REBUILDING A LEFT ECONOMIC ALTERNATIVE: Policy Alternatives for the New World Order Jim Stanford* Originally presented to Federal NDP Renewal Conference, Ottawa, September 1994 * Economist, Canadian Auto Workers Union (CAW-Canada), 205 Placer Court, North York, Ont., M2H 3H9, (416) 497-4110. Views expressed are those of the author and should not be attributed to the CAW-Canada. Introduction: It is an understatement to admit that socialist economic policy-making is in a state of disarray. The traditional pillars of a socialist economic program--public ownership and state economic planning--have been largely rejected as ineffective, both in motivating economic development and in promoting socialist goals. Socialist economists and left political parties have been relegated to fighting rearguard actions in defense of what few interventionist policy tools still remain from the post-war golden age of the mixed economy. The economic imperatives of globalization and deficit reduction are demolishing even the mildest remnants of welfare state capitalism. Free-market capitalism finds itself in a position of unprecedented, unchallenged global hegemony--the structures and ideologies of this system being propagated and implemented virtually everywhere in the world, with less resistance than ever before. Within such a pessimistic setting, it is hard to envision a rebirth of a socialist economic alternative. It is thus little wonder that so many left economists are tempted to make a virtue out of a necessity--to accept and even welcome the triumph of the free market economy as an inevitable manifestation of economic rationality, and to then set themselves the task of doing what they can to somehow make the economic outcomes of this system fairer and more humane. I come to an alternative conclusion, in the face of the current global dominance of the free-market vision, and the gloomy prospects for a socialist economic project. The time is ripe for a fundamental rethinking and ground-up reconstruction of an alternative to free-market capitalism. This reconstruction will be informed by the failures of previous experiments with socialist economic policy, and equally importantly by the failures of global capitalism, despite its all-powerful position, to improve the economic well-being of the vast majority of the human race. With unregulated markets ruling the world, it is all the easier to point out their flaws and their often catastrophic effects. And with the slate of real-world socialist experimentation wiped virtually clean, it may perhaps be easier to envision the precise, concrete mechanisms and structures that will need to be created as part of a socialist economic project, without being wedded to the flawed, rough-draft visions of those mechanisms and structures that were attempted in practice. This article will not provide any step-by-step recipes for concocting a socialist economic policy. But it will attempt to suggest a broad direction for the future intellectual and political evolution of a movement for a socialist economy. I start with the issue of public finances, which has dominated most economic debates in this decade. But I see the problem of the government deficit as a metaphor for the deeper, lasting problems of the free market economy, and for the choices which socialists face in how to address those problems. I suggest some broad features of a potential future socialist economic program, and discuss the political opportunities and constraints associated with this program. The Debt and the Deficit: The current preoccupation with the state of public finances has constrained progressives from proposing new forms of public intervention, and indeed has made it difficult to argue even for the preservation of existing forms of intervention. How should socialists address the deficit? To borrow the language of the Federal NDP "Renewal Workbook", the deficit is a problem, not the problem. But the deficit and accumulated public debt is becoming a big problem, one that is increasingly handcuffing the ability of government to address deeper, underlying economic problems. Indeed, persistent structural deficits in Canada are a symptom of underlying economic weakness, not its cause. But like an opportunistic infection that can attack someone with a serious disease, the symptom can eventually kill the patient. And the deficit is an issue on which the left has been incoherent and unconvincing. There are many progressive reasons why continued public deficit financing, and the cumulating debt which accompanies it, should be seen as a major economic problem. Here are four: * The payment of huge public debt service charges has highly regressive effects on income distribution. Given the skewed distribution of wealth in Canada, collecting money from taxpayers and giving it to wealth-holders is surely more regressive than other income distribution issues (such as the distribution effects of consumption taxes) which have traditionally infatuated the left. * The existence of a permanent structural deficit prevents government from playing a stronger counter-cyclical role. The government has less financial leeway to increase spending during recession. Worse, with public spending consisting so heavily of interest charges (paid to wealthy households or financial institutions with very low spending propensities), public spending ceases to have very much of a stimulative effect. * Public deficits--at least as they are currently financed, and this is an important caveat--are the dominant contributor to a looming Canadian foreign debt crisis. The foreign financing