The Great Repetition? Karl Polanyi and today

“Some books refuse to go away” it says in the introduction to the 2001 edition of The Great Transformation by the Hungarian economist Karl Polanyi.

Painstaking research sponsored by Google reveals that those words were written by a historian called Charles P Kindleberger, who with a name like that has to be American, in 1974.

If in 1974, The Great Transformation was obstinately sticking around, by now it is snaking out of book shelves across the world, screaming “Read me!”

Written as the Second World War was raging, The Great Transformation:  the Political and Economic Origins of Our Time, to give its full title, is a book that becomes more prescient the older it gets.

The book is about another age that is frighteningly reminiscent of our own. Its subject is the creation, in the nineteenth century, of what we would call now free market capitalism, molded and justified by the ideology of economic liberalism. It shows how that free market, liberal civilisation reigned supreme for a while but then imploded in the 1930s, as Fascism took over.

In keeping with the best Hollywood tradition, the plot of the sequel is uncannily similar to the original.

Then there was economic liberalism, now there is neoliberalism. Then, Fascism and Stalinism were in the ascendancy, now there is a fear that totalitarianism will return as neoliberalism flails ineffectually, unable to deal with the consequences of the society it has created.

Polanyi says the only humane alternative to the utopian fantasies of economic liberalism and the nightmares of totalitarianism, is socialism. He defines socialism as the conscious subordination of the free market to the demands of democratic society.

As such, The Great Transformation has provided inspiration to those who want to re-regulate capitalism. Maurice Glasman, the English political thinker behind Blue Labour is a “Polanyian”. The preface to the latest edition is by Joseph Stiglitz, the American Keynesian economist, who believes that government intervention will make capitalism stable and just.

But The Great Transformation can be interpreted in more than one way. It has also influenced more radical thinkers like the libertarian socialists Murray Bookchin and Noam Chomsky, who see in the book an appreciation that for almost all of human history, capitalism was rejected as a way to run society. And why should the future not draw on the wisdom of the past?

What The Great Transformation does is to destroy the notion that capitalism is a natural way to be, that a market economy automatically emerges when the restraints are taken away and people’s innate competitiveness is allowed to surface unimpeded. On the contrary, free markets are conscious creations, dependent on the destruction of older, more stable forms of society. Human nature, according to the evidence that exists, is not naturally competitive about the means of life.

Capitalism is an artificial economic system, in exactly the same way Communism was. And what has been created, can be uncreated.

Polanyi looks in detail at the first society that experienced this “great transformation” – England during the Industrial Revolution. He was able to study this history first hand because he fled to England from Vienna in the 1930s.

A market economy was pitilessly created by systematically annihilating the old society. Peasants were forced off the land and into the ‘dark, satanic mills” by government enforced enclosure of the open common lands on which their livelihood depended. Craft guilds, which set wages and established the quality of products, were abolished. A labour market was created by repealing laws which restricted workers’ mobility, obliged employers to provide seven-year apprenticeships, and enforced annual wage assessments by public officials.

In this blog, it has been asserted that the market economy is a myth, that the economy is not the scene of an entrepreneurial, Dragons’ Den-style, battle of the fittest among individuals, but a place where large corporations, controlled by tiny elites, seamlessly work for their own advantage.

But in the eighteenth and early nineteenth centuries, the market economy was not a myth. There was a transformation from an ordered, hierarchical and static society to an immensely fluid society in which new inventions could change the fortunes of people and the society around them. Industrialists often came from ordinary backgrounds, although they were soon swallowed painlessly into the British aristocracy. Corporations did not come into being until the 1850s.

This market economy did two things that are often not contemplated together. One was to create the dependency of millions of people on the fortunes of an economic system. In pre-capitalist societies, people were not threatened by society with starvation unless they made enough money. They were economically secure, although not rich. This changed with the creation of a market economy. People’s livelihoods and, often lives, were dependent on the kind of employment they could find. In Marxist terms, masses of people were turned into proletarians, surviving by selling their labour. The Left in the nineteenth century called it “wage slavery”.

The second was to create “unheard of material welfare.” For the first time in history, production based on machines became dominant and people were compelled to work for it, on threat of starvation. This raised the possibility, if not the actuality, of material abundance for everyone. “At the heart of the Industrial Revolution of the eighteenth century there was an almost miraculous improvement in the tools of production,” says Polanyi “which was accompanied by a catastrophic dislocation of the lives of the common people.”

