Financial Crisis, Labour Markets and Institutions

Sebastiano Fadda, Pasquale Tridico

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN: 9780415538602
• eBook ISBN: 9781136268502
• Edition: 1
• Topic: Economics
• Subtopic: Consumer Behaviour
• Index: Economics

This book seeks to explain the global financial crisis and its wider economic, political, and social repercussions, arguing that the 2007-9 meltdown was in fact a systemic crisis of the capitalist system.

The volume makes these points through the exploration of several key questions:

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• What kind of institutional political economy is appropriate to explain crisis periods and failures of crisis-management?

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• Are different varieties of capitalism more or less crisis-prone, and can the global financial crisis can be attributed to one variety more than others?

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• What is the interaction between the labour market and the financialization process?

The book argues that each variety of capitalism has its own specific crisis tendencies, and that the uneven global character of the crisis is related to the current forms of integration of the world market. More specifically, the 2007-09 economic crisis is rooted in the uneven income distribution and inequality caused by the current financial-led model of growth.

The book explains how the introduction of more flexibility in the labour markets and financial deregulation affected everything from wages to job security to trade union influence. Uneven income distribution and inequality weakened aggregate demand and brought about structural deficiencies in aggregate demand and supply. It is argued that the process of financialization has profoundly changed how capitalist economies operate. The volume posits that financial globalization has given rise to growing international imbalances, which have allowed two growth models to emerge: a debt-led consumption growth model and an export-led growth model. Both should be understood as reactions to the lack of effective demand due to the polarization of income distribution.

Part I

Capitalism in crisis

Nature and origins

1 Capitalism in deep trouble¹

Richard Wolff

1 Capitalism and crises

Capitalism has had an extraordinary run in the world and nowhere more so than in the United States. Its celebrants demand and capitalism as a system deserves much credit for catapulting Britain's former secondary colony into a global economic, political and cultural super-power in 200 years. The costs of the ride were huge and widely distributed; the gains were also huge, but less widely distributed. Therein lay a first seed of trouble to come. Moreover, the long-term rise in real wages bred conditions and expectations that eventually outran capitalism's capacities to sustain them. Therein lay another seed. The former colony turned to immigration and to imperialism as key means of its ascendancy. Yet they also contributed to dependencies upon an evolving globalization of capitalism: another seed.

Underlying and amplifying all of these seeds of trouble was the basic structural soil of the capitalist system. Its internal contradictions, tensions and conflicts – ceaseless and unevenly developing antagonisms of labor and capital interwoven with the competitive struggles among capitalists – periodically generated downturns, crises, panics, cyclical booms and busts. Those were often moments of harsh but clear insights into the system's darker dimensions. Slowly they accumulated not only appreciation of its profound social costs and many victims, but also increasingly powerful anticipations of economic and social systems better than capitalism. Today yet again, in the wake of one of capitalism's deepest and longest crises, critical insight has been revived and sharpened. It builds on capitalism's history, its present dilemmas, and its critics’ accumulated understanding.

Perhaps most importantly, the criticism of capitalism we can articulate today – as presented in Part I of this book – allows us more clearly than ever to envision a genuinely new solution. That solution not only overcomes many of capitalism's flaws and failures. It also learns from earlier efforts to go beyond capitalism which of its misunderstandings and resultant missteps to avoid. Together, the critique and the solution offer more hope for a breakthrough beyond a system in deep trouble than we have had for the last half-century.

Like all important topics, capitalism has been defined and understood quite differently by different people and groups throughout its history. That fact requires each user of the term to be clear and explicit about the particular definition being used. No one should proceed as if any one definition were either the only one or was a definition on which everyone agreed.

For example, many contemporary usages of “capitalism” – in the media, among politicians, and in academic treatments – focus on two key dimensions. The first is private property: capitalism is a system in which the means of production (land, tools, equipment, raw materials, etc.) and products (goods and services) are privately owned by individuals and enterprises. They are not owned collectively by society as a whole or by the state apparatus (representing, for example, society as a whole). The second dimension is the market: capitalism is a system in which productive resources and produced outputs are distributed by means of freely negotiated exchanges between their private owners. Distribution is not accomplished by means of the state's or any other collective agency's planned decisions. Thus, the twentieth century's great confrontation between “capitalism” and “socialism” was widely defined to be a struggle between private property and markets, on the one hand, and socialized property and government planning, on the other.

