Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: June 2011

The Logic of Capitalist Production

Those who support capitalism often do so by arguing that it is the most efficient system for promoting material and human progress.  Market competition, they claim, forces firms to produce the goods and services that people want and at the lowest possible cost.  Moreover, by making goods available to people at ever lower cost, competition works to expand the size of the market, enabling firms to take advantage of economies of scale and drive down prices even more.  The result is a virtuous spiral of progress.

Sounds good, but there are problems with this argument.  Among them, a false identity of profit maximization with efficiency as well as a one-sided understanding of the logic shaping the organization of production and its end product.

It is true that capitalists seek to maximize profits and those less successful will eventually be forced out of business.  However it is not true that the most profitable firms are necessarily the most efficient (at least in terms of how efficiency is commonly understood).  In other words success under capitalism does not guarantee efficiency.  In fact, it is likely that the most profitable firms are not the most efficient. 

In the sciences a process is said to be efficient if it produces the greatest output with the fewest inputs.  But that is not what capitalism promotes.  Capitalists seek to produce the most for the least cost, and the process of lowering cost normally involves use of labor regimes that increase the intensity of work.  In other words, capitalists will select the work process that ensures that workers have no choice but to work as hard as possible (thereby producing as much as possible) and normally, thanks to an associated deskilling, for the lowest possible wages.  The result is certainly favorable as far as profits are concerned (assuming sufficient demand).    

However, because the increase in output is achieved by increasing the input—in this case human labor—there is no basis to conclude that the work process is the most efficient even thought it will be the most profitable.  Regardless, it will be the work process chosen by capitalists.  This point highlights the class nature of capitalism.  Capitalists view labor as just another factor of production.  To them it makes perfect sense to maximize the intensity of its use.  But to those of us who work, there is a very real cost to the growing intensity and insecurity of labor that underlies and shapes the capitalist pursuit of profit. 

This discussion leads directly to the second problem.  All activity produces a joint product—a good or service as well as the human capacities, vision, and values of the producer.  As noted above, the pursuit of profit, which drives capitalism, generally leads capitalists to select a production process that truncates the potential of the worker; lower labor costs are achieved through the intensification and deskilling of work.   Thus, capitalism tends to promote a highly inefficient system of production if we take full account of its logic.   

This critique is not limited to some backward, declining sector of capitalist activity; it is applicable to the processes used to produce our most technologically advanced goods.  One example is the globalized production process used to make the popular Apple iPAD.  The following six minute video highlights working and living conditions for those who assemble the iPAD at the new Foxconn facilities in Chengdu, China.  The video was made by Students & Scholars Against Corporate Misbehaviour (SACOM), a Hong Kong-based labour organization, in March and April 2011, during a SACOM investigation of conditions at Foxconn (a Taiwanese transnational corporation).  

I want to make two important additions to the video.  The first is that while SACOM appropriately calls for consumers to take action to force Apple and Foxconn to improve worker conditions, corporate social responsibility initiatives have generally proven to be ineffective.  The second is that the workers employed by Foxconn as well as other transnational corporations operating in China are far from passive.  They have engaged, in ever growing numbers, in increasingly militant workplace actions.  In our press their efforts are reported as threats to our price stability.  In reality we should celebrate, learn from, and support their organizing and actions.  More generally, their actions should encourage us to think carefully and critically about the kind of society we value and how best to build it.

Learning From The UK

The U.S. economy isn’t the only one struggling.  That means there are things to learn from other countries.  Take the United Kingdom, for example. 

The United Kingdom faces many of the same problems we do.  And the British government has decided to respond to these problems with many of the same policies promoted by our own conservative political leaders: slash public spending and cut public sector jobs and wages.  In fact,  the British plan calls for six consecutive years of spending cuts.  As Paul Krugman explains:

Britain, like America, is suffering from the aftermath of a housing and debt bubble. Its problems are compounded by London’s role as an international financial center: Britain came to rely too much on profits from wheeling and dealing to drive its economy — and on financial-industry tax payments to pay for government programs.

Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. — slightly worse than the U.S. deficit. And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.

