The Mystery of the Post-War Boom – or why has economic growth been falling for over half a century?

According to a recent study, economic growth among the industrialised countries of the world has been declining for around sixty years.

“… contrary to what is widely believed,” the report from Geopolitical Economy Research Group (GERG) at the University of Manitoba in Canada states, “this [post-war economic growth of the industrialised North] has fallen continuously, with only brief and limited interruptions, since at least the early 1960s.” The trend includes all major Northern economies “without exception” and shows no sign of ending.

The study includes the usual suspects – the US, Germany, the UK, Japan and France – as well Australia (which isn’t in the Northern hemisphere admittedly) and 10 other countries.

Today’s “meagre” growth rates of 3 per cent are treated as evidence of economic success, but fifty years ago – when rates of 6 per cent or more were common – such an economic performance would have been greeted with “alarm and despondency”, the report’s author, economist Alan Freeman points out.

The erroneous widespread belief the report aims to counter is that either economic growth started falling after 1973 (i.e. a decade later than the reality) or – as in common on the Right – that the nadir of the strike-ridden 1970s was banished by the successful attempts of Thatcher, Reagan and others to revitalise Western economies.

And although the report doesn’t speculate as to why economic growth has fallen so drastically it does affirm the original cause – “an historical event, the Second World War, which brought in its wake one of the greatest and most prolonged economic expansions since the Industrial Revolution”.

The post-war enigma

As can be seen below, there are various explanations for the post Second World War boom, an economic expansion which few sentient people deny occurred. The US economy more than doubled in size between 1948 and 1973, while the UK, West Germany and Italy grew fourfold in the same period and the Japanese economy swelled tenfold.

However, the boom is treated very differently on the Left and the Right. For the mainstream Left, it was the consequence of a peculiarly benign set of economic policies, or in the words of the late economist Andrew Glyn, “a unique economic regime”. The so-called Golden Age of capitalism was built on collective bargaining with strong trade unions resulting in wage growth and rising effective demand, restrictions on finance which funnelled investment away from speculation and into physical assets (resulting in rising productivity) and an international economic architecture (the Bretton Woods system) that fixed exchange rates, stopped currency speculation and ensured global economic stability.

For the Right – or those elements on the Right willing to deal with the facts – the post-war boom had nothing to do with correct policies or regulations. Indeed those policies – for example high corporate and personal levels of taxation – may have ‘worked’ in spite of themselves and were exposed as impediments to growth in the stagnation years of the 1970s.

Rather the post-war boom was the result of an inherent, and frequently unnamed, economic vitality that gradually evaporated as the second half of the 20^th century wore on. This perspective can be seen in reactions to the inconvenient fact that, although Margaret Thatcher radically changed British society in innumerable ways, she left the rate of economic growth virtually untouched. Or in scepticism towards the advocates of a Basic income.

However, the debate about the post-war boom usually takes as it as read that it concerns capitalist economies only – GERG’s 16 country list solely comprises industrialised capitalist economies. But, there are, in fact, good reasons for including the communist Eastern bloc and the former Soviet Union. Although reliable economic statistics for the Soviet years are hard to come by, the broad outlines are widely accepted – the Soviet Union enjoyed strong economic growth for two decades after World War Two but this growth petered out in the mid-1960s.

Such was the economic optimism, Soviet leader Nikita Khrushchev boasted in 1961 about leaving the United States far behind in industrial and agricultural output – and was taken seriously. This boasting was based on the fact that output had shot up, towns and cities had been rebuilt, life expectancy had doubled and many infectious diseases conquered. And the ‘socialist’ system was responsible.

Unfortunately, from the mid-1960s all this went into reverse. Health spending was cut, mortality started rising (by the end of the 1980s the USSR had the worst mortality rates of any industrialised country anywhere in the world) and deaths from heart disease, cancer and respiratory diseases started increasing. Indeed, in 1976, a French demographer, Emmanuel Todd, predicted the collapse of the Soviet Union on the basis of rising infant mortality. The Soviet state stopped collecting these figures in 1974.

