Yesterday I described the main causes of the crisis of the 1970s. Today I want to discuss how this crisis was addressed by the capitalist class, and what the consequences of their actions were.
As I wrote in Part I, by 1973 the capitalist class faced the problems of stagflation, a crisis of empire, and a crisis of legitimation. As there were many causes of the crisis, there were many measures taken to address it, and again I will only highlight the major ones here.
The Keynesian postwar establishment was totally blindsided by the problem of stagflation. Keynes’ theories were meant to address the Great Depression, a very different economic situation from that which faced capitalists in the 1970s. The classic Keynesian situation is one in which productive capacity is underemployed because of inefficient allocation of capital. Examined from a Marxist perspective, this is typically a situation that follows an overwhelming capitalist victory in the class war. Capital becomes so concentrated in the hands of capitalists that demand falters, and a slump occurs where capitalists are unwilling to invest in the face of uncertain demand. This is called a crisis of underconsumption. Keynes’ innovation was to suggest that the state engage in stimulus spending (by either spending tax money collected from the capitalist class or money borrowed from the capitalist class) so as to promote the circulation of capital and end the slump. In the 1970s the opposite situation held, that of a profit squeeze crisis, where working class wage pressure squeezes out capitalist profitability. In this situation stimulus spending would have only increased inflation.
Keynesians and Social Democrats used to the corporatist politics of collective bargaining were therefore left floundering without a solution to the crisis. The only “progressive” (i.e. pro-worker) measure that could have been taken at this point was the abolishment of the internal contradictions of capitalism through a transition to socialism. This might seem like a somewhat extreme answer to the problem, but given the severity of the crisis the idea that capitalism had entered its death throes certainly was in circulation at the time. In fact a transition to socialism was actually attempted in Sweden under the intriguing Meidner Plan, and slightly earlier the French May Events of 1968 also aimed towards socialist revolution, two topics I will return to in a subsequent post.
In any case, while the objective conditions for revolution may have been ripe, the subjective conditions were largely lacking, with a corporatist and pro-capitalist mindset maintaining its hegemony over society. This meant that the only response to the crisis could be one that would seek to save capitalism from its slump. But the corporatist and pro-capitalist Keynesians were at a loss for ideas! What was to be done? From the obscure margins of (what was then considered) economic quackery rode Milton Friedman and a band of other heterodox intellectuals with plans to save the day. Their movement was later to be called neoliberalism, both because it advocated a return to classical laissez-faire liberal economics (as opposed to interventionist Keynesian economics) and because it tied the critique of Keynesianism to an individualist philosophy that also found its roots in classical liberalism. Neoliberalism was therefore not simply a rejection of Keynes’ theories, but also a rejection of “embedded liberalism” – that hybrid of fascist and liberal thought that everywhere manifested itself as “management.” With the help of capitalist lobby groups such as the United States Chamber of Commerce the neoliberals effected a coup against the Keynesians, banishing them institutions such as the International Monetary Fund and the World Bank, and establishing their own hegemony.
The first order of the day for neoliberalism was to beat back the working class and the profit squeeze its wage demands had induced. What was necessary was an end to inflation, and that meant wage repression on an enormous scale. The neoliberal counter-offensive contained within it many different avenues of attack, and has generally come to be associated with the presidency of Ronald Reagan.
The first and most obvious method of wage repression used by the neoliberals was the implementation of Friedman’s economic philosophy of “monetarism” to put an end to stagflation. This was most evident in Federal Reserve Chairman Paul Volcker‘s sharp hike of interest rates. David Harvey in A Brief History of Neoliberalism describes Volcker’s actions as follows:
In October 1979 Paul Volcker, chairman of the US Federal Reserve Bank under President Carter, engineered a draconian shift in US monetary policy. The long-standing commitment in the US liberal democratic state to the principles of the New Deal, which meant broadly Keynesian fiscal and monetary policies with full employment as the key objective, was abandoned in favour of a policy designed to quell inflation no matter what the consequences might be for employment. The real rate of interest, which had often been negative during the double-digit inflationary surge of the 1970s, was rendered positive by fiat of the Federal Reserve. The nominal rate of interest was raised overnight and, after a few ups and downs, by July 1981 stood close to 20 per cent. Thus began ‘a long deep recession that would empty factories and break unions in the US and drive debtor countries to the brink of insolvency, beginning the long era of structural adjustment’. This, Volcker argued, was the only way out of the grumbling crisis of stagflation that had characterized the US and much of the global economy throughout the 1970s (23).
