Capitalism Hits the Fan, Video by Richard Wolff
His purpose is to explain the origins of the current economic crisis and to encourage people to take matters into their own hands, since those in charge don’t know what they are doing
What the crisis is not:
- It is not a financial crisis in the sense that it arises from the whole economic system
- It is not temporary, fleeting or short
These long lasting economic crises are not just events that only happened long ago. In 1989, Japan’s economy encountered a severe downturn and has still not recovered, 18 years later. Japan is the second most important industrial country in the world.
The policies of Paulson (Treasury Secretary) and Bernanke (Federal Reserve Chairman) have been to stimulate the economy, to make money easier to obtain through lower interest rates, tax rebates and other measures
These policies were tried and failed in Japan and they will fail in the USA now. Already many stimulus policies have been tried and failed, only to be followed by a “bigger and better” stimulus policy.
Historical Framework of the Crisis, 1820-1970
Astonishing fact: In every decade of this 150 year period (1820-1970) the workers in the USA had a rising level of real wages. Even in the Great Depression decade (1930s) wages went down but prices went down even more. It is probably the only country in the world which can say that.
USA is a rich country, good quality land, supports productivity through immigration, improved technology and training etc. Workers were very productive and were rewarded with a rising standard of living.
Americans have internalized the experience of 150 years of expanding prosperity. This is sometimes called “American exceptionalism”, that there is something unique about America. The expectation is that “My children will live better than I do”. Americans have internalized the notion that they are copious consumers of goods. America invented advertising and became a society of consumption.
The Trauma of Flat Wages: 1970s – now
Starting in the 1970s, real wages stopped rising in the USA and have never resumed since. This is a fundamental change but the American people have not come to terms with it.
Why did real wages stop rising? (4 reasons):
- Technology – the efficient and versatile computer has replaced existing work
- Other industrialized countries (Japan, Europe) had comprehensively recovered from WW2 by 1970 and became efficient competitors to American capitalism. We no longer produce many televisions or automobiles in the USA. This led to a massive export of jobs.
- Women went to work in much greater numbers, part time and full time jobs
- Massive wave of Immigration, especially from Central and Latin America
How have American workers coped or adapted to the decline in real wages? ( 2 responses)
The first response is that the American working people did more work, put in more hours. The average hour worked by an American since 1970 has increased by 20%. By comparison the average hours worked in France, Germany and Italy have dropped by 20%
However, more work, more hours, for more people in each house (men and women) creates more costs as well as more dollars
The second response was that American working people went on the biggest borrowing binge ever in the history of the human race. At first they borrowed against the house (collateral - assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default). But the American people didn’t have enough collateral to borrow enough to keep their standard of living rising. Something else had to be invented to allow borrowing with no collateral at all.
So the credit card was created to allow banks to lend to the working people with no collateral at all. In economic terms this is called unsecured debt.
But no lender will lend to you without collateral unless there is something in it for them. The answer is the rate of interest. The average rate of Interest on a credit card today is 18% per year.
This borrowing solved a deep problem which arose from the history– how to maintain the impetus of the 150 years (up until 1970) now that real wages had stopped rising.
What has all of this led to:
- a working class which is exhausted by the amount of work it does
- a collapsing personal life created by too much work
- anxiety due to average level of debt exceeding average income
How did Business deal with the end of rising real wages?
The last 30 years have been SPECTACULAR for business, a period of rising labour productivity due to the introduction of computer technology. Workers were paid the same and yet they produced are more. So there were more profits arising from flat wages and rising productivity. This led to the greatest profit boom in the history of American capitalism.
This was an employers fantasy come true. I pay my workers the same and they work more and more for me. Wild euphoria. Unbelievable profits:
- Increased levels wages and bonuses for business, tens and hundreds of millions of dollars in annual salaries.
- They bought out competitors, they had the money to do this – mergers and acquisitions
- Business banked their money so that Banks became more powerful, had more money
- Then they lent these profits to their employees – the profits that the flat wages of the workers had made possible were then lent to the employees who produced that profit
One example was General Motors who setup a bank named GMAC (General Motors Acceptance Corporation). They lent money to workers to buy cars. This led to them making more money from the interest on their loans than selling cars. About ten years ago they became a general lender and went into the mortage business.
It is so profitable to push debt onto the American people that everybody does it.
Booms and Busts
They ended up lending to people who couldn’t pay it back. Boom and bust is built into this system. The only difference now is that it comes at the end of this long historical period where it has reached its outer limits.
This is now admitted by Greenspan to be “irrational exuberance”
Dot com internet bubble in the late 1990s-2000, then crash
The government was fearful and reacted by lowering interest rates. This led to more borrowing and the housing bubble, then another collapse
There is nothing left to bubble
Business now suffers from the anxiety and exhaustion (for different reasons) that was previously visited onto the working class. The economic landscape is littered with corpses.
Regulation won’t work
We won’t solve our problems with the monetary and fiscal policy that is currently being implemented.
What might be done instead of attempts to stimulate, attempts to bail out, government buying shares in the banks etc.?
Given the historical context these small halting steps do not add up to a solution. Some in Washington don’t think it will work either and so now some are suggesting regulation. But that won’t work either.
In the first 30 years after WW2 we lived in a regulated economy. Regulations cover what Banks are allowed to do, what Boards of Directors of Corporations are allowed to do, new institutions such as social security. These regulations arose from the desperation of the Great Depression. These regulations were in place from the 1930s to the mid 1970s.
Beginning with Reagan and continuing with Bush senior, Clinton and GW Bush we had an era of deregulation.
Some argue that if we reintroduce regulation now then that will fix our problems. Part of this is understandable, we did regulate our way out of the Great Depression. But another part of it is blind.
Regulation is meant to control capitalists, Boards of Directors. But what happens is that the Boards of Directors are highly motivated to work against and to weaken and destroy regulations. Capitalists are the enemy of regulation and work continually to undermine them. It is bizarre policy to introduce regulation whilst leaving in place Boards of Directors of big corporations who you know will work hard to undermine them. Not only do they have the incentives to undo regulations but they also have the resources since they are the people who receive the profits.
The American working class supported Roosevelt’s regulation but they won’t do that again. If we leave the structure of enterprise unchanged then we won’t be addressing the real issue: the conflict between those who own and run enterprises and those who work in them.
Regulation could work if the workers owned the business.
We need to extend democracy to the economic sphere, as well as the political sphere.
Many American workers have already implemented a form of this. Some Silicon Valley workers quit their jobs and work out of garages in a communal manner. In one way of thinking this could be called Marx’s idea of a communist enterprise.
In another way of speaking we could describe it as a "remarkably successful entrepreneurial initiative". People describing it this way are Republicans, who have never read Marx. Republicans in in Bermuda shorts in California are behaving like a communist enterprise
If we don’t take basic steps of this kind to deal with the crisis of capitalism then we will all be very sorry.