So this should not be mistaken for a paean of regret about the unfairly maligned ‘socialist’ economy in the Soviet Union. The Soviet system that emerged from the Second World War was a full ripe Stalinist one, based on terrible repression – the secret police had executed over 680,000 people in 1937-8 alone. Although direct repression significantly abated after Stalin’s death in 1953, this was still a police state and, moreover, one based on the expropriation by a small ‘nomenklatura’ of the wealth created by the mass of people. This nomenklatura – comprising about 1 million people or 0.4 per cent of the population – even had their own health service which was, unsurprisingly, vastly better than the one ordinary people had to rely on. And this property-hungry elite, incidentally, was first in the queue to buy up all the Soviet-era assets when ‘communism’ collapsed in Russia in 1991 and mass privatisation was rushed through by Kremlin decree.

The idea – common in the West after 1991 – that the Soviet system was, economically, profoundly dysfunctional and inefficient, may also have been true. But what was also true, the evidence strongly suggests, is that this dysfunctionality was hidden by – or perhaps overwhelmed by – the vigour of the post-war boom.

 However, if this is true – and we should include the Soviet Union in any analysis of the post-war boom – then none of the explanations for its existence quite fit:

1 Reconstruction after the Second World War made an economic boom all but inevitable

This is the explanation most favoured by the Right because it excludes government policy and a strong labour movement from any credit for what ensued. The immense physical destruction caused by the six years of total war, the argument runs, guaranteed robust economic growth once peace had returned because so much work needed to be done rebuilding cities and repairing physical infrastructures.

This account makes sense for many post-war economies such as Japan (whose GDP grew at 7.8% between 1950 and 1973 but at only 2% from 1973 to 2008), Germany and Italy. It is also very plausible for Western Europe and, to a degree, Britain. And it most certainly works for the territory of the ex-Soviet Union which had been devastated by Nazi invasion at the loss of 20 million lives.

But for other economies which grew strongly in the post-World War Two decades, this rationale is far from convincing. The United States enjoyed robust GDP growth after the Second World War and, although it played a decisive role in its outcome, internally the country was untouched by it. So there was no rebuilding to be done.

True, the United States was pivotal in the rebuilding efforts of other countries – in Europe through the Marshall Plan and in the case of Japan – but were those endeavours sufficient to set its own economy on an upwards trajectory for around two decades? In recent years US companies have made huge investments in China and the country’s largest corporation, Walmart, sources 80% of its products from China. But these connections have not shown up in US GDP growth.

There were also countries in Europe – namely Portugal, Spain, Sweden and Switzerland – that enjoyed strong post-war economic growth (and in the case of Spain caught up with the rest of Europe) despite not being involved in the Second World War.

Moreover, the basic premise here – that economies emerging from war always experience impressive economic growth – is dubious. In the years since the post-war boom there have been many devastating wars – wars of independence from colonial control and civil wars – but nothing to compare with the post-Second World War boom. To take one example, the countries of the former Yugoslavia endured a brutal four year civil war from 1991-95, but – despite the devastation – subsequent economic growth has only been marginally better than the EU and global average and pales in comparison with the 20% growth rates achieved in Europe in the post-1945 years.

2. A benign policy environment aligned with powerful labour movements

In contrast to the Right, the mainstream Left (by which I mean Left Keynesians and some Marxists) draws attention, not to the physical environment, but the policy one. Free market capitalism had been thoroughly discredited by the experiences of the 1930s and the rise of Fascism and what emerged from the wreckage of World War Two was a regulated, managed capitalism. There were heavy restrictions on fractional reserve banking – the practice of banks’ inventing money by lending out a multiple of their capital assets – and a stable international exchange rate which nipped currency speculation in the bud.

This was allied with the acceptance by private owners and capitalists of strong and unyielding trade unions that had to be negotiated with. Welfare and health spending, in conjunction with pension provision, also increased. As result, real wages rose impressively, and because workers were also consumers, effective demand sustained an economic boom. And unlike today, this auspicious economic environment ensured productivity – output per worker – rose healthily, reaching 5% a year on a regular basis. All this without, it seemed, the downside of capitalism: there were no significant recessions for three decades after World War Two.