of a significant share of public deficits is leading to an international debt servicing problem far greater than that associated with another favourite issue of the Canadian left: high levels of foreign direct investment (FDI) in Canadian industry. * The most serious, but least-recognized, problem associated with public deficits is the loss of control over monetary policy that they imply--again, at least as our deficits are currently financed. As discussed below, restrictive interest rate and monetary policies have been the most important and effective weapon in the successful neoconservative strategy of slowing economic growth, deliberately increasing unemployment, and reversing the post-war gains of labour. To some extent this policy direction could be turned around, through the re- regulation of financial institutions and interest rates, given sufficient political pressure and complementary interventionist policies in Canadian industries and the labour market. But as long as Canadian governments are going cap-in-hand to global financiers in search of liquidity to finance their deficits, then we can only accept the terms we are offered. Financial self- sufficiency will be an essential prerequisite for restructuring our financial system. Our socialist economic strategy should include as one component the relatively fast balancing of public budgets. There is nothing "left-wing" about running up a public debt. The most advanced social-democratic economies of Europe have had much smaller deficits (and hence smaller debt-servicing charges) than Canada: governments in these countries collect taxes to pay for their public interventions. Left governments which have attempted to finance social change through large deficits, without addressing the deeper structural constraints posed by the private profit- seeking economy, have inevitably collapsed amidst hyper-inflation and economic turmoil, leaving capital (especially international capital) more dominant than ever. Beneath the Deficit: This left-wing coming-to-grips with the problems posed by public debt is a metaphor for the overall political and intellectual problem which we face. The left is told that we must face the facts about the new global economy, give up our old dogmas, become more realistic and credible in what we advocate. This advice is offered not only with respect to public deficits, but also regarding other important issues: tax fairness, free trade, indeed our attitude towards private enterprise itself. There is some truth, of course, to the notion that we must update our arguments to reflect what has happened in the national and world economies. Some of our traditional, most sacred arguments and demands simply are not relevant anymore, may no longer even promote our ultimate socialist goals. But the problem in simply endorsing a "get-real" strategy, and implicitly or explicitly endorsing a free market approach, is that it mystifies the economic problems which we are supposed to be facing up to, and diverts attention from the underlying crisis in the new, all- powerful world market system. For example, within our country it is said that we simply cannot afford traditional left goals: quality public programs, higher wages, a more equal distribution of income. Right-wingers use this rhetoric to launch an all-out attack on public programs and regulation in general; the "realistic" left limits itself to calling for targeted programs and stricter, more punitive entrance requirements. But we must remember that these are demands that in many cases we had already achieved, 20 or even 30 years ago--the quality of our public programs and the equity of our distribution of income have been going backward since at least the mid-1970s. And so the key question that we can't lose sight of is: Why can't we afford these things anymore? Our economy is fantastically productive, relative to the 1970s when somehow we could afford new programs, higher wages, and more social equity--with a balanced budget, to boot. If properly utilized and distributed, our society has economic resources which are clearly capable of supporting existing and expanded public and social goals. When we simply accept that we must wake up to a new reality of globalization, all-knowing financial markets, and fiscal constraints, we ignore the deeper structural crisis that underlies the immediate problems we are dealing with. We obscure the true causes of that crisis, we let the system and the economic elites who run it off the hook, and we comfort ourselves with some common- sense ideology about how we have been living beyond our means and simply have to tighten our belts. Canadians have not been living beyond their means--this argument is a hoax. Instead, our economic system has been vastly underperforming: collectively, we have been living (and more importantly, producing) far below our means for most of the last two decades. That is the root of the economic and fiscal problems that have developed in Canada. This underlying reality of controlled, deliberate, permanent recession suits the most powerful economic agents in our system just fine. And now, the need to "face facts" is invoked in order to ram the round peg of what remains of Canada's public programs into a square hole created by permanent economic stagnation. The first priority of a left economic platform must be to expose the failure of the right-wing free-market program, rather than simply accepting the consequences of that failure as our own constraints. The Permanent Recession--Its Causes and Consequences: What explains this ongoing crisis in the free-market