How do you solve a problem like capitalism? Economic democracy versus the abolition of profit

In an interview on this blog last year, Hjalti Hrafn Hafthorsson of the Icelandic organisation Alda, put the case for an intrinsically different kind of economy. Companies, he argued, should be run as worker-controlled enterprises not as shareholder-owned entities managed by small boards of directors. With decisions guided by what employees want, rather than the legally prescribed imperative of maximising profit that determines current corporate behaviour, outcomes would be radically altered. Wealth would be more evenly distributed, companies would reflect what communities wanted and monopolies less likely to be formed.

 “I tend to believe,” Hafthorsson concluded, “that if working people were voting on some of the decisions made by corporate executives today many of those decisions would be overruled because people in general have values that aren’t measured in dollars or pounds.”

Alda’s vision of “economic democracy” is seen by many as a cure for the problems that plague society - inequality, stalling wages, environmental degradation, the dominance of large firms (in the energy ‘market’ for example) that exploit their captive consumers and companies’ footloose relationship with the communities that host them.

This means not merely a different way of reaching economic decisions, but the death of the shareholder. Workers, not wealthy investors or pension funds, would own as well as govern firms. It has been argued that the wider community should be represented on company boards, not just the workforce. Either way, what you have is an economy ostensibly geared towards the public interest, not private profit.

Taken together with the burgeoning movement for a basic, unconditional income, you can see the rudiments of an economy that values people, as opposed to things or profit. An economy, in other words, that treats people not as means to an end - economic survival and profit - but as ends in themselves, and gives them the freedom, and material security, to decide what is right for them.

“The difference, of course, is that we wouldn’t have capitalism anymore,” says Hafthorsson. But are these really the ways to transcend capitalism, or will we still be caught in its web?

There are some who think escape not so easy. The American Marxist, Andrew Kliman, looks upon capitalism as a network of relationships governed by immovable laws. You cannot simply “overrule” decisions because you don’t like them. It doesn’t matter, in this view, who is in charge or what their values are – whether they are money-grubbing psychopaths obsessed with profitability, or managers elected by the workforce, concerned above all else with the welfare of fellow employees and the effect of decisions on the wider community. Kliman is adamant that:

“Directives will not break the laws of capitalist production. The most important law is the determination of value by labor-time. It compels an enterprise, whoever owns or 'controls' it, to minimize costs in order to remain competitive, and therefore to lay off inefficient or unnecessary workers, speed up production, have unsafe working conditions, produce for profit instead of producing for need, and so on. If you are in a capitalist system, you cannot just issue a directive to produce for need, or a directive to refrain from laying off workers. Cutting costs is the key to survival.”

The disagreement as to what is and isn’t possible ultimately stems from contrasting definitions as to what capitalism is. Alda’s “economic democracy” stance reflects philosopher David Schweickart’s definition. Capitalism take places in the familiar “market economy”, yes, but the decisive characteristic, to Schweickart, is that it is based on wage labour. This means the vast majority of people have to rent themselves to the small minority that own companies, shops or offices in order gain the livelihood –  the wages, salaries or fees – that enables them to have a reasonable standard of life and not frequent food banks. Their need of an income means they are compelled to subject themselves to undemocratic rule at work and the baleful consequences of inequality, the dominance of huge firms and a lack of concern of external effects on society and the environment. The solution is to end the division between the elite that owns “the means of production” and the millions of people one or two payslips from bankruptcy. When workplaces are democratised, the argument runs, the behavioural characteristic of firms will change and seemingly intractable problems will become tractable. Values not “measured in dollars or pounds” would predominate. But this is decidedly not about the abolition of profit or competition. Profit will remain, it’s just that the people who receive it will alter.

Another way of describing this transformation is that it aims at the ‘democratisation of capital’.

However, to Kliman, this is based on a fundamental misconception of what capitalism really is. “Capital,” he writes, “is nothing other than value that is invested in order to end up with more value, so the fact that products have value is part and parcel of capitalism as such, no matter what its forms of property and institutional structures may be.” You can turn the institutions - the workplaces and corporations that overshadow our lives - upside down, you can put the people, not the corporate executives in the saddle, and nothing fundamental will change. Because any firm operating in a competitive economy will be drawn, however unwillingly, into the “grow or die” mentality that exists all around it, workers in a worker-controlled company will end up exploiting themselves.