There are problems with this explanation even if the Soviet Union is not included. These are ones of timing. According to GERG’s figures, economic growth started falling around 1963 or ’64 – well before this benign policy architecture began to be dismantled. The ‘Nixon Shock’ – the refusal of the US allow the conversion of the US dollar to gold, thus effectively ending the Bretton Woods system and paving the way for free floating currencies, took place in 1971. Efforts to “zap labor” (the phrase belongs to Arnold Weber, the head of Nixon’s Prices and Wages Board) gestated in the 1970s but began in practice – in the United States under Reagan and the UK under Thatcher – in the 1980s. And in Germany, hostility to organised labour only really materialised (in the form of the ‘Hartz’ labour market reforms and wage repression) in the first decade of the 21^st century.

However, include the Soviet Union, and the ‘unique economic regime’ explanation becomes even less tenable. The Soviet Union was not in any sense a consumerist society and its economy did not depend on effective demand on the part of consumers. Wages were deliberately supressed under Stalin – until the 1950s they were lower in real terms than they were in Tsarist times. They rose somewhat in the post-Stalin era but the economy cannot be said to have been driven by consumer spending. Nor was there any finance sector in the Soviet Union to regulate. There was no need to ensure banks invested in the productive economy in Soviet-era Russia because private banks did not exist. But the country still experienced a post war economic boom.

3. The decline of profitability

This third explanation is definitely less in vogue that the first two – it is far from universally supported even among Marxian economists – but it deserves elucidation nonetheless. According to Marx, ‘the fundamental law’ of capitalism is for profit to decline – profit in the sense of the financial return on the amount of capital initially invested. This is known as the ‘Tendency of the Rate of Profit to Fall’ – TRPF for short. Barring certain counter-veiling tendencies – such as the opening up of new markets – this will deplete economic growth and lead to a recession. However, contrary to myth, in Marxist theory this is not a terminal problem. If the resulting bust is allowed to play itself out and companies permitted to go bankrupt, the stage is set for a new boom. In Marx-speak, ‘capital value’ has been destroyed and so profitability spikes again, inaugurating a new cycle of economic expansion.

According this group of Marxists, this is exactly what happened in the aftermath of the Great Depression. In the laissez-faire atmosphere of the 1930s, businesses were allowed to go the wall and unemployment to rise inexorably. But this prior destruction is exactly why conditions were ripe for prolonged economic expansion after the Second World War.

However, given the consequences of allowing the Great Depression to unfold without ameliorative action – political radicalisation, the rise of Fascism and World War – governments since then have been determined to stop all economic downturns wreaking the havoc they are bent on. They have been usually been washed away – as in 2008-9 – with bail-outs, stimulus programmes and subsidies. As result, economic downturns have not been nearly as devastating as in the 1930s. But they have also not paved the way for any subsequent boom – precisely because ‘capital value’ has not been destroyed to any great extent.  So economic growth has gradually and inexorably declined, an erosion which, in Freeman’s words, “shows no signs of ending” (the one partial exception since the 1930s to government action arresting economic downturns may well have been the recession of 1980-81, which was exacerbated by the hiking of interest rates in the US and UK and led to a quarter of UK manufacturing industry being wiped out. Coincidentally it was followed by an “8-10 year blip” in the trajectory of slowing growth).

The chronology problems in the second explanation are manageable here. Although there are disputes among TRPF economists about precisely when in the post-war era profit began to fall, one, Michael Roberts, places the tipping point in the mid-1960s.

However, this explanation applies to capitalist societies. That the Soviet Union was not ‘socialist’ is not in dispute. A self-selecting elite ruled over the mass of society, denying most people any democratic rights or control over their work. It is not widely appreciated how unequal the Stalinist Soviet Union was – a ruling class enjoyed a materially comfortable existence while, in anti-Stalinist revolutionary Victor Serge’s words, “the rest of the population, 85 to 88 per cent lives in primitive conditions, in discomfort, in want, in misery”. Such a society fully deserves to be described as accumulative – a small minority exploited and benefitted from the labour of others. But it wasn’t actually capitalist. Investment decisions were not based on the level of profit they would accrue.

That the ‘law of the tendency of the rate of profit to fall’ did not apply to the Soviet Union can perhaps been seen by what transpired when it collapsed. As noted above, the law is cyclical – if capital value is decimated, then profitability is restored and economic expansion can begin anew. But in 1991-94, in the transition crisis in the former Soviet Union, the conditions for the destruction of capital value were undoubtedly met. Production “fell by almost half in the 1990s” and 80% of the 27,000 Russian state enterprises were privatised. Life expectancy endured the largest falls in modern history outside of war and natural disaster. But Russian economic performance in that decade ranged from terrible to mediocre.