This feature of capitalist societies, economic insecurity in the midst of material plenty, is an essential fact of life today. Most people are in an economically precarious situation – they are one or two payslips away from insolvency - but the economy produces an immense superfluity of goods.

The Great Transformation shows how the Industrial Revolution in England, which became the model for the rest of the world, was justified and shaped by the ideology of economic liberalism. Shaped because the idea of a laissez-faire economy, in which everything was a commodity and there was no outside intervention, became the unimpeachable principle of the age. England’s cotton industry, for example, initially got off the ground with the help of protective tariffs on imports, but later in the nineteenth century, free trade was supreme.

Economic liberalism sought validation in the past. It, finally, was liberating an elemental feature of human nature, which had been artificially held down by “civilisation” for thousands of years, the desire for individual gain. Adam Smith, who inspired free market philosophers, based his thought on man’s “propensity to barter, truck and exchange one thing for another”.

But this idea, though immensely powerful as a spur to action, was a gigantic error. “No society could, naturally live for any length of time unless it possessed an economy of some sort,” says Polanyi, “but previously to our time no economy has ever existed that, even in principle, was controlled by markets.”

Primitive societies lived through reciprocity. There was division of labour – different people performed specialised tasks – but not markets. A person coming back from a hunting or foraging expedition shared their spoils. Later, they would take as others gave. There was no motive of gain, or labouring for remuneration.

Later societies, even those horribly oppressive like the despotism of Egypt under the Pharoahs, were based on distribution in kind, rationing, not markets.

In Europe after the 15^th centuries, markets in towns were created, but they were deliberately prevented from trading with the surrounding countryside.

Past societies were not more altruistic or selfless, but non-economic purposes were paramount.

The historical falsity of economic liberalism means that its fabled concept of laissez-faire is also false. Laissez-faire has come to mean that if society is left alone by government, a market in which everyone competes and some people inevitably emerge victorious, will naturally come into being. Government regulation stops this natural competition happening. Much as laws against assault stop physical aggressiveness happening.

(Although notice the inverted logic, government stops market competition happening so it should get out of the way. Laws stop assaults happening, without them there would be mayhem, so they are necessary)

There is nothing natural about laissez-faire. What Polanyi shows is that laissez-faire can only happen once other ways of reproducing life, are destroyed. And then a laissez-faire, free market economy can come into being, rigorously policed by the state, so that it is not improperly interfered with. Economic liberals in Britain in the 1830s/1840s were fanatically opposed to extending the vote to the working class. And trade unions were illegal because they interfered with labour, now seen as another commodity, finding its price on the market. Neoliberals hate trade unions for exactly the same reason.

“For as long as that system [the market system] is not established, economic liberals must and will unhesitatingly call for the intervention of the state in order to establish it,” says Polanyi, “and once established, in order to maintain it.”

As the former New Labour health advisor, Paul Corrighan, put it in 2010, “The state has to actively create a market, they don’t appear of their own account.”

The experience of India under the British Empire illustrates what Polanyi is trying to get across. Millions of people died in famines in late 19^th and early 20^th centuries. The natural reasons for crop failures had not changed but the effect was far more devastating.

The explanation is that whereas in the old feudal arrangements of the past, there were stores of grain in case of famine, in the new market system, they were destroyed. Millions of people had to buy what they could on the market, where prices rocketed because of shortage.

“The three or four large famines that decimated India under British rule since the Rebellion were thus neither a consequence of the elements, nor of exploitation, but simply of the new market organisations of labour and land which broke up the old village without actually resolving its problems,” writes Polanyi. “While under the regime of feudalism and of the village community, noblesse oblige, clan solidarity, and regulation of the corn market checked famines, under the rules of the market the people could not be prevented from starving according to the rules of the game.”

So the great transformation was justified by piling fiction upon fiction. Humans weren’t naturally economically competitive, laissez-faire wasn’t just leaving things alone so that liberty could flourish, the power of the state didn’t diminish under the free market.

But balancing above all this was a still more fundamental fiction. Under a free market system, everything has to be a commodity and find its price on the market. Humans and nature were treated as commodities like everything else. But they aren’t commodities. They are, in Polanyi’s description, fictitious commodities.

