Reports from the Economic Front

a blog by Marty Hart-Landsberg

Ideological Struggle-Part III

People are mad—the economy is tanking and understandably we want to know who to blame.  Of course, AIG (and its bonus payments) is an easy target.  So is the failed bank bailout.  And the media is happy to oblige us with lots of stories.

The problem is that we are dealing with something bigger—a structural crisis.  That is something that the media refuses to address.

In an earlier post I described how most mainstream economists believe that capitalism is a stable system that produces and maintains full employment.  For these economists, serious problems must be caused by developments that are, at root, external to the workings of the system.  Examples include technology shocks or overly aggressive or misdirected government policy.

In reality capitalism is a system that generates contradictions—and crises.

Imagine you are a capitalist.  You hire workers and other inputs needed for production.  Your goal is to maximize profits.   So, what do you do?  If you are a “good” capitalist you find ways to get your workers to produce the very most they can for the lowest possible wage.

But if every capitalist does this we end up in a situation where production soars way beyond the purchasing power of the population.   What then?  Well, we are likely to end up in recession.  Unable to sell all their goods, capitalists will cut production and lay off workers, who will then have even less money, leading to a downward spiral.

It is true that capitalists themselves might demand enough (investment) goods and services to fill the gap—but that is a risky thing to count on.  There has to be some great new invention or access to some big new market to encourage such new spending in the face of declining household demand.

Of course we are not always in recession.  The reason is that capitalists and the government are resourceful.  They can try and promote exports and sell goods elsewhere.  Thus sometimes a potential crisis in one country can be forced onto another—think third world.  Or the government can engage in serious spending (directly by buying goods and services from companies or indirectly by transferring money to workers so that they can buy things from companies) to provide the necessary extra demand.  Or capitalists can develop (with government support) a sophisticated credit system that can lend money to workers to allow them to pump up their spending beyond what their income might allow.

These solutions can work for a time, sometimes for a long time—but they also generate their own problems.  For example, credit markets could end up triggering stock market or housing bubbles, leading to unsustainable debt-based growth.  Sound familiar?  And of course these solutions also have their class dimension—we are not all equal when it comes to enjoying the profits or sharing the pressured working conditions and employment insecurity.  AIG executives are able to defend their bonuses while GM workers are forced to renegotiate their contracts because of the structural inequalities of our system.

We got into our current mess because of structural problems.  In broad brush: growing international competition beginning in the late 1960s led to a decline in profits in manufacturing.  By the 1980s, capitalists had worked out their response.  Led by the government they restored profit margins by breaking unions and pushing down wages.  And they also gradually shifted away from manufacturing to finance.  By the late 1990s, things were in high gear.  Average earnings were generally stagnating but huge gains were being made by those at the top thanks to all sorts of financial developments, including the stock market and housing bubbles.  Workers relied on rising home prices to borrow enough money to keep consumption strong and the economy growing–at least until the housing bubble popped.

Yes, we need to block the bonuses and deal with the banking system—nationalization being the best answer to both.  But we need more than that—we have to recognize that capitalism was not working well for the great majority of us for decades and that growth was bound to end because of growing imbalances that were becoming unmanageable.  We have to start openly discussing how best to restructure our economy.  I wonder when the media will start encouraging that discussion.

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