So if gross profit – as opposed to profit share – did not spike in the ex-Soviet Union in the 1990s, one can be fairly sure that rising profit expectations were not behind the economic boom that undoubtedly occurred there in the post-war years.

What does it all mean?

According to the GERG report’s author, Alan Freeman, the findings have “profound implications”. The high growth of the post-war years was the result of a “long historical process”, rather than wise policy decisions, he affirms. The other side of the coin is that the protracted decline of economic growth since the mid-1960s cannot be undone by reversing government policy and replacing austerity with fiscal and monetary stimuli. Such policies may be urgently necessary socially, but they will not transform the economic environment of ‘advanced’ industrialised countries.

Rather – and I’m extrapolating here – if the post-war boom was the consequence of epoch-making events such as the Great Depression and World War Two, for any new boom to occur similarly momentous phenomena have to precede it.

And we have every reason for not wanting this to happen. Firstly, because deep economic downturns and hugely destructive armed conflict are intimately connected – you’d have to try very hard not to see a causal link between the Great Depression and World War Two. Secondly, because the world cannot endure a repeat of the high economic growth of the post-war decades. We are already in a situation where GDP growth levels are causing CO₂ emissions to rise year on year when they have to fall drastically and rapidly if a future of submerged cities, huge refugee flows and mass hunger is to be mitigated. And this is happening when the growth levels of industrialised nations are – in historical terms – insipid. The annualised growth of OECD countries (35 industrialised countries, excluding China and India) currently stands at 2.4%. The growth rate of GERG’s 16 Northern industrialised countries is probably just over 2 per cent. Caveats apply about how growth has been outsourced to the Global South and global trade, rather than economic growth per se, drives climate change. However, the “routine” growth rates of the 1950s – 6 per cent and higher – are unthinkable even if, though some miracle, they are achievable.

Logically, therefore, the requirement is for an economic system that provides stability and material assurance to people’s lives whilst at the same time keeping growth at negligible levels. Regardless of the visible effect of austerity policies, declining economic growth clearly has human consequences. Even in the Soviet Union, high economic growth spurred the rebuilding of cities and rising health spending, while economic stagnation produced its opposite.

Therefore the necessity is for an economic system that retains the socially benefits of high and equitable growth without relying on such growth. Such a system will not be capitalism – it will be post-capitalist – and it will negate capitalism’s fundamental characteristic: the accumulation of profit which is then used to reinvest in new profit-making schemes, and so on ad infinitum, thus turning the system into a perpetual growth machine.

We may be nearer to that outcome than we think. The ebbing of the post-war boom in the Soviet Union was accompanied by rising mortality and declining health spending. In the mid-1970s, its demise was predicted, though at the time few were listening, by someone who noticed that infant mortality figures were going up. And in 25 years’ time, that prediction came true.

And, now in the heartland economies of the industrialised North, life expectancy is falling. Granted, in countries such as Britain, this is intimately connected to austerity policies, but it is also apparent in the United States, a country that has shunned austerity, at least at the federal level. The question is, are we a quarter of a century away from the end of capitalism in its heartlands?

Reality-mongering about inequality will get you nowhere

Oxfam is a “thinly disguised left-wing lobby group” tweeted a Conservative Parliamentary candidate earlier this week after the British branch of the development charity reported that the five richest families in the UK boast more wealth than the poorest fifth of the population put together.

It’s an interesting definition of left-wing where your deep red political stripes are inadvertently displayed by the mere fact of relating what is actually happening in the world.

Charities can now so easily slip into the crime of “reality-mongering”. Last December, Christian food bank charity, the Trussel Trust was damned as “political” by Tory minister, Iain Duncan Smith, for daring to suggest that the government’s benefits sanctioning regime and the soaring price of food might have something to do with the fact half a million people are regularly forced to call on its services.

But there is, despite the brickbats, an unmistakable thirst for more reality, unencumbered by ideological blinkers. Manchester University’s “Post-Crash Economics Society”, for example, was formed by students last October, because they say orthodox economics “cannot explain the world we live in”.