economic system? Answering this question will in turn imply some suggestions about ultimate solutions to that crisis. The permanent recession springs from root problems in two fundamental processes of the capitalist economy--problems that began to be encountered after the three golden decades of stable expansion and near-full employment that followed World War II: i) problems in the labour process: that is, how our economy organizes and motivates work, and ii) problems in the capital accumulation process: how our economy invests in machinery, productive facilities, and technology, and how it oversees the wise and efficient use of those capital resources. Most social-democratic economic policy was formulated in the context of a vibrant welfare-state capitalism. Issues of managing work and investment were left, for the most part, up to the private sector. The interventionist state limited itself to trying to guide and stabilize those processes (through both macroeconomic management and various laws and standards, such as labour standards, which constrained the actions of profit-seeking private agents), and redistributing to some degree the fruits of the private sector's productivity (through progressive fiscal policy, pro-union labour relations structures, and the provision of a growing "social wage"). This happy accord, which produced (for as long as it worked) tremendous material progress for working people, seduced most social-democrats into abandoning the notion of fundamentally restructuring the capitalist economy. This political-economic rapprochement was summarized in the old social- democratic cliche: "let the capitalists take charge of production, but socialists will look after a fairer distribution". The problem is that production and distribution cannot be separated. The state cannot for long "trick" capitalists into doing what they do best with a strong profit motive, while simultaneously redistributing that profit away (through high wages or high taxes). After 30 years of the welfare state and full employment, which underwrote a vast increase in the political and economic power of working people, the system ran into a limit--a limit which was felt first and foremost through crises in the two central economic processes mentioned above. While it worked, welfare-state capitalism embodied a convenient coincidence of economic interests. The private sector managed work and investment. A long profit-led boom was all the stronger thanks to the positive multiplier effects contributed by growing wages and mass consumption. With full employment and rapid economic growth, the state had ample resources to fund improved social programs, a growing public sector, and initiatives to reduce poverty. The huge postwar expansion of collective bargaining further compressed the structure of income distribution. The bottom-line consequence of all this for employers, however, was a long historic rise in the wage share of output, mirrored by a decline in the profit share. At the microeconomic level of production, the key labour process problem faced by employers is how to extract productive labour effort from workers at a minimal cost. This problem became increasingly binding, as full-employment and expanded unionization enhanced labour's bargaining power over both wages and work practices, and expanded social programs provided workers with some opportunity for decommodification (that is, for a degree of social and economic security that was independent of their status as sellers of labour services). So wages were higher and productivity lower than employers would have preferred. Net profit share was further squeezed by tax measures and by increasingly competitive markets (due in part to free trade and international competition). The consequences of this redistribution from profits to wages were not felt immediately: the profit share started at a very high level after World War II, and was initially sustained by rapid increases in productivity and the beneficial effects of high rates of capacity utilization on profitability. Eventually, however, the crisis in profitability sparked a crisis in the capital accumulation process, and by the mid-1970s private investment slowed and the profit-led system began to grind to a halt. Starting around 1980, the elites of this system engineered a great U-turn in the dynamics of economic growth, in an attempt to undo the "damage" to the profit system caused by 30 years of full- employment and an expanding social sector. Most importantly, elected and unelected institutions embarked on a program of deliberate economic stagnation. Permanent unemployment was re- established in order to discipline labour: undermining both wage demands and worker resistance to speed-up and other "productivity- enhancing" practices in the workplace. But unemployment alone does not sufficiently discipline labour if social programs provide unemployed workers with some degree of economic security, and thus another element of the strategy of permanent recession must involve disassembling those programs. In this strategy of deliberate stagnation, no instrument proved more powerful than the monetarist high-interest rate policies which were implemented almost universally in the industrialized market economies. Indeed, the onset of high real interest rates provides the best indicator of the timing of this sea-change in macroeconomic management. High rates on financial capital are a blunt, destructive, but effective way of both slowing down the entire economy and shifting the structure of income distribution back in favour of capital. They