After five years of crisis – with no end in sight – it’s time to evaluate what happened, why and what needs to be done. One key cause of this crisis is the class structure of capitalist enterprises. I stress that because most treatments miss it. By class structure, I mean enterprises’ internal organization pitting workers against corporate boards of directors and major shareholders. Those boards seek first to maximize corporate profits and growth. That means maximizing the difference between the value they get from workers’ labor and the value of the wages paid to workers. Those boards also decide how to use that difference (“surplus value”) to secure the corporation’s reproduction and growth. The major shareholders and the directors they select make all basic corporate decisions: what, how and where to produce and how to spend the surplus value (on executive pay hikes and bonuses, outsourcing production, buying politicians etc.) Workers (the majority) live with the results of decisions made by a tiny minority (shareholders and directors). Workers are excluded from participating in those decisions: a lesson in capitalist democracy.
US capitalism changed in the 1970s. The prior century of labor shortages had required real wage increases every decade (to bring in immigrant workers). In the 1970s, many capitalists installed labor-saving computers, while others relocated production to lower-wage countries. Demand for US laborers fell. Simultaneously, women moved massively into wage work as did new immigrants from Latin America. The supply of laborers in the US rose. Capitalists no longer needed to raise real wages, so they stopped doing so. Since the 1970s, what capitalists paid workers stayed the same. Meanwhile, computers helped labor productivity to rise: what workers produced for capitalists to sell kept increasing. Surplus value (and profits), therefore, soared (stock market boom, rising financial sector etc.) while the wage portion of national product/income fell.
By making these changes, US capitalism provoked a classic contradiction/problem for itself. It paid insufficient wages to enable workers to purchase growing capitalist output. The solution, led by the fast-growing financial sector, was two-fold. First, it cycled rising corporate profits partly into major new consumer lending (mortgages; car loans; credit cards; and, later, student loans). Rising consumer debt sustained growing mass consumption despite stagnant wages, and so postponed an otherwise certain economic downturn. Second, financiers promoted profitable new investments for corporations and the rich (securities based on consumer debts and credit default swaps that insured such securities). Financial corporations displaced non-financial corporations as dominant in the US economy. Financial transactions based on consumer debts built on stagnant wages (the ultimate means to service that debt): those fruits of capitalist decisions brought the “2007 crash.” (What is widely known as the crash of 2008 technically began in the fourth quarter of 2007.) The crisis nightmare began: a cyclical downturn coupled to long-run decline in workers’ purchasing power.
As the crisis deepened, capitalists and mainstream economists insisted that it was “only a financial problem” – credit had frozen because banks did not trust one another and stopped lending. The credit freeze would be “easily managed” by federal bailouts of financial and a few other corporations (e.g. GM) deemed “too big to fail.” Dutiful politicians funded those bailouts with massive government borrowing from (rather than taxing) the large cash hoards accumulating in the hands of banks, large corporations and the rich. They hoarded, they explained, because lending to or investing in the economy they had crashed was “too risky.” Instead of making their hoards available to individuals and businesses that might have revived the economy, financial capitalists lent them to the government to bail out those same capitalists: a lesson in capitalist efficiency.
As government debts soared to bail out global capitalism, financial capitalists began to worry about over-indebted governments. Those governments’ citizens – especially where traditions of anti-capitalist criticism were strong, as in Greece – might balk at servicing debts that resulted from capitalism’s failures, not theirs. So, financial capitalists demanded ever-higher interest for lending to such governments. They also demanded the imposition of austerity programs. Public employment and services were to be slashed. The money thereby saved would instead guarantee interest and repayment of those governments’ debts. Major leaders dared not suggest – let alone raise – significant taxes on corporations and the rich as an alternative to government borrowing or austerity.
In this way, the costs of economic crisis and bailouts were shifted onto national populations via unemployment, home foreclosures and austerity: a lesson in capitalist justice.
Lets summarize: (1) capitalists decided in the 1970s to computerize and increasingly relocate production overseas; (2) that enabled them to impose wage stagnation and greatly increase surpluses and profits; (3) financial capitalists lent to consumers and built a speculative bubble based on consumer debt; (4) when rising consumer debts exceeded what stagnant wages could afford, the system crashed; (5) capitalists got trillion-dollar bailouts while lending government the money for those bailouts; and (6) now, capitalists make entire populations pay for the crisis and bailouts by directing politicians to impose austerity. This capitalist system not only fails to “deliver the goods,” it dumps ever-more-outrageous bads.
Nor are solutions available in New Deal-type regulations and Keynesian deficit spending as promoted by economists Paul Krugman and Robert Reich. While the New Deal reduced capitalist excess and eased mass suffering (neither happens now), it never overcame the 1930s depression (World War II did). Capitalism’s costly cycles were never stopped (eleven downturns occurred after 1941 and before the 2007 crash). Moreover, FDR’s insufficient New Deal regulations and taxes on corporations and the rich were undone after 1945 as capitalists funded the politicians, parties, lobbyists and think tanks that shaped legislation and public opinion. A new New Deal now (green or otherwise) would have poorer and shorter-lived economic results. Capitalists now have greater financial resources and decades of experience in blocking and undoing limits on their wealth and freedom.
After five years of crisis, it has become clear that any real solution for capitalist crisis must include changing the class structure of capitalist enterprises and thereby their directors’ decisions. Those are twin obstacles to ending capitalism’s repeated crises and their immense social costs. The necessary change would reorganize the production of goods and services. Instead of undemocratic, hierarchical capitalist corporations, workers would collectively become their own board of directors and make all the key decisions themselves. Had workers’ self-directed enterprises replaced capitalist enterprises in the 1970s, real wages would not have stopped rising thereafter; jobs would not have moved out of the US; a consumer credit explosion would not have happened – and so on.
Workers’ self-directed enterprises would have their problems, too. We cannot exchange an inadequate capitalism for some pretend paradise. America can, however, do better than a capitalism whose failures were already many and deep even before exploding into this latest severe crisis. We ought finally to dare to think so, say so, make the needed changes and move forward.
Richard D. Wolff is Professor of Economics Emeritus, University of Massachusetts, Amherst where he taught economics from 1973 to 2008. He is currently a Visiting Professor in the Graduate Program in International Affairs of the New School University, New York City. He also teaches classes regularly at the Brecht Forum in Manhattan. Earlier he taught economics at Yale University (1967-1969) and at the City College of the City University of New York (1969-1973). In 1994, he was a Visiting Professor of Economics at the University of Paris (France), I (Sorbonne).
I am afraid, the crisis is deeper. The source of the problem is human nature. We will not solve the problem until we will not realize that we have to change the basic rules of game for the whole society. We have to change the rules rather fundamentally – to create the new rules for the real human beings. As they are, and not as they are declared to be. I. V.