The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

Both the new British budget announced on Wednesday [October 20, 2010] and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.

Why is the British government doing this? The real reason has a lot to do with ideology: the Tories are using the deficit as an excuse to downsize the welfare state. But the official rationale is that there is no alternative. . . .

What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it.

Well, not surprisingly, the outcome of this austerity plan has been further economic decline.   As the chart below shows, the UK economy actually fell back into recession the last three months of 2010, suffering a 0.5% contraction. 

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Despite that outcome, the government, according to the BBC, remains committed to its austerity policy: 

The Chancellor, George Osborne, said the numbers were disappointing.

But he added the government would not be “blown off course” from its austerity program.

The figures are set to raise concerns over prospects for the economy, with large public spending cuts expected to come in this year.

The BBC’s economics editor Stephanie Flanders said people were right to worry about where the UK’s growth would come from in 2011, especially as higher-than-expected inflation had dealt a further blow to household budgets.

Michael Roberts provides the following update and summary of economic trends:

The UK economy is struggling to recover from the Great Recession of 2008-9.  While profitability has recovered, British big business is still refusing to invest.  In Q1’11, UK gross fixed investment slumped by 4.4% compared with Q4’10, while household consumption fell 0.6%.  Most significant, business investment excluding property fell 7.1%  (manufacturing investment fell 1.1%).  It prefers to heap up the cash, invest abroad or speculate in stock markets rather than invest in expanding production or employment in the UK.   And while that continues British households on average will continue to suffer significant losses in living standards.

Household spending  is set to experience the slowest pick-up of any post-recession period since 1830, according to a survey of economists.  British consumers will spending barely more by 2015 than they were before the financial crisis in 2008.  In the UK’s 18 major recessions since records began in 1830, Bank of England data show consumer spending on average recovered to 12% above its previous peak within seven years.  But forecasts by the UK’s Office for Budget Responsibility put spending in 2015 at just 5.4% above the 2008 peak, making it the slowest recovery of any comparable post-recession period.  After recessions in the early 1980s and 1990s, spending was 20% and 15% higher respectively.

That household spending will be so laboured is not surprising as the average British household faces the biggest drop in income for 30 years.   Average income could fall 3% this year, the steepest drop since 1981 and taking households back to 2004-5 levels.  The Institute for Fiscal Studies said average take-home incomes actually rose during recent recession due to low inflation and higher social benefits.  But IFS analysis suggests the long-term effects of the recession and higher inflation will soon squeeze incomes.  Lower wage increases and the corrosive effect of rising inflation mean that it is “entirely possible” that income this year will return to levels of six years ago.   Even the Bank of England warned that UK households faced a significant cut in their spending power as inflation heads towards a 5% annual rate.

So, one thing we can learn from studying the UK is not to adopt conservative budget policies.  Another is that there are alternatives to the other established policy option, which is to just keep spending and hoping for a magical revival of economic fortunes. 

For example, UK climate activists and several national trade unions are promoting a straightforward, effective campaign to create one million green climate jobs.  As the alliance says:

To find solutions to the climate crisis and the recession, we need more public spending, the opposite of current government policy. We have people who need jobs and work that needs to be done. A million climate jobs in the UK will not solve all the economy’s problems. But it will take a million human beings off the dole and put them to work saving the future.

Their plan is careful to distinguish between climate jobs (which reduce greenhouse gases) and green jobs (which can mean almost anything).  More specifically it calls for the creation of a million, new public sector jobs and a National Climate Service to employ them, highlights the kind of work that should be done, and presents a plan for financing it that does not rely on increasing the federal deficit.

In the words of the alliance:

We mean a million new jobs, not ones people are already doing. We don’t want to add up existing and new jobs and say that now we have a million climate jobs. We don’t mean jobs with a climate label, or a climate aspect. We don’t want old jobs with new names, or ones with ‘sustainable’ inserted into the job title. And we don’t mean ‘carbon finance’ jobs.

We mean new jobs now. We want the government to start employing 83,300 workers a month in climate jobs. Then, within twelve months, we will have created a million jobs.