require that any new real investment which can still occur must be much more profitable than in the past, due to the high hurdle rate of return dictated by financial markets. And the international integration of capital markets ensures that monetarism is a global agenda, not one which can be ascribed (as the Canadian left did with John Crow) to the personal obsessions of individual central bankers. Monetarism was initially promoted as a means of battling inflation. But the behaviour of central banks during the current low-inflation recovery indicates that they are guided by a more important but unstated objective. The fact that they (and the stock markets!) are alarmed by cycle-peak growth rates of 3-4% (far slower than Canada's average growth rate from World War II to 1980), despite the large gap that exists between actual and potential output, suggests their true mission: maintaining the state of controlled, permanent recession. This U-turn has been reasonably successful, in terms of its objectives (but not in terms of human well-being!). Unemployment is high, the expectations and demands of workers have been revised dramatically downward, real wages have stagnated, productivity growth has accelerated, and the profit share of output has rebounded impressively. In some cases, when this social restructuring is especially successful, the leash of controlled recession can even be modestly relaxed. Nowhere is this more clear than in the U.S. So fundamentally has a new regime of insecurity and institutional powerlessness been consolidated there, that the unemployment rate there has fallen below 6%, but the decline in real wages has hardly slowed, and there is hardly a peep of resistance from labour. When workers are politically, economically, and institutionally so weak, it does not take very much unemployment to discipline them (although full employment will never be in the cards). In these terms, the U.S. economy may be poised for a long period of reasonably vibrant, but still tightly-controlled, profit-led growth--one which will expand output and accumulate capital, but leave most Americans worse off year after year. Two Options for Dealing with the Crisis: When we start by recognizing and indeed highlighting the underlying economic problems which have constrained the free-market system, then it seems that socialist economic policy-making can go in one of two broad directions: i) It can attempt to manage the economic crisis of the market system--organizing the necessary adjustments to the permanent recession in a way that is somehow more fair and humane than would be organized by pro-business governments. Call this option structural adjustment with a human face. ii) It can recognize the moment of crisis in the global market system, and start to develop policies and institutions--and just as important, the social and political base to successfully implement those policies and institutions--which will attempt to resolve the crisis through systemic change. Call this option a strategy of structural change. Under the first option, a social-democratic movement would share the same underlying political-economic assumptions as other political parties--accepting the premise that economic policies must promote the cost-minimizing extraction of labour effort in the workplace, and profit-driven capital accumulation as the engine of economic growth. The movement would help society adjust to the new economic "realities", by dismantling or downgrading the structures of the post-war welfare-state system in light of the economic and fiscal realities posed by the permanent depression. But it would do so in a way that attempts to protect some social equity considerations -- or at least as many as can be protected, given the fundamentally regressive nature of the overall project. The Ontario government's social contract is a good example of this model of social-democratic economic policy. The NDP government inherited a fiscal crisis, one that was not the result of overpaid public servants or too-generous social programs, but rather a legacy of Canada's vicious 1990-91 recession: deliberately brought on by federal policies of free trade, fiscal cutbacks, and above all high interest rates. What should a progressive government do in such a difficult situation? The Ontario government's choice was structural adjustment with a human face: accept the constraints of the permanent recession as more-or-less given, and then set about "responsibly" managing the necessary adjustments to this situation. The NDP's "comparative advantage" in this task was that its ties with labour made it easier to cajole or forcibly extract the cooperation of unions, in return for some possible marginal benefits in terms of the "fairness" of the final package (at least in relation to alternative cutback packages). One of the social contract's architects, Peter Warrian, summed up this "human-face" approach nicely: "The underlying reality is that the economics of the public sector has changed as definitively as the fish stocks in Newfoundland. What distinguishes us as social democrats is how we deal with it: humanely and with effectiveness". Elsewhere in the world, too, this approach explicitly informs social-democratic economic strategy, and leads many social- democrats (even backed by business, in some cases) to advance themselves as being best able to facilitate maximum structural adjustment. Less "humane" right-wing versions of adjustment will be resisted by working populations, hence expending needless time and energy on social conflict; Social-democracy can accomplish the same