Friday, February 20, 2009

video: capitalism hits the fan

I’m posting this as a discussion piece about the current economic crisis. It probably has both factual and analytical errors as well as correct points. It is a good piece for thinking and discussion for someone like me who is not very strong on economic theory but sees the need to improve this given the current crisis.

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
In the Great Depression (1929-39), Presidents Hoover and Roosevelt introduced monetary and fiscal policies but they didn’t get us out of the Depression; World War 2 is what got us out

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):
  1. Technology – the efficient and versatile computer has replaced existing work
  2. 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.
  3. Women went to work in much greater numbers, part time and full time jobs
  4. Massive wave of Immigration, especially from Central and Latin America
So the new situation is more people looking for jobs (women, immigrants) but less jobs available (computer technology, export of jobs to abroad). This chronic unemployment is a recipe for real wages that don’t go up anymore.

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
Our society has reached the limit. We cannot carry more debt and we cannot do more work. This is not a temporary problem. We have reached the limits of the kind of capitalism this society has become.

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
The working class were desperate to borrow

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.


Anonymous said...

hmm.... there is a social resonance to the fact that real wages rose until the 70s; embedding the notion of expansion and consumption - so that when real wages stopped growing, then people ate into both time and debt in order to maintain that mindset of progress --- kind of feels like something of the story here as well

Anonymous said...

I liked the speech. It brought into high relief what I've felt like has been going on for a long time. I have not participated in this whole thing of going into debt to maintain or increase my standard of living. So I don't know what it's like. I've just lived however I can on what I make, only going into debt short term. Only thing is I have never owned a home.

He may be right that the form of capitalism we have practiced has run its course, and there is nothing left for it to offer. I wouldn't be surprised if this sort of thing has happened before in the U.S. The history of our economy has been one of boom and bust. The very colonies that were the incubators of our country were the product of a boom and bust cycle in a commercial enterprise initiated by Europe. When the idea of privatizing roadways was invented (I think in the 19th century) we went through a boom and bust cycle with that.

I've been feeling like the reason "there's nothing left" is we as a society have given up on basic research. We aren't generating genuinely new ideas. As Alan Kay has said we've instead focused on optimizing old ideas. This adds value for only so long before you've optimized to a point where there's nothing left to do to it, at least until a new technology comes along that allows more optimization, but this requires generating new ideas.

It's interesting that the speaker talked about bringing democracy into corporations. I had a brief conversation with Alan Kay a couple years ago about the culture of business. He said: "[An] interesting slant is to back off a few thousand miles and try to look at biz as anthropologists would when visiting some human culture never before seen. They would conclude that biz is a 'hunting and gathering, oral traditional culture' still a reasonable distance from inventing agriculture, reading and writing, math and science, and modern governance."

I feel like the speaker glossed over some things. He seemed to take it as a given that the computer is going to continue to automate people out of their jobs, and that foreigners are going to continue outcompeting us. The way I look at it is "Maybe we should look at those things and address them. Do computers have to replace people, or can they empower them? Do foreigners have to outcompete us? Why can't we outcompete them?"

I felt like he glossed over the notion of a Marxist enterprise at the end. He said that technologists in Silicon Valley left larger businesses to start their own, and made themselves the board of directors. I imagine though that not every employee they hired became a member of the board. Only the founders and their business partners were allowed to do that. As I've said earlier, a lot of young entrepreneurs who succeed have "adult supervision". Without that they fail because they don't understand business that well.

Lately I've heard that a common practice in Silicon Valley startups is to hire American engineers here to develop the first release of a product. After the product is released they are laid off and all maintenance work on it is outsourced to a foreign country, because it's cheaper to do that work there. Only executives and sales staff are kept here. From what I've heard from people experienced with outsourcing, this is the way to do it: do the creative work here, outsource the maintenance. But it's not very egalitarian in terms of "spreading the wealth around" in our society.