We mean government jobs. This is a new idea. Up to now government policy under both Labour and Conservatives has been to use subsidies and tax breaks to encourage private industry to invest in renewable energy. The traditional approach is to encourage the market. That’s much too slow and inefficient. We want something more like the way the government used to run the National Health Service. In effect, the government sets up a National Climate Service (NCS) and employs staff to do the work that needs to be done. Government policy has also been to give people grants and loans to insulate and refit their houses. Instead, we want to send teams of construction workers to renovate everyone’s home, street by street. And we want the government to construct wind farms, build railways, and put buses on the streets.

Direct government employment means secure, flexible, permanent jobs. Workers with new climate jobs won’t always keep doing the same thing, but they will be retrained as new kinds of work are needed.

I strongly recommend reading their plan.
 

Globalization And The Environment

Over 3000 participants from 183 countries are attending a two week UN sponsored climate gathering in Bonn, Germany.  The talks are supposed to help prepare the agenda for COP 17, or as it is more formally known, the 17th Conference of the Parties of the United Nations Framework Convention on Climate Change (defenders of the environment have renamed the meeting the Conference of Polluters) which will take place November 28 to December 9, 2011 in Durban, South Africa. 

The cost of climate inaction grows worse.  As the Earth Island Journal reports:

Last week, the International Energy Agency announced that emissions continue to increase unabated. Emissions released in 2010 were the highest in history, despite the economic recession. The report stated that the “prospect of limiting the global increase in temperature to 2 degrees Celsius is getting bleaker.”

The National Oceanic and Atmospheric Administration (NOAA) announced that the level of CO2 emissions released in May 2010 set another record high.

The COP meetings have three main goals, all of which remain far from satisfied:

• set emission reductions for developed and developing nations

• secure funding and technology to help developing nations adapt to climate change

• determine how to measure, report and verify emission reductions

The Kyoto Protocol is the only international treaty that has binding targets for reducing emissions.  It was adopted on December 11, 1997 and entered into force on February 16, 2005.  The implementation rules were adopted at COP 7, which was held in Marrakesh in 2001. The Protocol targets are only binding on developed countries (Annex I countries); there are no binding targets for developing countries.  The Annex I countries agreed to reduce their collective production of greenhouse gas emissions by 5.2% relative to the 1990 level over the period 2008 to 2012; their commitments are listed in the Protocol’s Annex B. 

Unfortunately, the Protocol does not include any mechanism for enforcing national action, which is one reason that overall emissions continue to grow.  Another reason is that some important polluters, like the United States, never signed the Kyoto treaty.

If no action is taken at COP 17, the Kyoto Protocol will expire.  Most developed countries appear content to let this happen.  At COP 15, held in Copenhagen, the United States led the charge for replacing the Protocol with a less binding agreement, one that included no specific emission reduction targets.  No progress was made at COP 16, which was held last year in Cancun.

Most third world countries–including the G77, Alliance of Small Islands States (AOSIS), the Least Developed Countries, the Africa Group, and ALBA–support a second renewal period as a step toward a strengthened treaty, one with enforceable national targets and a commitment by developed countries to pay climate reparations to those third world countries suffering the consequences of climate change. 

One argument made by the United States and other developed countries against a renewal of Kyoto is that the Protocol does not including binding targets on the third world, and third world countries like China and India are themselves now major producers of greenhouse gasses. 

new study, one that acknowledges the importance of globalization, offers an important perspective on this developed country claim.  In brief, the study seeks to distinguish between emissions generated by production in a given territory and emissions generated in a given territory as a result of both production and consumption.  This is an important distinction because developed country transnational corporations have off-shored manufacturing activity to the third world.  This development has promoted a significant rise in third world emissions.  However, since an ever growing share of third world manufacturing production is exported to developed countries, the calculation of territorial based emissions overstates third world country responsibility and understates developed country responsibility.