We do not use that popular definition in this chapter. A full discussion of the different definitions and of the arguments and disagreements among them would take us far afield. Instead, we will underscore some problems with the popular definition as an introduction to the different definition we use.

Private property is indeed a frequently encountered feature of capitalism. However, what most call capitalist economies also typically contain significant amounts of productive property and products owned by state apparatuses in the name of the society as a whole. In the US, for example, large tracts of land, harbors, air space, transportation facilities, military equipment, and educational institutions are publicly owned.

Likewise, markets are widely used mechanisms of distribution, yet what many call capitalist economies also include the distribution of goods and services in non-market ways. In the US, for example, food is distributed via food stamps issued to certain parts of the population, and many communities distribute park, fire, police and school services to citizens based not on market exchanges, but rather on local notions of citizens’ needs. Inside most households, members produce all sorts of goods and services (cooked meals, cleaned clothes and rooms, repaired furniture, and so on) distributed to other household members according to traditional plans and procedures and not by means of market exchanges.

Private property and markets are also not features that distinguish capitalist from other types of economic system in human history. For example, the slaves in the non-capitalist economic system of the US south before the civil war were private property. Similarly, in many parts and periods of medieval Europe, the land, horses, plows and mills were often privately owned means of production, yet we refer to the economic system of that time as feudalism, not capitalism. Markets were also often features of slavery and feudalism as well as capitalism. For example, feudal lords often sold the produce of their serfs’ labor in markets; feudalism thus worked with a market system of distribution. Similarly, the cotton produced by slaves in the US south was regularly sold in world markets by means of exchange for money.

In short, private property and markets do not provide us with a clear demarcation between capitalism and, for example, slavery and feudalism as economic systems. Nor do we get much further if we try to deal with this problem by invoking individual “freedom.” The idea here is that slaves lack freedom because they are property and serfs lack freedom because they are tied to their feudal manors, but workers in capitalism suffer neither of those lacks. Among problems with this definition is the widely noted fact that in capitalism wage workers are not free (other than formally, legalistically) because to live even minimally, they must work for others.

Because of these and many other difficulties, we define capitalism differently. Our distinctive focus will not be on property or distribution mechanisms or freedom. Rather we highlight the internal organization of production and distribution: how the social sites where goods and services are produced and distributed organize those processes.

A capitalist system is then one in which production and distribution are organized as follows: a mass of people – to be called productive workers – interact with nature to fashion both means of production (tools, equipment and raw materials) and final products for human consumption. They produce a total output larger than the portion (wages) given back to them. The wage portion sustains the productive workers: it provides their consumption and secures their continued productive labor. The difference between their total output and their wage portion is called the “surplus,” and it accrues to a different group of people, the employers of productive laborers. We define the latter as capitalists.

The capitalists receive the surplus from the productive laborers by virtue of a wage labor contract entered into between capitalist and worker. This wage labor contract specifies a particular commodity exchange. The capitalist agrees to buy – pay the worker regularly for – his/her capacity to labor or labor power. The worker agrees to sell his/her labor power to the capitalist. The worker further typically agrees to use the tools, equipment, raw materials and space provided by the capitalist. Finally, the worker agrees that the total output emerging from his/her labor is immediately and totally the private property of the capitalist.

The productive laborers – those who produce the surplus – use the wages paid to them by the capitalists to buy the goods and services they consume and to pay personal taxes. The capitalists use the surplus they obtain from their productive employees to reproduce the conditions which allow them to keep obtaining surpluses from their productive employees. For example, they use portions of their surpluses to hire supervisors to make sure the productive laborers work effectively. They use another portion to pay taxes to a state apparatus that will enforce the contracts they have with their workers. They use yet another portion of the surplus to sustain institutions (churches, schools, think tanks, advertising enterprises) that persuade workers and their families that this capitalist system is good, unalterable, etc. so that it is accepted and perpetuated.

The workers who sign contracts with capitalist employers thus fall into two kinds. Productive laborers are those directly engaged in the production of the goods and services that their employers sell; their labor yields the surplus that employers receive and distribute to reproduce their positions as capitalists. The term “unproductive laborers” refers to all those engaged in providing the needed context or “conditions of existence” for productive workers to generate surpluses. The unproductive laborers have their wages paid and their means of work provided by capitalists. The latter distribute portions of the surpluses they get from productive laborers to pay and provision the unproductive laborers. The terms “productive” and “unproductive” differentiate wage workers into two groups: one that produces the surplus directly and one that provides the conditions for surplus production.