A commodity is something – like a mobile phone – produced for sale. But human beings and the natural world are not produced for sale. They are not “produced” at all. But in the world of economic liberalism, they were assumed to be commodities, just in the same way that cotton was. Owners of land could do what they want with it. People had to get the means to live by selling their labour. If they can’t find a job or the economy goes into downturn, they can’t sell their labour commodity, and person irrevocably attached to that commodity, starves or is reduced to poverty.

Polanyi’s point, and one reason why he is extremely relevant today, is that people naturally rebel against being treated as commodities. “To expect that a community would remain indifferent to the scourge of unemployment, the shifting of industries and occupations and to the moral and psychological torture accompanying them, merely because the economic effects, in the long run, might be negligible, was to assume an absurdity,” he writes.

But as The Great Transformation shows, that rebellion can take different forms. It can be a civilised transition to what he calls socialism. But it can also entail scapegoating minorities, armed conflict and totalitarianism. In the 1930s, that rebellion meant the American New Deal but also Nazism and the Second World War.

Treating people as commodities, that periodically are not needed, has effects. What economic liberals said in the Great Depression was that if trade unions and the government stopped interfering, wages would naturally drop, in the long run, to allow profit to be made and the economy would eventually return to health. Theoretically, they have been right. But, in the long run, as John Maynard Keynes, said we’re all dead. What was said about Marxism by the Darwinist psychologist Edward Wilson, is now most descriptive of free market capitalism: “wonderful theory, wrong species”.

In part two, we will look at how economic liberalism gave way to totalitarianism in the 1930s. And what not treating human beings as commodities, really means.

"When she went there, the cupboard was bare" the exhaustion of policy

“No policy of any kind – whether imposed by a dictator, produced by democratic consensus, or anything in between – can ‘fix the problem’” said economist Richard Wolff in 2008.  “No policy ever did”.

The world is now realising this. “Policy” is exhausted. The only company with good prospects at the moment is the one that makes the t-shirt of Karl Marx saying, “I warned you this would happen”.

According to broker Louise Cooper, “the horrible reality is that those leaders in charge of our economy have no answers”.

 If policy can’t solve anything, then it’s time to look again at economists who never believed it could, like Richard Wolff and Harry Shutt, whose books have been reviewed in this blog.

There were only three policy tricks. The first was supply-side economics. This was the right-wing idea that the reason why companies don’t expand, or individuals create businesses, is that they are taxed too much. In the UK in 1973, the corporate tax rate was 53 per cent. It will be 23 per cent in 2014. The Con-Dems’ enterprise zones, with zero business rates for five years, spring from the same contorted and remorseless logic – tax cuts will conjure up economic growth.

The problem is reality. Economic growth was much higher in the ‘60s and ‘70s before supply-side economics took hold. Attempting to answer the paradox that to open a factory in South Korea in the early ‘90s required 299 permits, while the country had grown at over six per cent for three decades, the South Korean economist, Ha-Joon Chang, said: “Strange as it may seem to most people without business experience, business people will get 299 permits, if there is enough money to be made at the end of the process … in contrast, if there is little money to be made at the end  of the process, even twenty-nine permits may look too onerous.”

For permits, read taxation. If there is money to be made, taxation, won’t deter expansion. The trouble is, there isn’t.

Trick number two, was interest rates. They are lower, in Britain, than they have been for 400 years. The United States Federal Reserve has tried to halt huge stock market falls by promising to keep interest rates at near to zero until 2013  At that miniscule level, they are meant to bring about spending and borrowing and make saving an unattractive option. But with personal borrowing at historically unprecedented levels, £1.46 billion in Britain, this doesn’t work either. And if consumer spending doesn’t rise, you can reduce corporate taxation to zero (which might well happen given the mentality of “policy-makers” in the UK and US ) and it won’t magically revive economic growth.

The last trick was the cruellest of all. Take trillions of pounds of private sector debt and transfer them to the public. In Britain, the government has a debt of £2.3 trillion and, £1.5 trillion of that stems from the banking bail-out. Gordon Brown was lauded as the saviour of the global economy. But the economy wasn’t saved from depression. Banks prospered temporarily, but the recovery didn't apply to jobs or spending. And nothing, as we are now seeing, was solved. According to the UN, $18 trillion was added to public sector debt. And just what, it will increasingly be asked, did that unprecedented spending achieve? To delay the inevitable by three years?

