Roosevelt. During the last deep crisis of capitalism during the 1930s, Wolff relates, the American state didn’t react by embracing austerity but rather became prodigiously more generous. Even though tax receipts shrunk markedly as unemployment hit 23%, the government spent more money and reinvented itself as the guardian of public welfare. In the depths of the Great Depression, unemployment benefit and old age pensions were created and 12 million unemployed people were given jobs in state conservation or cultural projects.

Last time it was different.

Although the action takes place a decade or so later, Ken Loach’s documentary, The Spirit of ’45, provides, for Britain, a similar corrective to pervasive historical amnesia and the fatalistic assumption that austerity is the only conceivable response to economic hardship. The film is about the achievements of the Labour government elected in the immediate aftermath of the Second World War.

Here is the trailer:

Then the country really was broke. Britain, as government minister Douglas Jay relates in the film, had sold all its foreign investments, lost all its ships in war and run out of dollars. Yet there were no homilies about inescapable hardship and living within our means. Rationing continued but the government, in the six years of its lifetime, was still able to achieve a phenomenal amount. The National Health Service – free healthcare – was created, 2-300,000 council houses built a year and the transport system and gas and electricity were nationalised.

People came back from the war imbued with the spirit that “anything was possible” says one contributor. And so politics changed.

Where did the money come from?

But whatever the moveable limits of the possible, you can’t defy economic gravity. How were the accomplishments of the ’45 Labour government afforded?

One explanation is that many of its landmark policies didn’t cost a great deal. The NHS was formed, although it still lacked medicines, and the railways were nationalised. But neither cost the earth. By contrast, it has been estimated that the cost of creating a market in public healthcare, which current UK government legislation is doing, is a cool £20 billion a year. Nationalise the railways now in Britain, and you would save £1.2 billion annually and wouldn’t have to gift billions in subsidies to Richard Branson. Squirreling away tax in contriving private profit, is not, shockingly, a money saver.

But a more complete explanation would have to take account of the fact that the ’45 Labour government was not in thrall to supply side fixations and so taxed the rich and business. The highest rate of personal taxation back then was 97%, in contrast to 45% now. Corporations were taxed by a mixture of income tax and a tax on profit distributed to shareholders, set at 50%. Present corporation tax was created by another Labour government, in 1965. It was 53% in 1979. Now it stands at 20%.

Thus a lot of money was available to the ’45 Labour government that is now siphoned into consumption by the very rich and to the shareholders of large companies.

But tax rates are not set in a vacuum. The reason why they were so high after the war on corporations and the rich is that the holders of private economic accepted, for a time, that they were a price worth paying to escape a far worse fate. As the Conservative, Quentin Hogg, rationalised in 1943, “if you do not give the people social reform, they are going to give you social revolution.”

According to Richard Wolff, a similar modus vivendi was reached during the New Deal in the US. Roosevelt essentially gave an ultimatum to economic elites. Either you accept high tax rates – the highest band in personal income tax was 96% - and cough up the money for job and social insurance programmes, or the other people coming down the road after me – socialists and communists – will cut you a far worse deal. Enough of them accepted the bargain.

Now economic elites are not remotely threatened. There is no danger they can spy on horizon. So the result is austerity.

Sepia tinted history?

But though The Spirit of ’45 conveys the ‘where there’s a will, there’s a way’ post-war atmosphere, it also brushes over the limitations of the ’45 Labour government and embraces a deliberate amnesia of its own.

“The central idea was common ownership,” explains Loach in the insert that accompanies the DVD. “Production and services were to benefit all.”

Clause 4 of the Labour Party’s constitution (the part that Tony Blair abolished, anointing New Labour) is emblazoned on the screen.

“To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution and exchange.”

And there it ends. But Clause 4 doesn’t, in reality, end there. The film mysteriously omits the last phrase – “and the best obtainable system of popular administration and control of each industry or service”.

According to Wikipedia, Clause 4 is generally assumed to refer to nationalisation, but “close reading of the text shows that there are many other possible interpretations” – “common ownership” could mean municipal ownership, worker cooperatives or consumer cooperatives. But such a close reading is not possible from viewing The Spirit of ’45 because the viewer is given a truncated version of Clause 4.

The reason, I think, the film overlooks this element of Clause 4 is that the ’45 Labour government did precisely the same thing. The interpretation of Clause 4 it chose was state ownership. The public corporation in which ownership switched but, very often, the senior management remained the same.

This is very important. There are allusions to this in the film. “I’m not saying it wasn’t a better system because it was,” says Tony Benn, “but the idea that people who worked in an industry should have any say in how it was run was completely foreign.” A miner, in archive footage, says that the “same tyrants” were in charge after nationalisation.

But The Spirit of ’45 does not dwell upon these flaws and they were the very features that enabled the ’45 settlement to be overturned. By the 1970s, companies like BP, ostensibly nationalised, were not only intrinsically undemocratically organised, they were actively working against government policies when it conflicted with their commercial interest. 

The top down nature of these “public corporations” mirrored the way their private sector equivalents were organised. The only way the public could exert influence was very indirectly through electing a government, and even that method, as BP shows, was very much honoured in the breach. When Margaret Thatcher came along promising to abolish “socialism” the senior managers in these public corporations, encouraged by the prospect of mushrooming pay and share options, were very happy to oblige with the new project, while the wider public did not see enough to defend. There was something intrinsically wrong with British “socialism” and The Spirit of ’45 seems to want obscure what that was.

Then and Now

Nearly 70 years have elapsed since the election of that Labour government and while there are clearly analogies between then and now, in significant respects the situation we are facing in 2013 is vastly different.

“The economy had to grow very rapidly as the end of the Second World War,” says one interviewee, Raphie de Santos. Britain, not completely decimated by war, in contrast to continental Europe, had a vital role to play in producing things. “The world actually needed a lot of manufactured goods to be made,” de Santos goes on. Britain had to fill this gap in production and that is why full employment was an aspiration that could be fulfilled.

This situation is in wild contrast to now where there no dearth of manufactured goods. Quite the opposite, there is a glut of products. There is no lack, for example, of cars in the world. “Too many cars, too few buyers”, as The Economist magazine puts it. Last time really was different.

The government is indebted now as it was in 1945. In fact, the government was far more indebted in 1945 and still managed to achieve and create; the polar opposite of austerity. But corporate and consumer debt are inescapable feature of today’s landscape, absent in 1945. Real wages in Britain have dropped by 8.5% since 2009. There was scope for massive growth in the economy in way that doesn’t pertain now.

But The Spirit of ’45 is, ultimately, about an intangible, yet real, social atmosphere. You were your brother’s and your sister’s keeper, says one contributor. It was all for one and one for all, says another. If anything should be imported, unadulterated, from that age into this, it is surely that spirit. Because we need it.