Well some positively laughable job growth numbers have staved off a total panic at this point, but the stock markets keep falling. Today I want to give a basic outline of where this crisis originated, and what that means for where we stand now.
A lot of liberals argue that this crisis originated with financial deregulation, particularly in the 1990s, and that re-regulation would mean that bankers would go back to doing their social duty of resource allocation in a prudent fashion. This is a position most famously advocated by the 2010 documentary Inside Job. While most on the Left would certainly welcome re-regulation, we would also counter that deregulation is a symptom of deeper problems that also need to be addressed.
The most popular explanation on the Left for the crisis we are in is David Harvey’s theory of neoliberalism. The story of neoliberalism begins in the late 1960s, when the postwar capitalist order started to descend into crisis. After the Second World War a new world order was established by the United States. This entailed a new capitalist model that took many of the organizational innovations developed by pre-war Fascist bureaucracies to deal with the Great Depression and combined them with the political principles of Liberal Democracy to create what Harvey calls an “embedded liberalism” (that is a liberal political order embedded within a corporatist system of capitalism). In everyday terms we usually refer to this system as the “Welfare State” because it redistributed a considerable portion of wealth from the capitalist class to the working class in order to improve public welfare. This redistribution was accomplished in two main ways: 1) Through social programs of government spending that were funded partially through taxation and partially through government borrowing (the education system, welfare programs, the GI Bill, social housing etc.) and 2) Regular negotiated wage increases accomplished through an institutionalized system of union collective bargaining with management. This system was based on regular productivity increases that meant that corporations could stay profitable even with rising wages, and carried on growing for quite some time. This system didn’t just exist in the United States, but was exported throughout the postwar American empire – particularly to Germany and Japan which managed “miraculous” rates of growth.
However as I mentioned above this system started to enter a crisis in the late 1960s. There were a number of reasons for this, and I will just mention the major ones here.
First of all the productivity gains that had fed the relative peace between labour and management began to run out. Even though this was the case, the working class had become “unruly” during the long years of prosperity, and continued to press for wage increases, cutting into an ever more narrow corporate profit margin. In Marxist economics this is called a profit squeeze, and it is one of the main forms of capitalist crisis. In response corporations passed the cost of wage increases on to the consumers, preserving their profit margin while giving unionized workers (who were always a minority) their wage increases. This bit of sleight-of-hand on the part of management only intensified the problem for reasons that are easy to understand. The costs that the corporations passed on to the consumers meant progressively higher and higher inflation, which stagnated the wages of unionized workers, and hurt non-unionized workers even more. This in turn meant that unionized workers kept demanding more wage increases to compensate for inflation, which were passed on by management, which created more inflation, which lead to more wage demands, in an ever-intensifying vicious cycle that hurt non-unionized workers the most.
Second, the economies of Japan and Germany, whose growth America had sponsored as an outlet for investment and a method of stabilizing empire, now had grown to the point that they were out-competing American manufacturing. This only compounded the problems of the profit squeeze American capital was facing.
Third, America’s misbegotten adventure in Vietnam caused a host of problems that it struggled to address. First of all, military spending consumed an increasing portion of the US budget which was paid for with increasing levels of government debt. This problem was only aggravated by LBJ’s “Great Society” programs, which attempted to buy working class complicity with the war. America’s ongoing failure in Vietnam also shattered the illusion of American invincibility, and this considerably weakened its capacity to exploit the toiling masses of its empire. This lead to increasing commodity prices, particularly that of oil during the 1973 “oil shock.”
Finally the New Left threatened the basis of the corporatist establishment. It is difficult to imagine now, but the New Left was actually opposed to the welfare state. Herbert Marcuse’s One-Dimensional Man, which some consider to be the defining text of the New Left, defines the Welfare State as a condition of “sublimated slavery.” In arguing for a society of both real freedom and real prosperity the New Left shook the foundations of the postwar compromise.
As 1973 carried on America faced simultaneous stagflation, a crisis of empire, and a crisis of legitimation. This crisis was not limited to America alone, but was felt throughout the whole capitalist system. How did the capitalist class address this problem?
I will answer this question in tomorrow’s post.
NOTE: For further reading see David Harvey’s The Condition of Postmodernity and A Brief History of Neoliberalism as well as Giovanni Arrighi’s Adam Smith in Beijing.