“Neoclassical economics in the era of neoliberal triumph, beginning in the late 1970s,” say two Marxian economists, John Kennedy Foster and Robert McChesney, “promoted versions of economics that eschewed reality for pure market conceptions.” In their obsession with the fantasy battle of state versus market, conservatives simply cannot see inequality or the growing trend towards monopoly in contemporary capitalist society.

 The world won’t listen

Oxfam’s problem does not lie in its ability to discern the existence of huge inequality, but in its plaintive appeal for the British political system to do something about it. For long ago British politics forgot how to listen.

“The only effective design for diminishing the income inequality inherent in capitalism is the progressive income tax,” noted famed 20^th century economist John Kenneth Galbraith, in 1992.

“That taxes should now be used to reduce inequality is, however, clearly outside the realm of comfortable thought,” he went on.

To appeal to conservatives to raise taxes on the wealthy, is rather like imploring Michael Bay to embrace slow cinema. The tragedy of British politics is that the centre-left is almost equally resistant to causing the wealthy even mild discomfort. In this sense, as one economist has noted, Britain has an effective one party state.

The last Labour government, for example, slashed capital gains tax (the tax you pay, if you make money from selling shares) from 40 to 18%, a cut that was, ironically, partially reversed by the coalition. Labour did raise the top rate of income tax (on income above £150,000 affecting 1% of taxpayers) to 50% and has pledged to reverse the coalition’s cut back to 45%. But, in order not to appear “anti-business”, the party says a renewed 50% rate would only be temporary.

 Robin Hood in reverse

Corporate income tax was reduced by the 1997-2010 Labour government from 33% to 28% (it was 53% in the 1970s) and has been scythed down to 20% by the current government (at the same time as raising VAT which affects everyone). Labour has said – exposing an indelible stain of Bolshevism - that they will increase it back up to 21%!

By way of international comparison, Barack Obama, who has raised the top rate of tax in the US slightly, wants to cut the headline rate of American corporate income tax from 35% to 28% (the effective rate, taking into account all the exemptions that can be got, is 19%).

Corporate income tax is a tax on company profits and is frequently presented by politicians, who want to reduce or better abolish it, as a tax on economic growth. But these profits pay for all the dividends to large institutional shareholders, like hedge funds, and astronomical executive salaries and stock options – thus making a massive contribution to inequality.

Moreover, many wealthy people have, for tax purposes, transformed themselves into corporations to take advantage of the fact that the rate of corporation tax is so much lower than the top rate of income tax. Half as much, in fact, in the UK.

“The more corporation taxes are cut,” says the Tax Justice Network, “the more wealthy folk will shift their income out of personal tax category and into corporate forms, so as to pay the lower corporate tax rate. The more they do this, the more governments feel they must cut personal tax on wealthy people to stop it.”

It is worth recalling that when the profits tax (the precursor to corporation tax) stood at 50% in 1960s Britain, economic growth - at 3.27% - was more than double its current rate.

There is no appetite among the political class in Britain, for raising taxes on the wealthy in other ways either. While EU, led by Germany and France, is determined to introduce a financial transactions tax (a tax of 0.1% on the sale of shares and bonds, AKA the Robin Hood tax), a measure highlighted by Oxfam as a way to reduce inequality, the British government is opposed and the Labour opposition deafening in its silence on the issue.

Britain’s one party state on tax is so entrenched, it will survive even its dissolution. Scottish First Minister, Alex Salmond, is pressing for independence from Britain in September’s referendum, but is also in favour, should the yes vote win, of an even lower corporate tax rate than the UK – three percentage points lower, in point of fact.  In addition, Salmond parrots the UK government line that, while a financial transactions tax is eminently desirable, it can only be introduced if the whole world agrees, because unilateral implementation would damage the Scottish financial services sector. Isn’t consensus lovely?

 Don’t redistribute, distribute

But besides the futility of petitioning a deaf political culture, Oxfam’s inequality campaign is doomed for a more integral reason. For it rehashes the time-honoured method of reducing inequality through tax redistribution. At the risk of sounding simple-minded, if you don’t want the outcome of gaping inequality, perhaps you ought to alter how wealth is distributed in the first instance.

“If change is ever to occur,” writes Gar Aperovitz in his book, America Beyond Capitalism, “an assault must ultimately be made on the underlying relationships that have produced the inequality in the first place – especially those involving ownership and control of the nation’s wealth.”

