******************** POSTING RULES & NOTES ********************
#1 YOU MUST clip all extraneous text when replying to a message.
#2 This mail-list, like most, is publicly & permanently archived.
#3 Subscribe and post under an alias if #2 is a concern.
*****************************************************************
Foreign Affairs, July/August 2018 Issue
Marxist World
What Did You Expect From Capitalism?
By Robin Varghese
After nearly every economic downturn, voices appear suggesting that Marx
was right to predict that the system would eventually destroy itself.
Today, however, the problem is not a sudden crisis of capitalism but its
normal workings, which in recent decades have revived pathologies that
the developed world seemed to have left behind.
Since 1967, median household income in the United States, adjusted for
inflation, has stagnated for the bottom 60 percent of the population,
even as wealth and income for the richest Americans have soared. Changes
in Europe, although less stark, point in the same direction. Corporate
profits are at their highest levels since the 1960s, yet corporations
are increasingly choosing to save those profits rather than invest them,
further hurting productivity and wages. And recently, these changes have
been accompanied by a hollowing out of democracy and its replacement
with technocratic rule by globalized elites.
Mainstream theorists tend to see these developments as a puzzling
departure from the promises of capitalism, but they would not have
surprised Marx. He predicted that capitalism’s internal logic would over
time lead to rising inequality, chronic unemployment and
underemployment, stagnant wages, the dominance of large, powerful firms,
and the creation of an entrenched elite whose power would act as a
barrier to social progress. Eventually, the combined weight of these
problems would spark a general crisis, ending in revolution.
Marx believed the revolution would come in the most advanced capitalist
economies. Instead, it came in less developed ones, such as Russia and
China, where communism ushered in authoritarian government and economic
stagnation. During the middle of the twentieth century, meanwhile, the
rich countries of Western Europe and the United States learned to
manage, for a time, the instability and inequality that had
characterized capitalism in Marx’s day. Together, these trends
discredited Marx’s ideas in the eyes of many.
Yet despite the disasters of the Soviet Union and the countries that
followed its model, Marx’s theory remains one of the most perceptive
critiques of capitalism ever offered. Better than most, Marx understood
the mechanisms that produce capitalism’s downsides and the problems that
develop when governments do not actively combat them, as they have not
for the past 40 years. As a result, Marxism, far from being outdated, is
crucial for making sense of the world today.
A MATERIAL WORLD
The corpus of Marx’s work and the breadth of his concerns are vast, and
many of his ideas on topics such as human development, ideology, and the
state have been of perennial interest since he wrote them down. What
makes Marx acutely relevant today is his economic theory, which he
intended, as he wrote in Capital, “to lay bare the economic law of
motion of modern society.” And although Marx, like the economist David
Ricardo, relied on the flawed labor theory of value for some of his
economic thinking, his remarkable insights remain.
Marx believed that under capitalism, the pressure on entrepreneurs to
accumulate capital under conditions of market competition would lead to
outcomes that are palpably familiar today. First, he argued that
improvements in labor productivity created by technological innovation
would largely be captured by the owners of capital. “Even when the real
wages are rising,” he wrote, they “never rise proportionally to the
productive power of labor.” Put simply, workers would always receive
less than what they added to output, leading to inequality and relative
immiseration.
Second, Marx predicted that competition among capitalists to reduce
wages would compel them to introduce labor-saving technology. Over time,
this technology would eliminate jobs, creating a permanently unemployed
and underemployed portion of the population. Third, Marx thought that
competition would lead to greater concentration in and among industries,
as larger, more profitable firms drove smaller ones out of business.
Since these larger firms would, by definition, be more competitive and
technologically advanced, they would enjoy ever-increasing surpluses.
Yet these surpluses would also be unequally distributed, compounding the
first two dynamics.
Marx made plenty of mistakes, especially when it came to politics.
Because he believed that the state was a tool of the capitalist class,
he underestimated the power of collective efforts to reform capitalism.
In the advanced economies of the West, from 1945 to around 1975, voters
showed how politics could tame markets, putting officials in power who
pursued a range of social democratic policies without damaging the
economy. This period, which the French call “les Trente Glorieuses” (the
Glorious Thirty), saw a historically unique combination of high growth,
increasing productivity, rising real wages, technological innovation,
and expanding systems of social insurance in Western Europe, North
America, and Japan. For a while, it seemed that Marx was wrong about the
ability of capitalist economies to satisfy human needs, at least
material ones.