As Glen P. Peters, Jan C. Minx, Christopher L. Weber, and Ottmar Edenhofer, the authors of the study, explain:

Despite the emergence of regional climate policies, growth in global CO2 emissions has remained strong. From 1990 to 2008 CO2 emissions in developed countries (defined as countries with emission- reduction commitments in the Kyoto Protocol, Annex B) have stabilized, but emissions in developing countries (non-Annex B) have doubled. Some studies suggest that the stabilization of emissions in developed countries was partially because of growing imports from developing countries. To quantify the growth in emission transfers via international trade, we developed a trade-linked global database for CO2 emissions covering 113 countries and 57 economic sectors from 1990 to 2008.

We find that the emissions from the production of traded goods and services have increased from 4.3 gigatonnes [Gt] CO2 in 1990 (20% of global emissions) to 7.8 Gt CO2 in 2008 (26%). Most developed countries have increased their consumption-based emissions faster than their territorial emissions, and non-energy-intensive manufacturing had a key role in the emission transfers. The net emission transfers via international trade from developing to developed countries increased from 0.4 Gt CO2 in 1990 to 1.6 Gt CO2 in 2008, which exceeds the Kyoto Protocol emission reductions.

Our results indicate that international trade is a significant factor in explaining the change in emissions in many countries, from both a production and consumption perspective. We suggest that countries monitor emission transfers via international trade, in addition to territorial emissions, to ensure progress toward stabilization of global greenhouse gas emissions.

The figure below, which comes from their study, compares the rate of growth in a number of variables.  It shows that “emissions embodied in trade,” which are emissions generated by the production of exports, has grown faster than population, GDP, and global CO2 emissions.  It also shows that the growth in “net emission transfers Annex B to non-Annex B,” which are emissions contained in exports produced in developing countries but consumed by or used in developed countries, has outstripped all the variables, even the growth in international trade.

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Their study also included the following figure which shows the net change in territorial emissions over the period 1990 to 2008 along with the change in the net emission transfer between each country and developing countries.   The small orange star represents pledged emission reduction commitments.  

If we consider only territorial emissions, Europe actually came close to meeting its target reductions.  However, if we take into account the net emission transfers that come from consuming exports produced in the third world, Europe actually increased its emissions.  U.S. emissions grew territorially and again because of net emission transfers.  Looking at Annex B countries as a whole, we can see the important role that China plays as a producer and exporter of manufactured goods to the developed world.

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The authors of the study conclude by noting that their work shows that “a significant and growing share of global emissions are from the production of internationally traded goods and services.”  This means that emission reduction cannot fairly or productively be approached solely through the use of territorial mandates.  We need to recognize that progress in achieving environmentally sustainable economic relations will require national changes that also confront and transform contemporary capitalist globalization dynamics.

Globalization And Its Consequences

Although capitalism has always been a global system, the international integration of production and finance and our dependence on cross-border activities seems greater than ever before.  At the risk of oversimplifying, we now have a world system within which Latin America, Africa and the Middle East specialize in the production and export of primary commodities, increasingly to East Asia.  East Asia operates as the world’s manufacturing hub, exporting final products to the developed capitalist world, especially the United States.  And the United States specializes in providing the finance that underpins the international production system and developed capitalist country consumption. 

While this global system has done little for popular well-being, elites have clearly profited.  As the Wall Street Journal reports:

According to a new report by Boston Consulting Group out today, the number of millionaire households in the world grew by 12.2% in 2010, to 12.5 million. (BCG defines millionaires as those with $1 million or more in investible assets, excluding homes, luxury goods and ownership in one’s own company).

The U.S. continues to lead the world in millionaires, with 5.2 million millionaire households, followed by Japan with 1.5 million millionaire households, China with 1.1 million and the U.K. with 570,000. Singapore leads the world in “millionaire density,” or the percentage of millionaires, with 15.5% of its population now millionaire households.

The most important trend, however, is the global wealth distribution. According to the report, the world’s millionaires represent 0.9% of the world’s population but control 39% of the world’s wealth, up from 37% in 2009. Their wealth now totals $47.4 trillion in investible wealth, up from $41.8 trillion in 2009.

Those higher up the wealth ladder also gained. Those with $5 million or more, who represent 0.1% of the population, controlled 22% of the world’s wealth, up from 20 percent in 2009.