Besides using the disciplinary power of unemployment to subdue the working class, Reagan also engaged in a number of other union-busting measures, the most famous of which was his firing of the Professional Air Traffic Controllers Organization (PATCO) in response to their strike action. This sent a strong signal to unions that the age of institutionalized collective bargaining was over. Given that union wage demands had been a major cause of inflation, and given that non-unionized workers had suffered more from this inflation, it was very easy for propagandists in the employ of the capitalist class to employ a divide-and-conquer anti-union PR strategy that has never really ended since.
The twin phenomena of deregulation and globalization formed another avenue of attack against the working class. Under the label of “free trade” manufacturing capital escaped from restrictive labour arrangements in the advanced capitalist countries and exploited cheaply available labour in the impoverished Global South, a famous example of which was the flight of American manufacturers to Mexico following the conclusion of the North American Free Trade Agreement (NAFTA). This further helped end the profit squeeze and restored the competitive position of (at least some parts) of American manufacturing capital relative to Japan and Germany.
Yet another weapon used against the working class was the implementation of informationalism in the form of factory and office automation. This is my actual field of study, and I think it really doesn’t get enough attention considering that roughly two-thirds of job losses in the US during the neoliberal period are attributable to automation, and not simply off-shoring! This enormous amount of labour saving increased capitalist profitability, but threw many out of work, creating what is now called deindustrialization.
Finally we come to the phenomenon of financialization, which actually began prior to the neoliberal counter-revolution, but fed upon all the measures I listed above to become the dominant economic form of capitalism from the 1980s to the present. During the profit squeeze of the 1970s capitalists found fewer and fewer profitable opportunities for investment at home and looked increasingly for opportunities abroad. This pressure for global capital mobility was intensified by the outcome of the 1973 oil shock, where the rentier states of the Middle East, who were now receiving greater rents, needed some way to turn over this capital profitably. The United States was not pleased with the price hikes implemented by these Middle Eastern states, and brought its own pressure to bear on the situation, as Harvey explains:
The OPEC oil price hike that came with the oil embargo of 1973 placed vast amounts of financial power at the disposal of the oil-producing states such as Saudi Arabia, Kuwait, and Abu Dhabi. We now know from British intelligence reports that the US was actively preparing to invade these countries in 1973 in order to restore the flow of oil and bring down oil prices. We also know that the Saudis agreed at that time, presumably under military pressure if not open threat from the US, to recycle all of their petrodollars through the New York investment banks. The latter suddenly found themselves in command of massive funds for which they needed to find profitable outlets. The options within the US, given the depressed economic conditions and low rates of return in the mid-1970s, were not good. More profitable opportunities had to be sought out abroad (36).
The answer (for all the clients of the New York investment banks, not just the Arab states) was to invest in “developing” countries in the Global South, where there was an urgent desire for financing for infrastructure and other development projects. This had a number of extremely important consequences. First, it empowered finance capital on a global scale by filling its coffers and encouraging it to acquire a global scope of operations. Second, it greatly indebted the Global South to finance capitalists in the Global North (particularly the US). And third, it made global finance capital a key element of US foreign policy.
When the neoliberal counter-revolution came it accelerated this process of financialization enormously.