BOOM AND BUST
The postwar boom, it appears, was not built to last. It ultimately came
to an end with the stagflationary crisis of the 1970s, when the
preferred economic policy of Western social democracies—Keynesian state
management of demand—seemed incapable of restoring full employment and
profitability without provoking high levels of inflation. In response,
leaders across the West, starting with French Prime Minister Raymond
Barre, British Prime Minister Margaret Thatcher, and U.S. President
Ronald Reagan, enacted policies to restore profitability by curbing
inflation, weakening organized labor, and accommodating unemployment.
That crisis, and the recessions that followed, was the beginning of the
end for the mixed economies of the West. Believing that government
interference had begun to impede economic efficiency, elites in country
after country sought to unleash the forces of the market by deregulating
industries and paring back the welfare state. Combined with conservative
monetary policies, independent central banks, and the effects of the
information revolution, these measures were able to deliver low
volatility and, beginning in the 1990s, higher profits. In the United
States, corporate profits after tax (adjusted for inventory valuation
and capital consumption) went from an average of 4.5 percent in the 25
years before President Bill Clinton took office, in 1993, to 5.6 percent
from 1993 to 2017.
This sharp divergence in fortunes has been driven by, among other
things, the fact that increases in productivity no longer lead to
increases in wages in most advanced economies.
Yet in advanced democracies, the long recovery since the 1970s has
proved incapable of replicating the broad-based prosperity of the
mid-twentieth century. It has been marked instead by unevenness,
sluggishness, and inequality. This sharp divergence in fortunes has been
driven by, among other things, the fact that increases in productivity
no longer lead to increases in wages in most advanced economies. Indeed,
a major response to the profitability crisis of the 1970s was to nullify
the postwar bargain between business and organized labor, whereby
management agreed to raise wages in line with productivity increases.
Between 1948 and 1973, wages rose in tandem with productivity across the
developed world. Since then, they have become decoupled in much of the
West. This decoupling has been particularly acute in the United States,
where, in the four decades since 1973, productivity increased by nearly
75 percent, while real wages rose by less than ten percent. For the
bottom 60 percent of households, wages have barely moved at all.
If the postwar boom made Marx seem obsolete, recent decades have
confirmed his prescience. Marx argued that the long-run tendency of
capitalism was to form a system in which real wages did not keep up with
increases in productivity. This insight mirrors the economist Thomas
Piketty’s observation that the rate of return on capital is higher than
the rate of economic growth, ensuring that the gap between those whose
incomes derive from capital assets and those whose incomes derive from
labor will grow over time.
Marx’s basis for the condemnation of capitalism was not that it made
workers materially worse off per se. Rather, his critique was that
capitalism put arbitrary limits on the productive capacity it unleashed.
Capitalism was, no doubt, an upgrade over what came before. But the new
software came with a bug. Although capitalism had led to previously
unimaginable levels of wealth and technological progress, it was
incapable of using them to meet the needs of all. This, Marx contended,
was due not to material limitations but to social and political ones:
namely, the fact that production is organized in the interests of the
capitalist class rather than those of society as a whole. Even if
individual capitalists and workers are rational, the system as a whole
is irrational.
To be sure, the question of whether any democratically planned
alternative to capitalism can do better remains open. Undemocratic
alternatives, such as the state socialism practiced by the Soviet Union
and Maoist China, clearly did not. One need not buy Marx’s thesis that
communism is inevitable to accept the utility of his analysis.
Marx predicted that competition among capitalists to reduce wages would
compel them to introduce labor-saving technology. Over time, this
technology would eliminate jobs, creating a permanently unemployed and
underemployed portion of the population. NOAH BERGER / REUTERS A Kiva
robot moves inventory at an Amazon fulfillment center in Tracy,
California December 1, 2014.
LAWS OF MOTION
Marx did not just predict that capitalism would lead to rising
inequality and relative immiseration. Perhaps more important, he
identified the structural mechanisms that would produce them. For Marx,
competition between businesses would force them to pay workers less and
less in relative terms as productivity rose in order to cut the costs of
labor. As Western countries have embraced the market in recent decades,
this tendency has begun to reassert itself.
Since the 1970s, businesses across the developed world have been cutting
their wage bills not only through labor-saving technological innovations
but also by pushing for regulatory changes and developing new forms of
employment. These include just-in-time contracts, which shift risk to
workers; noncompete clauses, which reduce bargaining power; and
freelance arrangements, which exempt businesses from providing employees
with benefits such as health insurance. The result has been that since
the beginning of the twenty-first century, labor’s share of GDP has
fallen steadily in many developed economies.
Competition also drives down labor’s share of compensation by creating
segments of the labor force with an increasingly weak relationship to
the productive parts of the economy—segments that Marx called “the
reserve army of labor,” referring to the unemployed and underemployed.