I have heard of a form of democracy taking place at a natural foods store chain in the U.S. called Whole Foods. A few years ago they took a vote of all employees to decide how the company would structure its health care benefits. They decided on whether the company would choose their health care plan for them or if the employees would choose their own plans. The majority voted to choose their own plans, and so that's what the company instituted for all employees. Some employees complained about this decision, but the CEO said the decision was much more cost-effective for both the company and the employees.

When the U.S. set up a democratic republic the intent was to change the relationship between the power of government and the people that were governed. Similarly, democracy in corporations should do the same thing. I can't imagine though that corporations could work like our government. The primary purpose of the government is to protect people's rights. The sole economic provisions it provides are the respect of contracts, copyrights, and patents, which are civil rights. The primary purpose of a business in a capitalistic system is to conduct trade: trading capital for profits derived from production or services, and trading production or services for capital. A business cannot survive long without doing these things. So how does "democracy" or a "democratic republican" process exist in this environment? I think a rare few businesses are trying to find that out.

There's a book I got many years ago (I still have not completely read it) called "The New Pioneers: The Men and Women Who Are Transforming The Workplace and Marketplace.", by Thomas Petzinger. What I got out of it was Petzinger was promoting the idea that employees should be like mini entrepreneurs, and that business owners and managers should seek to bring out the creative energies of their employees and let them "run free" to create their own unique solutions to problems within the realm of the business they work for. It was a kind of anti-bureaucracy, anti-hierarchy manifesto. The book is filled with anecdotes about people who have used this strategy and succeeded. I think I got bored with it after a while because it felt like all he did was tell story after story, with the same theme, and the same end result. I've seen other books that promote business strategies this way. It gets boring after a while, but I think the ideas Petzinger presents are worth considering.

The part that got me was the central theme, which was (if I remember correctly) that businesses exist in a natural (ie. nature-like) environment, and if we observe what happens in nature there is competition, and there is also symbiosis. Different forms of life implement different strategies of survival, and different social systems. Change is a constant, and the systems that survive are the ones that are capable of adapting to changing conditions such that they continue to assure their survival. He advocated for a flat management structure, and feedback loops between employees and management. Something like that. The picture he painted was of creative, collaborative, agile, vibrant organizations, which were the antithesis of top-down, bureaucratic, hierarchical management styles, which he considered to be dinosaurs that would eventually go extinct.

Anonymous said...

I would say that FDR was well on his way to ending the depression before ww2. The original legacy project was used to resurrect Hoovers memory.

This article details what FDR was able to do.

The American Liberty League precursor to the modern conservative movement wanted to stay out of WW2 to protect the economy.

Bill Kerr said...

Direct links to articles from anonymous arguing that FDR New Deal policies turned around the Great Depression before WW2:

The "FDR Failed" Myth
The Forgotten Math: Pre-WWII New Deal Saw Biggest Drop In Unemployment Rate in American History

These articles seem well argued to me (but I'm not an expert). I will accept for now that Richard Wolff fudged this point.

Also note that Charles McMillion, the author of the first article, says that current US government policies are incorrect:
"I personally believe the recent and current bailout and stimulus packages are grossly misdirected and inadequate when compared with the remarkable trade and industrial policy strategies being implemented elsewhere, particularly in China."

Also, I remembered an earlier article I had read by Kevin Phillips which argues that America's situation today is far worse than that of the 1930s and outlines the reasons for that:
Bubble and Bail (worth reading in full):

1. Greater danger of inflation
2. America has largely lost its manufacturing base, finance capital dominates over manufacturing capital (in Phillip's terminology)
3. America is far weaker or more vulnerable compared to other countries now compared with then

If Phillip's is correct then America is finished as number one power, in decline, similarly to how Britain previously declined after WW1 and WW2

Charles McMillion's comment about China is interesting. Will China emerge from this as a new Superpower or will the whole system collapse, as Wolff argues?