The reality of the exhaustion of policy is not pleasant or easy to face. In one way it is an admission of impotence. “The world is now embarked on a supposed recovery strategy that is both self-contradictory and doomed to failure,” said Harry Shutt in 2010. The only comparable experience, he says, was the Great Depression, which lasted a decade and was only ended by the Second World War.

Richard Wolff also likens what is happening now to the Great Depression. Then the reaction was far more creative. The US government employed directly 11 million people, some as singers, poets, painters to take culture around the US. But that far more interventionist policy didn’t solve the Great Depression.

“Policy” solutions are like closing the stable door after the horse has bolted. We can reject the self-imposed policy strait-jacket of western governments, and call for new ones. We can all become Keynesians again, re-regulate finance, ban derivatives or hedge funds. Corporations can be taxed properly and tax havens closed. That might conceivably help with the next downturn but we are still in the middle of this one.

“The whole idea of policy is bizarre,” wrote Richard Wolff in 2008. “The ‘right policy’ represents an absurd claim that that this or not that law or regulation can somehow undo the many different factors that cumulatively produced this crisis. Policies are ‘magic potions’ offered to populations urgently demanding solutions to real problems.”

Wolff attributes the 2007 economic crisis to the fact that US wages had stagnated for thirty years. Huge amounts of borrowing to compensate for this change enabled debt-based financial instruments to become so dominant. And when defaults began as interest rates rose, the contagion spread, causing the “credit crunch”. No government policy could “somehow undo” these trends.

Which is why Wolff’s answer doesn’t involve policy, but rather a shift out of capitalism. Only that can really “solve” the crisis. He wants workers to become their own board of directors. That post-capitalist settlement can change the factors that made the economic crisis happen in the first place.

For Harry Shutt, the problem is related but larger. Capitalist economies like ours are subject to the business cycle. The incessant recycling of profit to make more profit eventually produces more than can be absorbed by consumers.

But the downside of the business cycle – recession - has been evaded for years by government and business.  Now it is happening and will be more severe for having been eluded for so long. One consequence of the business cycle not being allowed to take its natural course, is that people, and governments, are overloaded with debt, and can’t bolster spending even if they wanted to.

Financial speculation is now more profitable than actual production. The upswings of future business cycles will be brief. So, he too, wants a transition out of capitalism, and end to the requirement that for an enterprise to exist it must make a profit, and the severing of the link between a liveable income and paid employment.

These solutions are now out of sight. But if governments have no answers to what will happen, then inevitably attention will shift to those who have some kind of explanation, and a solution, however radical it appears at the moment.

Milton Friedman, who was one of the gurus of neoliberalism, said in 1976 that “brute experience proved far more potent than the strongest of political or ideological preferences” in ending Keynesian economic policies and ushering in free market policies.

In other words, brute experience has a way of altering minds in a way that argument and debate can’t on their own. We shall see.

What's that coming over the hill? It's not conservatism

Sometimes people who desperately don’t want something to happen are more clear-sighted than people who do. It’s like that with capitalism and anti-capitalism. Right-wingers are often able to think and speak more freely and, for that reason, what they say is more interesting and insightful. 

There was an example of this at the end of July. An article in the Sunday Telegraph by Charles Moore, for all its blind spots, displayed more of a birds-eye view, than the Left can muster.  Moore, former editor of the Spectator, Daily Telegraph and Sunday Telegraph, is a supremely confident scion of the British Right (Eton, Trinity College, Cambridge). He is writing Margaret Thatcher’s authorised biography.

The article was entitled, “I’m starting to think that the Left might actually be right". In it, he said that after 30 years as a journalist, he was now forced to ask whether the Left was correct all along and the “free market” was just a “set up”, a means for the rich to enhance their power and wealth, while everyone else, works harder and is more insecure.

One example he gives is Rupert Murdoch. “It was a great day for newspapers when, 25 years ago, Mr Murdoch beat the print unions at Wapping,” Moore says, “but much of what he choose to print on those presses has been a great disappointment to those of us who believe in free markets because they emancipate people. …. The News of the World and the Sun went out of their way in recent years to give their readers far too little information to form political judgements.”

Then there is the credit crunch – “a system purporting to advance the many has been perverted in order to enrich the few.” Banks, protected by government guarantee aren’t punished, but rather millions must lose their jobs to ensure their balance sheets are healthy.