Marx thought of this reserve army as a byproduct of innovations that
displaced labor. When production expanded, demand for labor would
increase, drawing elements of the reserve army into new factories. This
would cause wages to rise, incentivizing firms to substitute capital for
labor by investing in new technologies, thus displacing workers, driving
down wages, and swelling the ranks of the reserve army. As a result,
wages would tend toward a “subsistence” standard of living, meaning that
wage growth over the long run would be low to nonexistent. As Marx put
it, competition drives businesses to cut labor costs, given the market’s
“peculiarity that the battles in it are won less by recruiting than by
discharging the army of workers.”
The United States has been living this reality for nearly 20 years. For
five decades, the labor-force participation rate for men has been
stagnant or falling, and since 2000, it has been declining for women, as
well. And for more unskilled groups, such as those with less than a high
school diploma, the rate of participation stands at below 50 percent and
has for quite some time. Again, as Marx anticipated, technology
amplifies these effects, and today, economists are once again discussing
the prospect of the large-scale displacement of labor through
automation. On the low end, the Organization for Economic Cooperation
and Development estimates that 14 percent of jobs in member countries,
approximately 60 million in total, are “highly automatable.” On the high
end, the consulting company McKinsey estimates that 30 percent of the
hours worked globally could be automated. These losses are expected to
be concentrated among unskilled segments of the labor force.
Whether these workers can or will be reabsorbed remains an open
question, and fear of automation’s potential to dislocate workers should
avoid the so-called lump of labor fallacy, which assumes that there is
only a fixed amount of work to be done and that once it is automated,
there will be none left for humans. But the steady decline in the
labor-force participation rate of working-age men over the last 50 years
suggests that many dislocated workers will not be reabsorbed into the
labor force if their fate is left to the market.
The same process that dislocates workers—technological change driven by
competition—also produces market concentration, with larger and larger
firms coming to dominate production. Marx predicted a world not of
monopolies but of oligopolistic competition, in which incumbents enjoy
monopolistic profits, smaller firms struggle to scrape by, and new
entrants try to innovate in order to gain market share. This, too,
resembles the present. Today, so-called superstar firms, which include
companies such as Amazon, Apple, and FedEx, have come to dominate entire
sectors, leaving new entrants attempting to break in through innovation.
Large firms outcompete their opponents through innovation and network
effects, but also by either buying them up or discharging their own
reserve armies—that is, laying off workers.
Research by the economist David Autor and his colleagues suggests that
the rise of superstar firms may indeed help explain labor’s declining
share of national income across advanced economies. Because superstar
firms are far more productive and efficient than their competitors,
labor is a significantly lower share of their costs. Since 1982,
concentration has been increasing in the six economic sectors that
account for 80 percent of employment in the United States: finance,
manufacturing, retail trade, services, wholesale trade, and utilities
and transportation. And the more this concentration has increased, the
more labor’s share of income has declined. In U.S. manufacturing, for
example, labor compensation has declined from almost one-half of the
value added in 1982 to about one-third in 2012. As these superstar firms
have become more important to Western economies, workers have suffered
across the board.
WINNERS AND LOSERS
In 1957, at the height of Western Europe’s postwar boom, the economist
Ludwig Erhard (who later became chancellor of West Germany) declared
that “prosperity for all and prosperity through competition are
inseparably connected; the first postulate identifies the goal, the
second the path that leads to it.” Marx, however, seems to have been
closer to the mark with his prediction that instead of prosperity for
all, competition would create winners and losers, with the winners being
those who could innovate and become efficient.
Innovation can lead to the development of new economic sectors, as well
as new lines of goods and services in older ones. These can in principle
absorb labor, reducing the ranks of the reserve army and increasing
wages. Indeed, capitalism’s ability to expand and meet people’s wants
and needs amazed Marx, even as he condemned the system’s wastefulness
and the deformities it engendered in individuals.
For a period, it seemed that the children of the middle class had a fair
shot at swapping places with the children of the top quintile. But as
inequality rises, social mobility declines.
Defenders of the current order, especially in the United States, often
argue that a focus on static inequality (the distribution of resources
at a given time) obscures the dynamic equality of social mobility. Marx,
by contrast, assumed that classes reproduce themselves, that wealth is
transferred effectively between generations, and that the children of
capitalists will exploit the children of workers when their time comes.