You need do “do away” with capital, Kliman insists, and that requires doing away with commodities and the production of commodities. Given that most people – Marxists included – don’t think people should just live on the potatoes and onions they have planted in the back garden, he must be referring to a special quality in “commodities” that separate them from consumer goods. But more of that shortly.  

Kliman’s firm belief is that, in a capitalist society, institutional forms don’t matter. However hard they try not to, everyone has to swim with the current. In this, I think he is partly right. Non-shareholder enterprises do, I believe, behave differently, but not differently enough. In Britain, for example, you can see a glaring disparity in the way consumers are treated. The traditional shareholder-owned companies dominant in energy and water provision since privatisation in the 1980s, have engaged in crass profiteering. Electricity prices have shot up by 120% and gas prices by 190% in the last decade. Welsh Water, by contrast, which has been run as a social enterprise without shareholders since 2001, has reduced bills every year for seven years. The nationalised Scottish Water, is into its fourth year of a price freeze. Railways in the UK paint a similar picture. Private train companies have, in the context of burgeoning taxpayer subsidy, made an enormous return of 147% for every pound invested, but when the state is inadvertently put in charge of a rail-line, the taxpayer subsidy miraculously drops. The British National Health Service, in its heyday, exemplified the primacy of need over the bottom line.

Gar Alperovitz in America Beyond Capitalism, argues that the price advantage displayed by municipally-owned electricity utilities in the US “is due to the fact of public ownership itself; locally controlled public utilities often can be especially responsive to customers' needs and do not need to pay dividends to private shareholders.”

However, all these instances occur in cases of non-competitive monopolies or without direct competition for market share. When competing in a market against shareholder-owned competitors, social or state-owned or worker-controlled enterprises have much less freedom. The record of the famed worker cooperative corporation in Mondragon in Northern Spain, illustrates both how worker-run coops are an advance on the capitalist model, but also, in important respects, ape it. In Mondragon, we have, not an isolated divergence from capitalism, but Spain’s seventh largest company. Mondragon comprises 256 businesses that generate $4.8 billion a year in manufacturing, retail and distribution. It boasts 43 schools, one university and more than 80,000 employees.

As this analysis demonstrates, in stark contrast to the towering edifices of economic dictatorship and inequality that surround us, Mondragon is a beacon of democracy and egalitarianism. It operates on a one worker one vote basis, and each worker’s vote in the Mondragon general assembly, controlling production, income distribution and the election of the board, carries the same weight. The Mondragon CEO earns only nine times the federation’s lowest paid employee. Economic downturns are not met with automatic lay-offs. Mondragon members are more likely to vote for pay decreases in order to spare unemployment.

“In contrast to most capitalist companies, whereby the measure of a successful company is almost always based on maximum profitability, the cooperative approach offers an alternative that supports democracy through an egalitarian voting system, while at the same time promoting job security for worker-members, social justice and community responsibility,” say authors from the Center for Social Epidemiology, of Mondragon.

But this is not the whole story. While Mondragon embodies these undoubted advances, it has also expanded into other countries – Mexico, Morocco, Egypt, Argentina, Thailand and China, for example –  in much the same way that a capitalist company might and, significantly, its international workforce have not been offered cooperative membership. Roughly a third of Mondragon’s workers are not members of the coop. And, after trying in 1960s to adopt alternative manufacturing processes, Mondragon now incorporates familiar capitalist practices such as just in time inventory and shift work.

What this indicates, I think, is that it is very difficult to make worker cooperatives universal – to expand them without ensuring, at the same time, that a sizeable chunk of the population remains outside them. And also that cooperatives will inevitably respond to outside competition. There is no way to ensure that even a worker’s coop that is an exemplar of internal democracy will not vote to gain an edge through the introduction of ultra-competitive practices, thus compelling other cooperatives to follow suit, to grow or die.

