One can describe much of economic history over the past few centuries in terms of conflict between the owners of capital and those who provide labor. A similar focus would also shed light on the evolution of society as a whole. At this moment in time, it appears that capital has won a decisive victory. If so, what does this mean for the futures of both capitalism and society? Those are questions discussed by Mark Blyth in an article, Capitalism in Crisis, that appeared in the journal Foreign Affairs. If capital has been victorious in exerting its dominance over labor, why would capitalism be considered to be in a state of crisis?
Blyth is Eastman Professor of Political Economy at Brown University. Note the use of the term “political economy” in his title. From Wikipedia:
“Political economy is a term used for studying production and trade, and their relations with law, custom, and government, as well as with the distribution of national income and wealth. Political economy originated in moral philosophy. It was developed in the 18th century as the study of the economies of states, or polities, hence the term political economy.”
The old economic masters recognized that economics and politics (“law, custom, and government”) were firmly coupled. Consequently, there will always be a power struggle between those who wish to conduct business as they desire and those who wish to impose rules and regulations on business conduct. Blyth expresses this fact.
“Ever since the emergence of mass democracy after World War II, an inherent tension has existed between capitalism and democratic politics; capitalism allocates resources through markets, whereas democracy allocates power through votes. Economists, in particular, have been slow to accept that this tension exists. Instead, they have tended to view markets as a realm beyond the political sphere and to see politics as something that gets in the way of an otherwise self-adjusting system. Yet how democratic politics and capitalism fit together determines today’s world. Politics is not a mistake that gets in the way of markets.”
Blyth provides this concise assessment of where we stand today.
“In the three decades that followed World War II, democracy set the rules, taming markets with the establishment of protective labor laws, restrictive financial regulations, and expanded welfare systems. But in the 1970s, a globalized, deregulated capitalism, unconstrained by national borders, began to push back. Today, capital markets and capitalists set the rules that democratic governments must follow.”
Given this state of affairs, how does the term “crisis” arise with respect to capitalism?
Blyth’s article discusses three recent books that provide different views on how and why capitalism has evolved to a crisis state. One will be discussed here: Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck. Streeck provides interesting insight into the events of the 1970s that caused the pivot from social control of capitalism to capitalist control of society. His analysis is based on a hypothesis formulated by the Polish economist Michal Kalecki and published in 1943. Blyth summarizes:
“Kalecki published a remarkable article in 1943 that predicted the economic turmoil of the 1970s. Kalecki argued that if full employment ever became the norm, workers would be able to move freely from job to job. Not only would this undermine traditional authority relationships within firms; it would also push wages up regardless of productivity levels, since workers would have more leverage to demand higher wages.”
“In response, firms would have to raise prices, creating a spiral of inflation that would eat into profits and lower real wages, which would, in turn, promote greater labor unrest. Kalecki argued that to restore profits, capitalists would rebel against the system that promoted full employment. In its place, they would seek to create a regime in which market discipline, with a focus on price stability rather than full employment, would be the primary goal of policy. Welfare protections would be rolled back, and the discipline that unemployment provides would be restored.”
This is a rather accurate prediction of what actually occurred in the 1970s as the high growth postwar years transitioned to the period of “stagflation” characterized by high inflation and lower profits and lower real wages. Conservative governments supported capital by reversing the recently acquired labor rights, bought into a small-government philosophy that reined in spending on social-welfare projects, deregulated much of the economy, and cut taxes dramatically for the wealthy.
The lost tax revenue due to the cuts meant the government was no longer able to cover the expenses of running the nation without borrowing money, providing additional influence to those in a position to provide the financing of public debt.
“This transformation has had profound political consequences. The increase in government debt has allowed transnational capitalists to override the preferences of domestic citizens everywhere: bond-market investors can now exercise an effective veto on policies they don’t like by demanding higher interest rates when they replace old debt with new debt.”
“The financial industry has become, Streeck writes, “the second constituency of the modern state,” one more powerful than the people.”
The net result of the revolutionary changes that began in the 1970s was the disruption of mass democracy in the western economies and a vast increase in economic inequality. A crisis in democracy bodes ill for the future of capitalism as well. As the wealthy are well aware, they are strongly outnumbered. They need the democracies they control to remain stable.
“Streeck foresees a prolonged period of low growth and political turmoil ahead, in which states commanded by creditors, allied with transnational investors, struggle to get resisting debtor states into line: think of Germany and Greece. ‘The clock is ticking for democracy,’ Streeck writes, but ‘it must remain an open question . . . whether the clock is also ticking for capitalism’.”
Streeck is correct in being concerned about the future of democracy and the possibility of a counterrevolution to regain power by the masses. However, there is also a purely economic issue that has arisen in the age of globalization that suggests there is a very fundamental flaw in capitalism as it is now practiced.
An understanding of macroeconomics requires an understanding of income flows. The most fundamental of these flows is that between consumers and businesses. Consumers provide income to businesses in return for goods and services. Consumer expenditures are balanced by income from wages, rents, and dividends. The effect of capital’s dominance over labor has been the stagnation of wages for the majority of the nation over several decades. This has been exacerbated by globalization which has effectively transferred wages from the most productive consumers, the middle class, to relatively poor people in far off lands. The result has been a vast increase in labor supply, but a decrease in potential consumer demand.
The second most important income flow is that between consumers, businesses, and government. Streeck argued that the emergence of debtor nations was not caused by excessive public spending, but by tax cuts and financial bailouts of corporations. By limiting governments’ abilities to raise revenue, capitalists have also limited governments’ abilities to spend funds as consumers in the general economy.
Capital’s victory has resulted in limiting the growth in consumption by its two biggest customers: workers and governments.
A state has been arrived at whereby businesses are earning high profits, but see little or no growth in demand. If they are to see profits continue to increase, as the financiers demand, the options they have are to lower wage costs and/or taxes even further. This cannot go on forever.
Capitalism seems to have reached a dead end. A new contract must be reached with labor and with government if progress is to be renewed. Hopefully, this can be attained within the context of mass democracy.
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