Volcker’s interest rate hikes not only worked to discipline the working class of the Global North, they also enormously increased the payments that countries in the Global South had to pay to the New York investment banks (because their debts were denominated in US dollars). This was a situation very similar to the one which has recently afflicted Greece. A period of easy money caused by banks desperate for investment opportunities followed by a sudden reversal of the situation, throwing the indebted country into insolvency. In the ensuing crisis the International Monetary Fund, newly stocked with neoliberal ideologues, stepped in and imposed its new economic orthodoxy on the prostrated debtor nations. This was a pattern that began with the Latin American Debt Crisis of the late 1970s – 1980s, and was repeated again and again across the globe.
Union-busting and the breaking up of the “rigidities” of the labour market (i.e. job stability) increasingly caused workers in the Global North to invest in mutual funds and other forms of financial assets in order to plan for their retirements. This further strengthened the position of finance capital.
Deregulation and globalization meant that finance capital had more room for maneuver across the globe (because barriers to investment came down, particularly under IMF pressure and through institutions such as the World Trade Organization) that it was less constrained in its actions by the state (investment and savings banks were allowed to merge once again with the end of Glass-Steagall, manufacturing capital increasingly became involved in finance as in the case of GMAC, and general mergers and acquisitions proceeded at a feverish pace) and that it profited enormously by providing the circulatory system required by the new system of globalized (i.e. off-shored and trans-nationally interconnected) manufacturing. These processes all increased the mass of finance capital, progressively increasing finance capitalists’ power over both manufacturing capital and over the political structures of the world.
Finally automation (and off-shoring) reduced the bargaining position of labour in the global north to the point of stagnation of working class wages despite rising productivity and the mass entry of women into the official labour force. This suppressed the capacity of the working class to absorb surplus production (produced commodities must be purchased to be realized as capital) meant that the capitalists were faced with a choice to either spend their capital on luxury consumption (as I discussed my previous post) or to reinvest their capital in the financial system. As David Harvey explains in The Enigma of Capital and the Crises of Capitalism:
So the answer has to lie in capitalist reinvestment. Assume that capitalists use their surpluses only in the further expansion of production. The extra demand for expansion today then mops up the surpluses of means of production and of wage goods produced yesterday. Surplus production internalises its own increasing monetary demand! Put more formally, the effective demand for yesterday’s surplus product depends upon workers’ consumption plus capitalist personal consumption plus the new demand generated out of tomorrow’s further expansion of production. What appears as an underconsumption problem becomes a problem of finding reinvestment opportunities for a portion of the surplus produced yesterday (110)!
The more that the capitalist class engaged in wage repression, the more it had to invest in finance. This created the opposite of a profit squeeze crisis – a crisis of underconsumption. Capital became increasingly “fictitious” as real production (which could not be profitably realized due to lack of effective demand) declined and was replaced by attempts to make money out of money! Increasingly bizarre and improbable “financial innovations” proliferated under the approving eye of the “saintly” Alan Greenspan (who had to convince himself they were really creating “frictionless” capitalism despite all the indications of the economic data he was reading). Finance capital took control of national and international politics, and the international system of education, employment, management, and production began to fuse the capitalist class into a transnational entity more beholden to the international solidarity of money than to any patriotic tie.
Yet through the successive crises of 1997, 1999, and then 2008 the dream of the infinite self-expansion of capital came (as always) to a crashing end. The neoliberals had succeeded in ending the profit squeeze created by the Keynesians’ policies, only to end up creating another crisis of underconsumption! Behold the results of the noble struggle of the rugged individual against the evil managerial state!
In Homer’s Odyssey the hero Ulysses must pilot his ship between the monsters Scylla and Charybdis, yet there is no possibility of a middle course. He must face the danger of one monster or the other. So it appears with the good ship Capital, forced to choose between fearsome Profit Squeeze and the terrible Underconsumption, and seemingly compelled to forever alternate between the two with its working class crew forced to suffer the wrath of these two monsters. But is the answer to today’s crisis a return to Keynes, or is another solution in order? I will try to answer this question in my subsequent posts.