Kliman would say that these inescapable flaws mean you have to “do away with” capitalism and markets, or, alternatively, that capitalism, the process of adding value through the sale of products, inevitably entails markets and you cannot have one without the other. That is what he means by commodities, the selling of products and the reinvestment of the profit made through that sale, as opposed to the neutral designation, ‘consumer goods’. But lesson of 20th history seems to indicate that you can’t abolish capitalism and markets, without entering a nightmare realm of central planning and total state domination. Kliman refers to the “horrors of state-capitalism that called itself ‘communism’” so he clearly doesn’t want to go back to that. He also says “we have to work out how we can have a modern society that operates without the laws of capitalist production being in control”. By “modern society” he seems to mean a society with a myriad of consumer goods and conveniences but lacking the compulsion or necessity to make a profit from these goods; to turn them into commodities. Is this an impossible dream? Is economic democracy within some form of regulated market, the best we can hope for? Can you really abolish capitalism? I would like to consider these questions at some point when I have the time.

When Marxists disagree

From outside, Marxism can appear an ideological monolith. Workers, so the story traditionally goes, involuntarily supply their employers with surplus value and watch as the capitalists’ wealth exponentially increases, while they themselves get poorer. Through some combination of the working class overcoming their false consciousness and getting wise to the real situation and the unavoidable instability and crisis-prone nature of the capitalist economic system, the crunch will come, revolution will result and everyone will live happily ever after now that class distinctions have been abolished. Amen.

The truth is more complicated. Marxian economics - and it is economics that Marx was fundamentally concerned with - is a much more contested field that you would imagine. Two recent books by American Marxists, The Endless Crisis by John Bellamy Foster and Robert McChesney and Andrew Kliman’s The Failure of Capitalist Production illustrate the dissension.

At stake is what causes economic crisis, more importantly, this economic crisis. Is it a growing gap, as Bellamy Foster and McChesney maintain, between the endless production of goods and services and workers’ finite ability to consume them, leading to stagnation? Or, as Kliman says, the decline in the rate of capitalists’ profit, leading to stagnation (alright, they do agree on some things).

Monopoly capitalism

We live, say The Endless Crisis authors, in a society dominated by very large monopolistic and oligopolistic corporations, a trend which is only exacerbating through constant mergers and acquisitions. The power of these giant corporations means they are able to extract more and more profit (or in Marx-speak, surplus) from their workforce; profit that needs an outlet and can’t all be absorbed by the consumption of wealthy investors. The trouble is demand can’t keep up; the value of real wages in the US is lower than it was in the 1970s. The result is slow growth and unused capacity – one-third of the capacity of the US automobile industry was unused in the run-up to the Great Recession, for example.

In these circumstances, speculative finance becomes irresistibly alluring, as the only way to effectively deploy all the money that is being made. The portion of US national income devoted to finance, real estate and insurance, say Bellamy Foster and McChesney, has risen from 35% in the early 1980s to over 90% now. But the escape promised by financial baubles like mortgage backed securities or credit default swaps is illusory because they make crashes, like the one in 2008, far more likely.

And the promised escape is actually a trap because, once a crash has happened, the political authorities can think of nothing but reinstalling the old casino economy because they regard the ‘real economy’ as irretrievably stagnant. Think of the UK economic recovery, based on near zero interest rates and rising house prices. “Rather than overcoming the stagnation problem,” write The Endless Crisis authors, “this renewed financialization will only serve at best to put off the problem, while piling on further contradictions, setting the stage for even bigger shocks in the future.”

What does stagnation mean? It means lower wages, stalled careers, unemployment and under-employment, lack of social mobility and periodic economic instability. The authors quote older economists Paul Sweezy and Henry Magdoff, who, writing in the late ‘80s, reflected on their formative experiences of fifty years before: “For us economic stagnation in its most agonizing and pervasive form, including its far-reaching ramifications in every aspects of social life, was an overwhelming personal experience” But this is not the same for people who grew up after the Second World War. “Under these circumstances,” they wrote, “they find it hard to relate to what they are likely to regard as our obsession with the problem of stagnation. They are not quite sure what we are talking about or what all the fuss is over. There is a temptation to say: just wait and see, you’ll find out soon enough.” We are now finding out.

Not quite recession

In one way, Andrew Kliman doesn’t disagree with this prognosis. He, too, thinks we live in a “new normal of not quite recession” and the future of the economy is likely to be stagnation, interrupted by crashes. But, in another, he disagrees profoundly. For he traces the problems back to a completely different source, a fall in the rate of profit. To Kliman, problems of “effective demand” (the expression is from Keynes) are a red herring. Demand hasn’t fallen and, even if it had, it wouldn’t matter. This is a complete reversal of standard left-wing economic thinking which says that companies are compelled by competition to introduce new technologies and cut costs, thus precipitating an ever-widening gap between supply and demand.

