Less Is Not Always More: Capitalism Hits the Fan.

by Rick Wolff
April 29, 2009


Let me begin by saying what I think this crisis is not. It is not a financial crisis. It is a systemic crisis whose first serious symptom happened to be finance. But this crisis has its economic roots and its effects in manufacturing, services, and, to be sure, finance. It grows out of the relation of wages to profits across the economy. It has profound social roots in America’s households and families and political roots in government policies. The current crisis did not start with finance, and it won’t end with finance.

Rising Productivity, Wages, and Consumption

From 1820 to around 1970, 150 years, the average productivity of American workers went up each year. The average workers produced more stuff every year than they did the year before. They were trained better, they had more machines, and they had better machines. So productivity went up every year.

And, over this period of time, the wages of American workers rose every decade. Every decade, real wages—the amount of money you get in relation to the prices you pay for the things you use your money for—were higher than the decade before. Profits also went up.

The American working class enjoyed 150 years of rising consumption, so it’s not surprising that it would choose to define its own self-worth, measure its own success in life, according to the standard of consumption. Americans began to think of themselves as successful if they lived in the right neighborhood, drove the right car, wore the right outfit, went on the right vacation.

Wages and Productivity Diverge

But in the 1970s, the world changed for the American working class in ways that it hasn’t come to terms with—at all. Real wages stopped going up. As U.S. corporations moved operations abroad to take advantage of lower wages and higher profits and as they replaced workers with machines (and especially computers), those who lost their jobs were soon willing to work even if their wages stopped rising. So real wages trended down a little bit. The real hourly wage of a worker in the 1970s was higher than what it is today. What you get for an hour of work, in goods and services, is less now that what your parents got.

Meanwhile, productivity kept going up. If what the employer gets from each worker keeps going up, but what you give to each worker does not, then the difference becomes bigger, and bigger, and bigger. Employers’ profits have gone wild, and all the people who get their fingers on employers profits—the professionals who sing the songs they like to hear, the shareholders who get a piece of the action on each company’s profits—have enjoyed a bonanza over the last thirty years.

The only thing more profitable than simply making the money off the worker is handling this exploding bundle of profits—packaging and repackaging it, lending it and borrowing it, and inventing new mechanisms for doing all that. That’s called the finance industry, and they have stumbled all over themselves to get a hold of a piece of this immense pot of profit.

The Working-Class Borrowing Binge

What did the working class do? What happens to a population committed to measuring people’s success by the amount of consumption they could afford when the means they had always had to achieve it, rising wages, stop? They can go through a trauma right then and there: “We can’t anymore—it’s over.” Most people didn’t do that. They found other ways.

Americans undertook more work. People took a second or third job. The number of hours per year worked by the average American worker has risen by about 20 percent since the 1970s. By comparison, in Germany, France, and Italy, the number of hours worked per year per worker has dropped 20 percent. American workers began to work to a level of exhaustion. They sent more family members—and especially women—out to work. This enlarged supply of workers meant that employers could find plenty of employees without having to offer higher pay. Yet, with more family members out working, new kinds of costs and problems hit American families. The woman who goes out to work needs new outfits. In our society, she probably needs another car. With women exhausted from jobs outside and continued work demands inside households, with families stressed by exhaustion and mounting bills, interpersonal tensions mounted and brought new costs: daycare, psychotherapy, drugs. Such extra costs neutralized the extra income, so it did not solve the problem.

The American working class had to do a second thing to keep its consumption levels rising. It went on the greatest binge of borrowing in the history of any working class in any country at any time. Members of the business community began to realize that they had a fantastic double opportunity. They could get the profits from flat wages and rising productivity, and then they could turn to the working class traumatized by the inability to have rising consumption, and give them the means to consume more. So instead of paying your workers a wage, you’re going to lend them the money—so they have to pay it back to you! With interest!

That solved the problem. For a while, employers could pay the workers the same or less, and instead of creating the usual problems for capitalism—workers without enough income to buy all the output their increased productivity yields—rising worker debt seemed magical. Workers could consume ever more; profits exploding in every category. Underneath the magic, however, there were workers who were completely exhausted, whose families were falling apart, and who were now ridden with anxiety because their rising debts were unsustainable. This was a system built to fail, to reach its end when the combination of physical exhaustion and emotional anxiety from the debt made people unable to continue. Those people are, by the millions, walking away from those obligations, and the house of cards comes down.