“We are bust – both actually and morally,” Moore concludes. He ends on a note of extreme pessimism, which may be self-indulgent, but is worthy of note. He thinks something else is on the horizon, and it’s not conservatism.

“One must always pray that conservatism will be saved, as has so often been the case in the past, by the stupidity of the Left. The Left’s blind faith in the state makes its remedies worse than useless. But the first step is to realise how much ground we have lost, and that there may not be much time left to make it up.”

In one way, Moore’s mea culpa articulates, but doesn’t understand, the intellectual prison in which conservatism has incarcerated itself. Conservatism was originally against concentrations of power and not automatically pro-market, but since at the least the 1970s, conservatism has welded itself to economic liberalism, the belief that government should not interfere in the economy and this will release entrepreneurial aspirations. (this economic liberalism was originally, in Britain, aimed at the Liberal Party. The intellectual spark behind it, Friedrich Von Hayek, thought of himself as a Liberal).

And, in turn, this economic liberalism has become synonymous with giving as much freedom and money to large employers, corporations, as possible. And using the state to do it, if necessary. “What’s good for General Motors is good for America”, they used to say. This was still held to after GM was nationalized. That’s not economic liberalism (or conservatism). It’s corporate capitalism, doing exactly what the largest and richest organisations in the economy want you to do.

In Britain, the same constrained logic applies. What’s good for HSBC is good for Britain. The banks were “punished” by a reduction of corporation tax to 23 per cent (it was 33 per cent in 1997). Everyone else is given a rise in VAT.  In Ireland, one thing that has conspicuously survived after the economy completely tanked, and massive bailouts financed by the taxpayer occurred, is a corporate tax rate of 12.5 per cent.

Moore relates how he was recently in the company of “intelligent conservatives” (as opposed the other kind) in the US. “Conservatives” have just forced through a package of spending cuts as a result of which, as one ex-Republican senator puts it, “the little guy is going to be cremated.” Raising taxes on corporations and the extremely wealthy is out of the question. This, after three decades of tax cuts for them and not middle or low income earners. In 1970, corporate profit taxes contributed 20 per cent of the Federal Government’s tax revenues. In the early 2000s, it hovered around 7 per cent.

This isn’t conservatism, it’s masochism.

It is also flogging a dead horse (which also makes it sadism but let’s not go there). If the basic economic problem is a lack of demand (the stock market collapse of 2000 hinged on internet companies not actually making money, and the wave of borrowing that resulted from reduced interest rates post-2001 created the housing bubble that collapsed when those interest/borrowing rates went up), you don’t solve it by cutting taxes on corporations and rich people in the hope that they will magically use the money to produce goods that people, already massively in debt because of stagnating wages, will then go and buy.

But about the Left, Moore is right, or half-right. “The Left’s blind faith in the state makes its remedies worse than useless,” he says.

Taxing and not borrowing, ending tax evasion and defaulting on debts to Goldman Sachs, is not worse than useless. It’s obvious. If the question is “who pays?” the answer should be not the majority of people.

But a blind faith in the state remains the default position of a lot people on the Left. The state is not the answer, and reason is partly given by Moore himself.

He says he believes in free markets because they emancipate people. But the market economy, which Moore has such faith in, is a fiction of academics, and politicians and journalists. As the British writer Dan Hind  points out, “The neoliberal description of society, in which self-seeking individuals compete under the watchful eye of an enabling state, is radically at odds with reality. The economy is not an entrepreneurial free-for-all but a space dominated by very large organizations, where the state uses taxpayers’ money to subsidized favoured sectors. For the most part, the individual competes with other individuals for employment and promotion.”

It follows that the consequences of this economic system that we are seeing unfold is not, as Moore believes, a “perversion” of self-seeking individuals competing with each other. But a logical and predictable result of very large organisations mercilessly pursuing their own interests, as they are legally charged to do. The outcomes for the rest of us are, quite literally, not their problem.

But it is also follows that you don’t change hierarchical organisations by merely switching their ownership to the state. A new Left should not become the old caricature that the Right is comfortable opposing.

The old social democratic compromise of a mixed economy and regulation and control of the private sector, won’t work in the future. The Left has to be about more meaningful forms of democracy, and taking democracy to places it hasn’t been before.

