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".

Most of all you've got to hide it from the kids

Review of 23 Things They Don’t Tell You about Capitalism

By Ha-Joon Chang

 It may have been uttered in 1980 but the meaning of Margaret Thatcher’s mantra, ‘there is no alternative’ is only now becoming clear. For the global elite there really is no alternative to corporate capitalism, even when that system is entirely discredited. Privatise, drive the sick into non-existent jobs, outsource public services to the private sector. More of the same medicine that nearly killed the patient in the first place.

Albert Einstein said a long time ago that you can’t solve a problem with the same kind of thinking that created it. As a matter of interest, Einstein was a socialist

Chang's 23 Things is an attempt to rouse the sleepers from their ideological slumbers. It is a sustained attack on the assumptions behind the economic thinking that has been dominant for the past 30 years. But it is not an anti-capitalist manifesto. It is an argument for a different kind of capitalism. 

Here is Chang talking about the ideas of the book:

Noam Chomsky once said that before you can change the world you have to understand it. He has described Chang as a “fine economic historian” and his respect stems from the fact that Chang doesn’t believe in convenient myths, such as the fallacy that rich countries have always believed in free trade 

In 23 Things the myth Chang attacks is that neoliberalism works. The raft of policies that constitute neoliberalism – tax cuts for the rich, degregulation for the financial sector, privatisation, dismantling of all protection against the  freedom to speculate in things like food and currencies – were sold as a pill that had to be swallowed because everyone would benefit in the end. But the result turns out to be all pain and no gain, or only gain for a minority.

Chang’s point is that neoliberalism, the way the world has been run economically for the last 30 years, has resulted in slower growth. In the 1960s and 1970s, when countries protected native industries and speculation was heavily restricted, the world economy grew at 3 per cent a year. In the post-1980 neo-liberal era, the growth rate is 1.4 per cent.

Britain, which exported many of neoliberal practices to the rest of the world, grew economically by 1.7 per cent between 1990 and 2009. But during the 1960s and ‘70s, when the country suffered from the “British Disease” of high taxation of the rich and strong trade unions, the growth rate was 2.4 per cent. Economically, neoliberalism is a confirmed flop.

Chang says that this failure has been masked by a huge expansion of borrowing and the fact that both partners in a household invariably work now. In the US, average hourly wages are barely more than they were in 1973.

The failure is even more dramatic in poor countries where a lack of democracy meant neoliberal policies could be imposed in a purer form. In the 1960s and ‘70s Sub-Saharan Africa grew at 1.6 per cent a year. But after 1979 these countries, through the World Bank and IMF, were forced to adopt neo-liberal policies.

Industries collapsed because of foreign competition. Countries were forced back to exporting basic commodities like cocoa and coffee and the large increase in supplies caused a collapse of prices. During the 1980s and 1990s income in Sub-Saharan Africa fell by 0.7 per cent a year. Only after this failure of neoliberal policies, Chang says, did excuses for African underdevelopment, such as laziness and too much ethnic diversity, gain currency.

The core justification for neoliberalism, that if you give corporations maximum freedom and make rich people richer, everyone will benefit in the long run, turns out to be just plain wrong. “We have to question an assumption that has dominated economic thinking over the last three decades” he says, “The belief that maximising market freedom is the best way to generate wealth.”

The economic rationale was that the investing class (corporations and the very rich) have to keep more of their money or they won’t invest. In plain terms, you have to create wealth before you distribute it.

In line with this dogma, there were tax cuts for the rich, exemplified by New Labour's cutting of capital gains tax to encourage investment. In the UK, after 13 years of a Labour government the richest   10 per cent paid less tax than everyone else. More money to shareholders only interested in short-term gains and executive salaries went through the roof.

But through it all, Chang says, investment fell rather than rose. Investment, as a proportion of national output, has dropped in all G7 countries and in most developing countries. “The rich got a bigger share of the pie all right, but they have actually reduced the pace at which the pie is growing,” he says.

Neoliberalism was also supposed to make the economy more stable. It was an alternative to the turbulence of the 1970s. But it’s feted taming of inflation was bought at a price of more instability. 

The financial crisis that has engulfed the world since 2008 did not “fall out of a clear blue sky" in the words of Bank of England governor Mervyn King. Despite what Gordon Brown wants us to believe, it was not the first crisis of globalisation but the latest.  

There were virtually no banking crises, Chang points out, between the end of the Second World War and the 1970s. In the 1980s, 5-10 per cent of countries had a banking crisis. In the 1990s, it was 20 per cent. After the latest financial crisis, the figure went up to 35 per cent of countries.

Why are banking crises more frequent? Because it is far easier to move capital around the world in search of quick financial gain than it was before the 1980s.

Job insecurity and intensity have increased. One in five private sector workers in the UK are employed by a company owned by a private equity firm.The purpose is to “restructure” the firm, frequently through mass job losses so it can be sold again for a profit.

As Chang shows, the logic of these economic changes, though presented as benefiting the majority, are just self-serving. The beneficiaries are the holders of financial assets. Greater labour market “flexibility” is needed because hiring and firing workers more easily enables companies to be restructured and sold more quickly. Capital mobility is required because higher returns are depended upon the ability to move financial assets around at speed.

But 23 Things is not anti-capitalist. Capitalism run in the interests of capitalists doesn’t work, says Chang, but it can deliver the goods if controlled in the public interest. Companies should be owned by shareholders interested in long-term investments. The shareholders might be representatives of the government or the workforce.

Governments should reassert their capacity to direct the economy. He gives the example of the South Korean government in the 1960s banning the LG group from going into the textile industry, as it wanted to, and compelling it to enter the electric cable industry. The result, decades later, is world-famous mobile phones.