It’s fair to say Karl Marx’s theory of the tendency of the rate of profit to fall is commonly thought of, if it is thought of at all, as a historical curiosity. Or just plain wrong. Many Marxist and radical economists were convinced that the Japanese economist, Nobuo Okishio, had proved its falsity in 1961. Needless to say, Kliman says he did no such thing.

This is how the theory goes. Marx said that all value is created by labour. But as mechanisation proceeds and edges out work performed by people, value or profit decreases. Eventually this fall in the rate of profit causes a crisis. If – and this is the important part – the destruction of capital value caused by this crisis through bankruptcies, companies going bust and unemployment, is allowed to happen unimpeded, the whole process can begin afresh. It becomes much cheaper to buy companies and rate of return on profit resumes at a new peak. A new boom ensues.

Even if they don’t explicitly reject the theory, many Marxists say profit isn’t falling. The Endless Crisis authors say that the rate of profit fell during the nineteenth century under conditions of competitive capitalism but it has risen since as monopolistic corporations have ruled the roost. Indeed the rising amount of profit or surplus is a prime reason for the crisis because it is diverted into speculation, having nowhere else to go. Probably the most famous contemporary Marxist, Richard Wolff, says profit has gone wild in the US as a result of falling wages.

Capitalism hasn’t changed

Kliman says this is all mistaken. “Capitalism has changed far less than many people – its critics as well as its supporters – want to think,” he writes. The rate of profit has fallen, though this has been masked, initially by inflation and then by the fact that economists used the wrong measure of profit. Kliman says radical economists, for some reason, measure profit by what it costs to replace machinery as opposed to the more common sense method of judging the rate of return on advanced capital.

Not since the Great Depression of the 1930s, says Kliman, has there been a free market response to an economic downturn. Every subsequent downturn has been washed away with government subsidies and debt guarantees. This ensures that the downturns have not been half as severe as they otherwise might have been but also that there could be no resultant boom because capital value was not destroyed. The US economy, he says, has never properly recovered from the recession of 1974. And because of this the rate of profit has continued to fall, and is reflected, in a delayed fashion, in increased debt and financial speculation.

Kliman’s explanation does differ profoundly from what he calls the “conventional Left account” and, rather than rejecting it or accepting it in toto, I think it needs some interrogating. I think the most important questions are:

Firstly, Kliman uses a method of measuring the rate profit – the rate of return on advanced capital – which he says is meaningful to most people and to business itself. Given that, a discernable decline in the rate of the profit should have been a major concern of business over the past thirty years or so and hotly debated in the business press. I’m not aware of this, so why hasn’t it happened?

Secondly, Kliman says that in order for a fall in the rate of profit to be actualised, prices have to fall. But inflation has been the norm at least since the Second World War. The only area of decreasing prices for Western consumers I’m aware of, is in the realm of cheaper clothes and the reason for that is super-exploitation of garment workers in countries like Bangladesh and Vietnam, not mechanisation. And mechanisation, according to the theory, has to occur in order for prices to fall and the rate of profit to drop.

Thirdly, I don’t believe demand is so irrelevant to capitalist economic health as Kliman says. Kliman is a dyed in the wool demand-sceptic. He claims the post-World War Two boom was not due to pent-up consumer demand or government stimulus but to a resumption in a high rate of profit. But why did this reinvigorated rate of profit not kick in in the late ‘30s, when the US slipped back into recession as government stimulus was temporarily withdrawn? The pre-conditions of a new boom were present, as capital value had been destroyed utterly in the downturn of the early ‘30s. So why did it take the Second World War to put the Great Depression out of everyone’s misery?

Kliman maintains that the final consumer is not as important to capitalist economic health as most radical economists think. Businesses can and do sell to other businesses and investment spending has risen much more markedly than consumption spending in the US, over the last 75 years. That is why the economy grows at all. He is also at pains to point out that only with a very selective use of statistics, can you demonstrate that real wages have fallen in the US since the 1970s. Using another method of calculating inflation, Kliman says, wages have risen markedly. And if you measure total compensation, including employer social security and medicare contributions, they show an unmistakable rise.