There’s a new interest in forms of economic democracy – Dan Hind, Richard Wolff, the Equality Trust, even Maurice Glasman of Blue Labour fame. There are limitations in this, which the economist Harry Shutt has outlined in previous comments, but it is, creditably, talking about remedies that don’t involve state ownership.

There is an ancient principle that ought to be revived here. In Ancient Athens you couldn’t be considered a citizen with a right to participate in decision-making if you were employed. In that instance, you were a client  - what you said was thought to be coloured by the need to curry favour with the person on whom your livelihood depended. You weren’t independent.

Independence, in this view, depends on material independence. A basic income paid to everyone no matter what, would be one way to ensure this independence and freedom to think and participate, in a modern context. That way, the Left could be more than about regulation and control. It could also be about liberation.

Waitrose and the myth of the market economy. Does worker-owned mean anti-capitalist?

 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.

Journalism and the death of the public

The exposure of News International’s resurrection of the private detective industry has prompted introspection about that neglected and defamed art: journalism.

Journalism is the canary in the coal-mine for a 21^st century Left. Real journalism is something society can’t do without if it isn’t to degenerate into a schizoid, Public Relations nightmare in which everything is wonderful forever on your TV screen, while it falls slowly apart outside.

It is increasingly obvious that the private sector can’t provide journalism but hiving it all off to the state just creates different problems, such as political interference. The big or bigger state is not the solution. The answer isn’t the market and it isn’t the state. So what is it?

The commentator Ian Dunt does a good job of explaining why journalism is “uniquely unsuited to the private sector”. It is a social good which can’t justify itself economically. In the past, he writes, this was less of a problem as newspapers would treat investigative journalism or foreign news as loss-leaders, but with a certain gravitas that attracted advertisers.

Now, in the days of the internet, there is much more detailed and reliable information about the behaviour of consumers. Hence, endless revelations about celebrities, ‘strange but true’ stories, and photos of dogs doing funny things.

Journalism is gradually being asphyxiated.  A 2010 OECD report concluded that “no business models have been found to finance in-depth independent news production” which raises questions about “the supply of high-quality journalism in the longer-term”. (translated: here’s a picture of a kitten to distract you)

Dunt is encapsulating the process described by Mark Fisher in his book Capitalist Realism as the replacement of the public by the consumer. It is the difference between the public interest and what the public is interested in. The consumer has won. But giving people what they want, based on ever more effective ways of finding out what they want, doesn’t create satisfaction. It just breeds the opposite.

Fisher says this is not only because people don't know what they want, they want what they don’t know.

“The most powerful forms of desire are precisely cravings for the strange, the unexpected, the weird. These can only be supplied by artists and media professionals who are prepared to give people something different from that which already satisfies them: by those, that is to say, prepared to take a certain kind of risk.”

But a risk obviously involves the possibility of being unpopular, of saying something which people don’t want to hear, at least in the short-term. And if everything the media does has to justify itself immediately in monetary terms, you left with (in Fisher’s words) “conformity and the cult of the minimal variation, the turning out of products which very closely resemble those that are already successful”.

The question Fisher asks in conclusion is the question ultimately raised by the News International revelations – what to do about the death of the public. “Since it is now clear that a certain amount of stability is necessary for cultural vibrancy, the question to be asked is: how can this stability be provided, and by what agencies?” (my italics)

One response has been to fund investigate journalism through philanthropy. In the US, the Huffington Post website has received money from charitable foundations for investigative reporting. There are also small funds for investigative journalism in Belgium (the Pascal Decroos Fund which has given 21,000 euros to five teams) and in Norway the Storebrand fund. But, as an article about them says, they are a very small response to a rapidly increasing problem.

Journalism funded through charity can only ever be a limited answer. It is, after all, dependent on capitalist profits being healthy, because this is exactly where charitable foundations get their money from. You might cry, ‘what about non-profit agencies?’ but non-profit businesses still have to survive in the market, and follow its diktats even if they don’t have shareholders to placate. Besides, if no viable business model exists, they won’t exist.

George Orwell once said: “If liberty means anything, it means the right to tell people what they don’t want to hear”. That right is becoming more and more abstract.

 The above is an artist's impression of George Orwell responding to current events

I’m a sharing kinda person and everything’s still f****** up. Or how I learned to start worrying and blame capitalism instead of greed

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".