goal more smoothly and peacefully. For example, the PRI in Mexico has used its social-democratic roots and "solidaristic" public programs to smooth the path of a brutal structural adjustment there. Far from being alarmed at the rebirth of socialist parties in Eastern Europe, business leaders have actually hailed these parties' ability to more effectively sell cutbacks and structural adjustment to their electorates; "socialists can make the bitter pill easier to swallow", said one free-market economist of the Eastern European leftists. I use Ontario's social contract as a stereotype of this strategy, but in fact most of the NDP's policies throughout the period of the decline of welfare-state capitalism have been limited to putting a human face on restructuring, on deregulation, on globalization. Even some of the party's most courageous stands-- such as opposing the NAFTA and promising to abrogate the FTA in the last federal election--amount to little more than "Neo-Liberalism Light": a bit less free trade, a bit less deficit-cutting, a bit less privatization. None of these come close to addressing the underlying problem of the free-market economy, this "new reality" that we all have to adjust to. What is lacking is a vision of how to change that reality, not just adjust to it. Rebuilding the Alternative There is an alternative to structural adjustment, but it requires preparing ourselves to fight for and implement structural change. This is a huge, profoundly difficult long-run task. There are no models or recipe books to guide us. The things that have been tried in the past--simple nationalization, central planning, worker co-ops--have generally failed. I feel like socialists must have felt 100 years ago, in 1894, after 20 years of global recession, with the global hegemony of capitalism unchallenged. Now, like then, we have to make it up as we go along. This is why socialists around the world are in such fundamental crisis, searching for a path along which we can start to rebuild an alternative to the free-market system whose constraints and "new realities" imply such poverty and pessimism. It is much easier to retreat into accepting the basic economic structures (and the policies which they presuppose) as inevitable, tinkering with them around the edges to draw on a happy human face. But that greatly undermines the political bargaining position of working people. For in the process of developing and fighting for fundamental alternatives over the past century, socialist movements have left working people much stronger than they were 100 years ago--even though we have not achieved our nominal goal. We can do the same over the next 100 years, whether or not we manage to attain socialism at the end of it all. What will a rebuilt socialist economic program look like? I cannot present any detailed set of instructions. But by referring back to the two economic problems which underpin the market economy's permanent recession, I can at least suggest the questions that we will have to answer in the course of developing our program. i) Reconstructing the Labour Process: If we want to simultaneously achieve full employment, high wages, social security, and economic productivity, then we will need a whole new model of how to manage and motivate work. The current market system of labour extraction relies heavily on the stick, not just the carrot: the risk of being thrown out of work and into poverty is an essential ingredient in enforcing productivity and limiting wage demands. Permanent unemployment is a prerequisite for this model. We will need to replace this with a program of wide-ranging labour-market regulation, whereby wages, employment, and working conditions are all collectively managed with an eye to both efficiency and equity. ii) Socializing the Capital Accumulation Process: Growth and employment in the current system are strictly constrained by the requirement of high private profitability. This is how the system automatically recreates unemployment and stagnation: if profits are too low, private investment stops (ie. capital goes "on strike"), and the system grinds to a halt until high unemployment has disciplined labour and restored profitability. We need to eliminate the barrier that profitability poses to full employment, and this will involve some kind of socialization of the investment process--the exercise of some kind of collective social control over capital. Learning from the lessons of the past, these goals will be difficult to achieve in a traditional top-down fashion--by nationalizing large firms, for example, and appointing sympathetic directors to run them more in the "public interest". Instead, I propose a kind of economic revolution in the Gramscian sense: instead of trying to take over existing economic structures, we gradually build up our own alternative structures alongside them, slowly expanding their size and credibility, until they have eventually become more important and powerful than those initial structures. I propose a movement for Community Entrepreneurship, but not in the "up-by-your-bootstraps" small-business sense implied by many community economic development advocates. Imagine, rather, a broader process of getting communities to collectively perform the tasks for which we have traditionally relied on private entrepreneurs: coming up with new product or process ideas, employing capital and workers, and organizing and managing production. There are many ways in which this could occur, and the real- world process of rebuilding a socialist economic vision will require a diversity of experimentation. Let