In short, the capitalist economic system divides people into three basic economic groups: productive laborers, capitalists and unproductive laborers. Just as the social context for the economic system – the politics and culture – shape and influence the economy, so the reverse also holds. To focus on a society's economic system – as this chapter does – does not mean that economics is any more important than politics, culture or nature in the interaction among them all that comprises each and every society. Our focus on the capitalist economic system is driven chiefly by the widespread neglect of that dimension of today's social problems and crises and our aim to rectify that neglect.

For the last half-century, the capitalist economic system in the US and indeed in many other parts of the world has gotten a free pass in terms of criticism and debate. Intense debates have swirled around other basic institutions or systems (marriage, schools, health care delivery, transportation, urban structure and so on). Criticisms about their current conditions and problems have informed proposals for changes ranging from the relatively minor to the fundamental. However, our economic system – capitalism – was almost entirely exempted as if some taboo precluded criticism. About the capitalist system, business and political leaders, mainstream mass media, and the bulk of the academic community substituted celebration and cheer-leading for serious criticism and debate. This was their response to the Cold War and even more an intrinsic part of the conservative resurgence after the Great Depression, New Deal and wartime US alliance with the USSR which frightened and galvanized them into reaction. They insistently treated capitalism as beyond criticism, debate, or basic change and demanded no less of others.

Critics of capitalism were marginalized. Laws were passed and conventions established that linked such criticism to disloyalty. Colleges and universities discriminated against such critics. Politicians competed in their adulations of capitalism and condemnations of all alternatives. Culture wars yielded purges of journalists, film-makers, playwrights and others suspected of sympathies with criticism of capitalism as a system. The post-1940s history of the US labor union movement shows the stark social consequences of punishing criticisms of capitalism. First, the state apparatus pressed successfully for the systematic rooting out of those union leaders and activists who dared to include criticisms of capitalism in their work. They were excoriated for “subversive” and “ideological” politics rather than doing their proper jobs of “serving their members.” Yet, as most unions fell into line, they also declined in part because of repeated attacks on unions as a “special interest serving only its members” at the expense of the broader social good.

Criticism of particular capitalist enterprises or their particular practices did sometimes surface over the last half-century. Their monopolistic activities could be targeted, so too their racial and gender discriminations, environmental degradations, and even their corruption of political institutions. However, critics learned quickly to focus only on specific misbehaviors but not the economic system that induced, rewarded and thereby reproduced them. Many of the critical movements foundered or collapsed because their members who dared venture some criticism of capitalism as a system could not be tolerated by those determined to avoid such criticism at all costs. In contrast, the 2011 Occupy Wall Street movement broke with the traditional taboo as it clearly and consistently affirmed the legitimacy of criticizing capitalism as a system.

Like any social system long exempted from criticism and debate, the capitalist system deteriorated behind its protective wall of celebration. Big business subordinated the small when it did not eat them. Laws protecting labor and labor unions were amended, repealed or simply unenforced. Freedom came to be redefined as first and foremost the freedom of businesses to decide what, where, and how to produce without interference from other parts of society. The results of so long-lasting a pass on serious criticism and debate of the capitalist system are many and sobering. These include returns to levels of inequalities of wealth and income typical a century ago, consequent inequalities in the distributions of political power and access to culture, atrophy of government-provided social services and supports, multi-dimensional ecological crises and so on. Indeed, two central objectives of this book are (1) to show how the severe crisis since 2007 is partly another result of capitalism and (2) to help reopen the space for criticism of capitalism as a key step towards fundamental social change.

The capitalist economic system persists so long as labor contracts between capitalists and both productive and unproductive laborers provide acceptable quantities of surpluses to capitalists and employment and incomes to workers. Developments within the capitalist economic system and/or in its social and natural environment can disrupt – suddenly or gradually – the system's reproduction. Then unemployed workers, unutilized means of production and the resulting loss of output coexist – often for years – in a stunning reproach to capitalism's pretensions to efficiency, equity and progress.

Such disruptions are viewed by the masses of people in capitalist economies as “hard times” to be prepared for and endured. Capitalism's defenders fear disruptions as threats to the system. Capitalism's enemies treat them as opportunities for organizing workers to change or supersede the system. No wonder then that ...

Table of contents

• Front Cover
• Financial Crisis, Labour Markets and Institutions
• Title Page
• Copyright
• Contents
• Notes on the authors
• Acknowledgements
• Introduction
• PART I Capitalism in crisis: Nature and origins
• PART II Impact and consequences of the crisis
• Index