Most of all finance should be reined in because it weakens productivity growth by directing resources to short-term gains. Complex products like derivatives should be banned, hostile company takeovers made more difficult, and restrictions reintroduced on the cross-border movements of capital.

If the “machine” of capitalism is properly regulated, says Chang, it can be force for good. Chang, a South Korean, can’t help but point to the success of the “Asian Tiger” economic model, before it dismantled after the 1997 Asian financial crisis. South Korea was a prime example with the highest economic growth rate of any country in the world for three decades.

The “Korean model” was based on preserving domestic ownership of its business conglomerates and joint planning between Korean banks and government ministries.

Chang points to the income growth rate of Asian Tiger economies (of which South Korea was one) of 6-7 per cent a year between the 1950s and mid-1990s. This “deserves to be called a miracle”, he says.

The only comparable country now is China. But, as Chang says in the introduction to the book, China, while liberalising its economy, has not introduced full-blown free-market policies.

Here lies the flaw in the Chang approach. 23 Things is an extremely lucid, persuasive account of why free-market economics fails on its own terms. Why corporations, shareholders and the very rich benefit, but investment is reduced and economic growth and productivity held down. In short, why neoliberalism is an ineffective form of capitalism.

The problem is that the world cannot take a miraculous form of capitalism. China has achieved double digit growth rates but it is also, according to the Guardian newspaper "the world's biggest greenhouse gas emitter, number one energy user and arguably most polluted nation on earth".  But if Chang’s prescriptions were adopted there would be 10 or 15 Chinas, in economic terms, around the globe. If what we have now is capitalist economic failure, thank heavens we don’t have success.

The limits of Chang’s thinking are seen in his take on Soviet communism. The communist central planning system failed because there were no markets, no-one knew what consumers really wanted. Many unwanted things were produced and the second largest cause of fires in Moscow in the 1980s was exploding televisions. There were, Chang says, many dedicated managers and workers who tried to make the system work. Despite this, it failed because of its unavoidable inefficiency. It was, institutionally, flawed.

Quite true, but what about capitalism? There are lots of dedicated managers and workers toiling away for corporations who don’t want to destroy the biosphere and who want to represent the interests of consumers. But what do they end up doing after their efforts are filtered through the profit-dedicated institutions that they work for?

It’s one of the things that they don’t tell you about capitalism that the needs of consumers aren’t represented by it. But Chang chooses not to contest this convenient myth. As economist Harry Shutt has noted conventional economics says that competition between enterprises means the customer gets the best deal because nobody buys bad products. In a market system, restaurants that serve terrible meals don’t survive.

 However the truth is that the customer is not always king, but there to soak up as many products as possible. The imperative is not what the consumer wants, but what he or she can be persuaded to buy. To that there is no limit. The aim is always to raise the level of consumption to the maximum that production will allow for, by advertising and credit, rather than adjusting production to satisfy what consumers need and want.

And despite the myth-busting quality of 23 Things there is one way in which Chang give credence to an idea that has become a convenient excuse for an establishment that wants to change as little as possible.

This is the idea of free-market economics that, in order to make its models work, treats all people as if they were purely calculating and selfish.

But self-interest is not all that counts. ““The bottom line is that companies, and thus our economy, would grind to a halt if people acted in totally selfish way, as they are assumed to do in free-market economics,” says Chang.

Chang gives the example of the work to rule, which reduces output by 30 to 50 per cent, to conclude that production depends on workers’ goodwill, and that they will go beyond what is required by their contracts.

This idea, that the roots of the economic crisis lie in a denial of capitalism’s moral dimension, has been expounded by UK Conservatives like Jessie Norman (see review below).

It has been seized on by people like Bank of England governor Mervyn King who has obviously read Norman’s book. Nissan, in Sunderland, asks all its workers how to raise productivity, he says.

Chang, as a supporter of Japanese and South Korean capitalism, would agree. But the obvious question is how do workers who help raise the profit levels of corporations like Nissan, benefit in return? The answer is that they don’t. It’s a one way exchange of give and then give some more.

People, who are workers and consumers, are naturally moral agents. Corporations aren’t. They are institutionally selfish institutions only interested, as institutions, in making profit. But humans, acting in moral way, keep the system working, and permit inhuman institutions to flourish.

It was the economic historian, Karl Polanyi, a great influence on Chang, who pointed out the obvious. He said that if workers followed faithfully the free market doctrine of only selling commodities at the highest price you can get, they should almost permanently be on strike. Because what they are selling is their labour and they should get the highest price for it.

The problem with capitalism isn’t that people are too selfish but that they are not selfish enough. Of course if people were truly selfish, capitalism would grind to a halt. Which would be a terrible shame.

The most pithy response to this question was made by the American community organiser, Saul Alinsky. He was asked by the President of a US corporation why he saw everything in terms of power and conflict instead of goodwill and cooperation, when he seemed such as nice guy personally.

"When you and your corporation approach competing corporations in terms of goodwill, reason and cooperation instead of going for the jugular, then I'll follow your lead," was his answer

But this is one lacuna in Chang’s assault on the triumphalism of neo-liberalism. His answer is that we should look back to the state capitalist economies of Japan and South Korea, and to the welfare economies of Scandinavia.

23 Things is an assault on conventional economics. But another unconventional economist, Harry Shutt, argues that we can’t go back. That capitalism, the incessant search for returns on investment, has become dysfunctional. For the sake of taxpayers and consumers, we need a more rational economic system. To his ideas, we turn in the next review.