For a period, it seemed that the children of the middle class had a fair
shot at swapping places with the children of the top quintile. But as
inequality rises, social mobility declines. Recent research by the
economists Branko Milanovic and Roy van der Weide, for instance, has
found that inequality hurts the income growth of the poor but not the
rich. Piketty, meanwhile, has speculated that if current trends
continue, capitalism could develop into a new “patrimonial” model of
accumulation, in which family wealth trumps any amount of merit.
THE KEYNESIAN CHALLENGE
Marx’s overall worldview left little room for politics to mitigate the
downsides of capitalism. As he and his collaborator Friedrich Engels
famously stated in The Communist Manifesto, “The executive of the modern
state is but a committee for managing the common affairs of the whole
bourgeoisie.”
Until recently, governments in the West seemed to be defying this claim.
The greatest challenge to Marx’s view came from the creation and
expansion of welfare states in the West during the mid-twentieth
century, often (but not only) by social democratic parties representing
the working class. The intellectual architect of these developments was
the economist John Maynard Keynes, who argued that economic activity was
driven not by the investment decisions of capitalists but by the
consumption decisions of ordinary people. If governments could use
policy levers to increase overall demand, then the capitalist class
would invest in production. Under the banner of Keynesianism, parties of
both the center-left and the center-right achieved something that Marx
thought was impossible: efficiency, equality, and full employment, all
at the same time. Politics and policy had a degree of independence from
economic structures, which in turn gave them an ability to reform those
structures.
Marx believed in the independence of politics but thought that it lay
only in the ability to choose between capitalism and another system
altogether. He largely believed that it was folly to try to tame
capitalist markets permanently through democratic politics. (In this, he
ironically stands in agreement with the pro-capitalist economist Milton
Friedman.)
Under capitalism, Marx predicted, the demands imposed by capital
accumulation and profitability would always severely limit the choices
available to governments and undermine the long-term viability of any
reforms. The history of the developed world since the 1970s seems to
have borne out that prediction. Despite the achievements of the postwar
era, governments ultimately found themselves unable to overcome the
limits imposed by capitalism, as full employment, and the labor power
that came with it, reduced profitability. Faced with the competing
demands of capitalists, who sought to undo the postwar settlement
between capital and labor, and the people, who sought to keep it, states
gave in to the former. In the long run, it was the economic interests of
capital that won out over the political organization of the people.
MARXISM TODAY
Today, the question of whether politics can tame markets remains open.
One reading of the changes in advanced economies since the 1970s is that
they are the result capitalism’s natural tendency to overwhelm politics,
democratic or otherwise. In this narrative, les Trente Glorieuses were a
fluke. Under normal conditions, efficiency, full employment, and an
egalitarian distribution of income cannot simultaneously obtain. Any
arrangement in which they do is fleeting and, over the long run, a
threat to market efficiency.
Yet this is not the only narrative. An alternative one would start with
the recognition that the politics of capitalism’s golden age, which
combined strong unions, Keynesian demand management, loose monetary
policy, and capital controls, could not deliver an egalitarian form of
capitalism forever. But it would not conclude that no other form of
politics can ever do so.
The challenge today is to identify the contours of a mixed economy that
can successfully deliver what the golden age did, this time with greater
gender and racial equality to boot. This requires adopting Marx’s
spirit, if not every aspect of his theories—that is, recognizing that
capitalist markets, indeed capitalism itself, may be the most dynamic
social arrangement ever produced by human beings. The normal state of
capitalism is one in which, as Marx and Engels wrote in The Communist
Manifesto, “all that is solid melts into air.” This dynamism means that
achieving egalitarian goals will require new institutional
configurations backed by new forms of politics.
As the crisis of the golden age was ramping up in the 1970s, the
economist James Meade wondered what sorts of policies could save
egalitarian, social democratic capitalism, recognizing that any
realistic answer would have to involve moving beyond the limits of
Keynesianism. His solution was to buttress the welfare state’s
redistribution of income with a redistribution of capital assets, so
that capital worked for everyone. Meade’s vision was not state ownership
but a broad property-owning democracy in which wealth was more equally
distributed because the distribution of productive capacity was more equal.
The point is not that broader capital ownership is a solution to the
ills of capitalism in the present day, although it could be part of one.
Rather, it is to suggest that if today’s egalitarian politicians,
including Bernie Sanders in the United States and Jeremy Corbyn in the
United Kingdom, are to succeed in their projects of taming markets and
revitalizing social democracy for the twenty-first century, it will not
be with the politics of the past. As Marx recognized, under capitalism
there is no going back.
_________________________________________________________
Full posting guidelines at: http://www.marxmail.org/sub.htm
Set your options at:
http://lists.csbs.utah.edu/options/marxism/archive%40mail-archive.com