There was acclaim across the political spectrum, including from Conservative MPs, for the 2009 book, The Spirit Level. Authors Richard Wilkinson and Kate Pickett showed how problems such as obesity, mental illness and violence were made worse by greater economic inequality. But what seemed to escape understanding was that Wilkinson and Pickett did not place all their faith in the traditional method of combatting inequality, tax redistribution. They placed greater importance in changing the “underlying relationships” through democratic employee-ownership of companies, as a way of addressing inequality at its root.

Capitalism produces inequality as surely as breathing produces carbon dioxide. And unsuccessful capitalism – the kind we have now – generates extreme inequality. According to French economist Thomas Picketty, if the rate of economic growth is below the after-tax rate of return on capital, inequality will spiral.  Those are precisely the conditions – insipid growth and capitalists demanding a high rate of return - that we have experienced in the West for the past 30 years.

To return to Alperovitz, he argues that the future of efforts to reduce inequality do not reside in tax redistribution but in worker and municipally controlled economic enterprises. “There is no way to achieve movement towards greater equality,” he writes, “without developing new institutions to hold wealth on behalf of small and large publics.”

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

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

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

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

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

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

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

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

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

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

Oh shit

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

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

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

Something had gone badly wrong.

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

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

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

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

Flatliners

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

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

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

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

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

The globe stops warming

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

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

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

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

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

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

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

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

Post-capitalism

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

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

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

Is this a market I see before me? Review of 'After Capitalism'. Final part.

If memory serves we were up to number 5.

5 Overwork

ED (economic democracy) should be able to do something about both the length of work and its intensity. Workers in control of an enterprise, if they desire a healthier balance between leisure and work, have it within their power to institute just that. “Work-life balance” would become a reality as opposed to possessing, as it does now, the status of an abstract choice.

Work could also become more varied. In the co-operative complex of Mondragon in Northern Spain, work tasks are rotated every two hours as a way of enhancing the mental health and productivity of the worker-owners.

But it is questionable whether, in a market, ED would be able to do everything about overwork. The imperative of any enterprise in a market is to survive and if other work-controlled enterprises chose to prioritise work over leisure and increase production and sales as a result, it seems likely that fellow worker-controlled enterprises would have to follow suit whether they wanted to or not.

Cure for Capitalism rating: 6/10

6 Instability

Capitalism’s instability stems from what (Keynesian and Marxist) economists call the business cycle. An immense and growing amount of goods and services are produced which eventually glut the market and become too much for consumers to absorb. Recession results and, in time, the process begins again.

Like ping-pong, you might say. “Don’t worry, be happy/things will get better naturally”.

In addition, capitalism, in the last thirty years, has become more volatile. It has suffered more frequent downturns and financial crises. This, it seems, is due to attempts to postpone a full-blown depression by bolstering people’s flagging incomes with consumer debt, and thus, because of spiralling interest payments, creating far more money at the top of society which just ends up in speculation.

“The ever-present danger to the system is deficient demand,” says Schweickart. “When supply outstrips demand, the economy falters. If goods can’t be sold, production is cut back, workers are laid off, and demand declines further.”

Would ED abolish the business cycle? I have to admit I’m not entirely sure. ED would undoubtedly abolish, or drastically reduce, wage-labour - the material dependence workers have, under capitalism, on how much money they can negotiate by selling their labour. Workers in ED enterprises would not be exploited. They would own and direct their work-places and receive a full share of profits. Labour would not be another “cost” of production. Because of this, the income of worker-consumers should be far more stable.

Whether ED enterprises would accumulate profits and use that capital to produce more goods, eventually glutting the market, I’m not certain. From what I can gather ED would substantially ease the business cycle, if not abolish it outright.

Cure for Capitalism rating: 7/10

Is this a market I see before me?

ED, compared to traditional socialism, embodies an alien trinity – profits, competition and markets. ED enterprises make profits and they compete with each other in a market economy. Historically, the Left has regarded the “market economy” as the problem, never the solution. It is, in many leftist eyes, from Friedrich Engels to Murray Bookchin, synonymous with capitalism and its myriad injustices.

But ED is unashamedly, a market economy. The “counterfoil” to the market lies in the practice of social control of investment – the destination of up to 15% of new investment is determined democratically through public meetings. But the bulk of the economy takes place in a market.