It is widely accepted, certainly not just by the left-wingers or Keynesians, that consumer spending supplies an integral part of economic growth, nearly two-thirds of economic activity in the UK. And it is indisputable that real wages are falling now - by an eye-watering 8.5% in Britain since 2009, according the state Office for National Statistics. At the same time, consumption is forming a large part of the headline rise in GDP, an increase that, in the absence of wage increases, can only come from savings or borrowing. Thus, I think you can safely conclude that consumer spending is vital for economic health and an important component of the profits of the financial sector. Consumer demand is, at the very least, part of the story.

You can’t buck the market

But, in spite of these reservations, I do think Kliman’s insights are valuable, because he has realised something that many Left Keynesians and Marxists don’t want to face up to. Namely, that capitalism depends for its vitality on periodic destructiveness and, in this sense, you can’t buck the market. Keynesianism was predicated upon ending this instability but failed, as shown by the large-scale recession that occurred in the mid-1970s. There is a fascinating table on page 53 of Kliman’s book that gives GDP statistics for all regions of the world. It shows that economic growth was higher in every single region of the globe between 1950 and 1973 than it was between 1973 and 2008. In many places, after 1973, growth fell like a stone. Post-1973, the growth rate in Japan, Europe, Latin America and Africa plunged by more than half. Yes, you can say post-war reconstruction petered out, but a seismic economic jolt clearly occurred in the 1970s, which no amount of neoliberalism, declaring war on organised labour, exponentially increasing credit or providing government support to failing financial institutions, has been able to correct. As Kliman points out, all of our current economic malaises – slow growth, slowly rising wages, spiralling inequality, financial instability and debt crises – date from the 1970s, not the 1980s. In other words, from before the neoliberal era and the supremacy of Thatcher and Reagan.

In this acceptance that capitalism’s problems stem ultimately from the 1970s and that Keynesianism, despite the hype, could not overcome the internal dynamics of capitalism, Kliman has an equivalent in Britain, the economist Harry Shutt. Shutt isn’t a Marxist and doesn’t believe that falling profit is to blame, rather he traces the malaise to the need to find investment outlets for an ever increasing volume of funds (a ‘wall of money’) and a decline, in the digital age, in the demand for large-scale capital investment. Nevertheless Shutt, too, thinks that governments attempts to evade recurrent system crashes by intervening with subsidies and debt guarantees, have only resulted in insipid growth, more instability, spiralling debt and a “postponing of the evil day”. To him, Keynesianism is the problem, not the solution. As with Kliman, Shutt thinks that the corporate debt overhang is too great to permit sustainable growth. Artificial stimulation, from the outside, can’t work.

The intractable problem is that a fervent desire to avoid a fully-played out crash of capitalism is not limited to ruling elites or policymakers. Ordinary people are now are locked in to the success of the system, not just through their jobs but through pension funds invested on the stock market. Nobody wants a crash and the perception that, in Shutt’s words, “preserving the status quo was an end that could justify almost any means” is not confined to the summit of society. If there is another crash coming – and the feeling of The Endless Crisis authors and Kliman is that it’s inevitable – then it’s a sure-fire bet that governments will attempt to quench it with public money. If it proves too big for that then all bets are off as to what will ensue.

The lesson of his analysis, according to Kliman, is that new regulations or laws cannot break with the laws of capitalist production. A “somewhat comprehensive socialisation of investment” as Keynes called for, won’t change the fact that banks still have to exist in a capitalist economy. “Investment decisions cannot be based on what would enhance workers’ well-being or fulfilment of public policy objectives,” writes Kliman. “… a bank that dared to pursue these goals would soon find that lenders and investors would not supply it with the funds it needed.”

The pessimistic conclusion, although Kliman would describe it as sober and realistic, is that institutional structures don’t matter. Neither enterprises controlled by their workers or state enterprises represent a rupture with the laws of capitalism and will just reproduce its flaws. In order to transcend those flaws, you need a society governed by new methods of production and exchange. Yet, workers’ control, or worker self-directed enterprises, is thought of by growing numbers of people as a cure for capitalism. It is to this debate that I want to turn to, next.