me propose one concrete but by no means exclusive example. Canada has a thriving auto parts industry. But the industry, by and large, is failing to take advantage of a strategic opportunity: as more auto parts production is subcontracted from the major auto-makers, there is a need for advanced firms (called "Tier 1" firms in industry jargon) to step forward with complex, high-technology, pre- assembled auto parts sub-systems. The economic and social benefits of this type of production are much greater than the more standardized mass production which is the industry's traditional bread and butter. But the Canadian industry, by and large, is not filling this need, largely because it is composed of small, highly competitive firms which do not have sufficient capital resources or technical know-how to develop and produce these new auto parts sub- systems. Community entrepreneurship could step into the void. Collectively, Ontario has technical know-how and highly skilled auto parts workers. Publicly-controlled capital (perhaps sourced from a public industrial development bank, as proposed by the Canadian Labour Congress) could fund both R&D (at community-based research centres) and the initial product development initiatives that could be spun off from that R&D. Smart public management could unite technical know-how, with capital and labour, with the emerging markets provided by the major auto-makers. Over time a public, community-based, high-tech auto parts industry could develop, one that would be gradually able to challenge private firms for new opportunities, and perhaps even branch into other industrial activities. The industry would be amenable to measures (such as reduced working time) aimed at sharing more widely its economic benefits; as a publicly-owned industry, it will not be seeking cheaper foreign production locations for its innovative products. There is nothing magical about capital. No pot of gold savings is required. Capital is created by private banks, as a line item in a chequing account, when the bank is presented with an investment opportunity that it deems appropriately profitable and secure. By changing the criteria which guide this capital- formation process we can gain access to the financial resources which will be necessary. Much more difficult questions involve how to collectively manage those resources, ensuring that both capital and labour are used productively and flexibly. Socialist Economics and Political "Realities": The minimum program of a movement for a socialist economy should be to reverse the great economic U-turn that has been engineered over the past 15 years. Expose whose interests have been served by the permanent recession, reduce real interest rates, put productive investment before the interests of financial wealth- holders, re-elevate full-employment to the top of the economic agenda. This is an intimidating political and economic challenge but all it would do is put us back where we were at the end of the 1970s; when welfare-state capitalism was reaching the limits imposed by its continued reliance on profit-driven labour extraction and capital accumulation. That is why we also need a maximum program, one which proposes to gradually replace these pillars of the free-market economy with more humane and ultimately more efficient alternatives. As a political platform, the program sketched out above is sparse and undeveloped, and would likely be ridiculed in the political mainstream as far-fetched and dangerous. I cannot pretend that it presents a complete, comprehensive, or credible alternative economic program. But it does propose a direction for our long-run policy-development efforts. It is an economic strategy rooted in the finest tradition of democratic socialism: one that provides a vision of ultimate social transformation-- peaceful, gradual, but thorough. It rediscovers our movement's socialist roots, and recasts them in light of what we have learned in the past half-century. Is the program electable? I would not underestimate its political appeal. It has some attractive and novel features, such as focusing public attention on what has happened in our economy, on the new power that business has attained, and on how that power is being squandered. It puts the free-market economic project on the defensive, instead of accepting its underlying precepts and fighting a few skirmishes around the fringes. But it is extremely unlikely that a party espousing such a program could be elected in Canada in the near or even medium future. And even if it were, it would not yet possess the political or economic base to implement the sort of social change we are proposing. However, I would argue that the more important task for socialists is to help Canadians understand what is happening in the economy, why their standard of living is deteriorating, and what sorts of challenges will have to be overcome if we are to put the economy back into the service of Canadians rather than their oppression and exploitation. This could prove to be a more important contribution to a strong and vibrant socialist movement in the long-run, and hence to the ultimate economic and political well-being of working people--whether or not it involves electing an NDP government. The alternative, in my mind, is worse. It plays at managing the crisis. It aims to obscure the true causes of the crisis by pretending it is inevitable and beyond our control, and thus serves to demoralize and demobilize. Socialists can do better than this. Rebuilding a Left Economic Alternative by Jim Stanford JS:nk:jmopeiu343 December 5, 1994