ED is, as Schweickart says, decentralised. It avoids the deformations of Communism. “There is no central authority,” he writes, “dictating consumption, production or employment.” But at what costs are these defects, this fatal centralisation of political and economic power, avoided? Does ED “socialism” cut off its nose to spite its face?

ED is based on the assumption that our most pressing economic problems stem, not from the fact that enterprises interact in a market, but the way production is organised. A hypothetical Martian landing on earth, mused the economist Herbert Simon, would conclude that human beings live in an organisational economy, rather than a market economy. Most economic activity takes place within the boundaries of firms rather than through market transactions between those firms. ED wants to radically change how these firms are internally organised.

You can, theoretically, utterly change the way Tesco is organised as a business, without altering its place in a market competing with other supermarkets

Light and Dark

But markets have inescapable defects. Organisations operating within them are forced to be institutionally selfish and have little regard to the people outside the boundaries of their precious organisation. They become egotistical competitors and, even if organised democratically, can become in Arizmendietta’s fear, “collective egotists.” Worker-controlled enterprises can and probably would be selfish in much the same way that trade unions currently are. Unions do, to some extent, represent the general interest but in a sense if you are not a member of a particular union, you don’t count.

But markets also have, it seems to me, certain definite advantages. They signal consumer preferences to enterprises more effectively than any form of planning. You can have undemocratic planning – central planning, the way the old Soviet Union and its replica states were organised. And you can – though it never been implemented on a mass scale - have democratic planning. Participatory economics and social ecology both embody democratic planning. But if you want goods and services to be produced unconsciously   -- to be available merely because enterprises react to signals that what they produce or do is popular and has demand – then that means some form of market.

The dilemma, I think, is that the advantages of markets are intrinsically linked to their detriments. The advantages are that consumer desires don’t have to be consciously stated. The disadvantages are that markets only work if there is profit to be made, they have a conservative bent, are hostile to experimentation and they grow.

Mondragon has an entrepreneurial division that tries to find consumer niches to exploit.  It’s quite possible that worker-controlled firms may be too successful. The evidence (and we are in the realm of large bodies here) is that they are more efficient than their capitalist equivalents, so they may actually be better at exploiting and magnifying consumer desires, and thus growing.

Shutting your (market) butt down (in certain areas)

What is clear is that there are large areas of society that should be closed to markets, however organised. “Thinking that we can live by the market alone is like believing that we can live by eating only salt, because salt is vital for our survival,” says the anti-austerity but pro-capitalist economist Ha-Joon Chang.

Markets – whether worker-controlled or not – do not work in health, for example, and cause either over-treatment or no treatment at all. In the media, the field of the creation and propagation of ideas and interpretation of everything “out there”, solutions are now focusing on non-market solutions. Participatory commissioning, for example, eschews markets and concentrates on public funding of investigative reporting.

Or culture, cinema and TV. The English writer Mark Fisher has spoken of the “the cult of minimal variation” - the need to make a profit means the risk-taking essential to artistic and cultural innovation is hamstrung. “Since it is now clear,” he writes, “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?” Notice, he does not say state agencies. But neither does he say market agencies.

Richard Wolff, another advocate of economic democracy, says you can have the advantages of markets – that they respond to consumer desires – without their downsides automatically following in train. If an enterprise in a worker-controlled economy fails, new jobs or training should be offered to its workers, he says. They are not just left to fend for themselves.

I can’t give absolute approval to Schweickart’s ED plan. There are elements I like about it. It gives meaning to democracy when the current capitalist charade just does a not very plausible impersonation. It accepts the necessity of markets but doesn’t go far enough in adjusting to their limitations and downsides. There are articles that consider this issue more completely than I have. ED also, rather conventionally, regards employment creation as an absolute good, when we are moving towards a world where thanks to technology, work is changing.

But After Capitalism does debate capitalism as a system and looks it squarely in the eye.  “If the contradictions of capitalism are as serious as I argue they are, and if they become more, not less, acute, as almost surely they will, then we will witness another sustained challenge to this most peculiar economic order,” Schweickart wrote a decade ago.

The contradictions are becoming more acute and another sustained challenge is brewing. The contents of the intellectual backpack of this coming anti-capitalist movement are, therefore, of crucial importance.