This growing concentration of wealth is increasingly underpinned by the globalization process itself.  Corporate mobility creates a framework within which governments compete for investment by offering the most attractive labor conditions possible.  That translates into a race to the bottom in terms of majority living and working conditions.  

China provides an excellent example.  China plays a critical role as the final assembly platform for East Asia’s export driven growth.  As the Asian Development Bank explains:

there is the cluster of highly interdependent, open, and vibrant economies in East Asia and Southeast Asia that include the NIEs, the PRC, and the more advanced countries of ASEAN. With the PRC at the center of the assembly process and with exports going mainly to the U.S. and Europe, production in and trade among these economies have been increasingly organized through vertical specialization in networks, with intense trade in parts and components, particularly in the Information, Communication and Technology (ICT) and electrical machinery industries.

China’s unique position is highlighted by the fact that it is the only country in the region that runs a deficit in components trade, and whose exports are overwhelmingly final products.  It is this unique position that has enabled China to increase its share of world exports of ICT products (such as computers and telecom equipment) from 3 percent in 1992 to 24 percent 2006, and its share of electrical goods such as semiconductors and semiconductor devices) from 4 percent to 21 percent over the same period.  Of course, these are not truly Chinese exports, but rather exports assembled/produced in China.  Foreign corporations are responsible for approximately 60 percent of all Chinese exports; their share is 88 percent for high-tech goods. 

All this production has generated real wealth for some Chinese.  As the BCG study highlights, China now hosts the third greatest number of millionaires and is closing fast on Japan for the number two position.  But what is happening to the manufacturing workers in China that produce the goods consumed by people in other countries?

Perhaps most surprising, according to a new study by the Bureau of Labor Statistics (BLS), the actual number of manufacturing workers in China is on the decline.  That’s right.  China is not stealing jobs from anyone.  The globalization process is erasing jobs everywhere, including in China, the “world’s workshop.” 

The BLS drew upon official Chinese statistics to create a consistent employment series.  They found that the sum of manufacturing employment in urban enterprises and manufacturing employment in township and village enterprises (TVEs) provided the best estimate for the total number of Chinese manufacturing workers.  As the last two columns of the table below show, the absolute number of manufacturing workers in China has declined from a peak of 126.09 million in 1996 to 112.63 million in 2006.  The total drops even more dramatically in the following two years but that is largely because the Chinese government decided to drop self-employed workers from the TVE manufacturing employment series beginning in 2007.

Thus, despite becoming the workshop of the world, there has been no increase in the total number of Chinese workers employed in manufacturing.  That means the enormous increase in manufacturing production has been underpinned by an increase in the capital intensity of production and, perhaps even more importantly, a significant increase in the pace of work and length of the work week.  In terms of the latter, the BLS reports that some 25% of urban manufacturing workers were on the job between 41-48 hours a week and 35% worked more than 48 hours a week.   Work hours are generally longer in the TVEs.  No wonder that we have seen a dramatic increase in labor struggles in China. 

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The BLS also estimated the hourly compensation of Chinese manufacturing workers.  It is worth emphasizing that the figures in the table below represent compensation, which means wages plus all social benefits.  Moreover, they are in nominal terms, which means that they are not adjusted for inflation.  This is critical because inflation in China has been substantial.   Some researches believe that Chinese workers suffered a decade of wage stagnation until 2002.  That means that the nominal compensation increases shown in the table below may well reflect both wage catch-up and higher costs for an unchanged package of social benefits.     

As the table shows, after several years of significant gains, Chinese manufacturing workers now earn an average of only $1.36 per hour.  In relative terms, Chinese hourly labor compensation costs in 2008 are roughly 4% of those in the United States.   They even remain considerably below those in Mexico.  

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What is especially significant about the above is that China is the world’s star economic performer.   If Chinese workers are finding their manufacturing jobs disappearing and their compensation limited, no wonder that workers in other countries are facing serious challenges. 

We dont have a broken system.  Rather we have a system that works very efficiently to enrich an ever smaller number of people.  Those people think that it is working just fine.