If you put together (a) the desperation of the American working class and (b) the efforts of the finance industry to scrounge out every conceivable borrower, the idea that the banks would end up lending money to people who couldn’t pay it back is not a tough call. The system, however, was premised on the idea that that would not happen, and when it happened nobody was prepared.

Two Responses to the Crisis: Conservative and Liberal

The conservatives these days are in a tough spot. The story about how markets and private enterprise interact to produce wonderful outcomes is, even for them these days, a cause for gagging. Of course, ever resourceful, there are conservatives who will rise to the occasion, sort of like dead fish. They rattle off twenty things the government did over the last twenty years, which indeed it did, and draw a line from those things the government did and this disaster now, to reach the conclusion that the reason we have this problem now is too much government intervention. These days they get nowhere. Even the mainstream press has a hard time with this stuff.

What about the liberals and many leftists too? They seem to favor regulation. They think the problem was that the banks weren’t regulated, that credit-rating companies weren’t regulated, that the Federal Reserve didn’t regulate better, or differently, or more, or something. Salaries should be regulated to not be so high. Greed should be regulated. I find this astonishing and depressing.

In the 1930s, the last time we had capitalism hitting the fan in this way, we produced a lot of regulation. Social Security didn’t exist before then. Unemployment insurance didn’t exist before then. Banks were told: you can do this, but you can’t do that. Insurance companies were told: you can do that, but you can’t do this. They limited what the board of directors of a corporation could do ten ways to Sunday. They taxed them. They did all sorts of things that annoyed, bothered, and troubled boards of directors because the regulations impeded the boards’ efforts to grow their companies and make money for the shareholders who elected them.

The Self-Destruct Button on Liberal Regulation

You don’t need to be a great genius to understand that the boards of directors encumbered by all these regulations would have a very strong incentive to evade them, to undermine them, and, if possible, to get rid of them. Indeed, the boards went to work on that project as soon as the regulations were passed. The crucial fact about the regulations imposed on business in the 1930s is that they did not take away from the boards of directors the freedom or the incentives or the opportunities to undo all the regulations and reforms. The regulations left in place an institution devoted to their undoing. But that wasn’t the worst of it. They also left in place boards of directors who, as the first appropriators of all the profits, had the resources to undo the regulations. This peculiar system of regulation had a built-in self-destruct button.

Over the last thirty years, the boards of directors of the United States’ larger corporations have used their profits to buy the President and the Congress, to buy the public media, and to wage a systematic campaign, from 1945 to 1975, to evade the regulations, and, after 1975, to get rid of them. And it worked. That’s why we’re here now. And if you impose another set of regulations along the lines liberals propose, not only are you going to have the same history, but you’re going to have the same history faster. The right wing in America, the business community, has spent the last fifty years perfecting every technique that is known to turn the population against regulation. And they’re going to go right to work to do it again, and they’ll do it better, and they’ll do it faster.

A Socialist Alternative

So what do we do? Let’s regulate, by all means. Let’s try to make a reasonable economic system that doesn’t allow the grotesque abuses we’ve seen in recent decades. But let’s not reproduce the self-destruct button. This time the change has to include the following: The people in every enterprise who do the work of that enterprise, will become collectively their own board of directors. For the first time in American history, the people who depend on the survival of those regulations will be in the position of receiving the profits of their own work and using them to make the regulations succeed rather than sabotaging them.

This proposal for workers to collectively become their own board of directors also democratizes the enterprise. The people who work in an enterprise, the front line of those who have to live with what it does, where it goes, how it uses its wealth, they should be the people who have influence over the decisions it makes. That’s democracy.

Maybe we could even extend this argument to democracy in our political life, which leaves a little to be desired—some people call it a “formal” democracy, that isn’t real. Maybe the problem all along has been that you can’t have a real democracy politically if you don’t have a real democracy underpinning it economically. If the workers are not in charge of their work situations, five days a week, 9 to 5, the major time of their adult lives, then how much aptitude and how much appetite are they going to have to control their political life? Maybe we need the democracy of economics, not just to prevent the regulations from being undone, but also to realize the political objectives of democracy.

Rick Wolff is professor of economics at the University of Massachusetts, Amherst. He is co-author of Knowledge and Class: A Critique of Political Economy, Economics: Marxian vs. Neoclassical, and Bringing It All Back Home: Class, Gender, and Power in the Modern Household.