Markets are key to the current economic meltdown. First, the US real estate market drove up prices and provoked fantasies that unprecedented prices would not collapse. Then markets reversed and plunged us into recession. The misnamed “sub-prime mortgage” crisis began by hobbling mortgage brokers and lenders and big investment banks. Their huge losses were then spread, by the world’s integrated capital markets, to yield a general “credit crunch” crippling countless other lenders and borrowers. Now, the links among credit and output markets have brought recession, rising bankruptcy, and falling employment. US households, for the first time in history, now spend more of their disposable income to pay off debts (14 per cent) than to buy food (13 per cent).
In such conditions, the primary concern of corporate executives and politicians has been to blame others. Their favorite targets are the economic version of “a few bad apples,” namely those “sub-prime” borrowers who took out mortgages they could not afford and those greedy lenders who “may have” connived with them.
After blame, the next priority is to “solve” the economic problems by means of “economic reforms.” Calls for them are growing everywhere. Reform proposals list steps for corporations and/or the government to take to regulate and control credit markets “so that they will work better and not repeat the current mess.” Those who resist market reforms and cling to the old mantra of “free markets” as “efficient” feel ever more isolated and marginalized.
Yet, economic reforms deserve a “been there, done that” dismissal. Past reforms, emerging from past economic crises, have repeatedly failed to prevent subsequent crises. For example, in recent years over 90 per cent of all US mortgage borrowers were required to sign and deliver a special Internal Revenue Service document (IRS Form 4506T) to their lenders. The form allowed lenders to access borrowers’ tax filings to verify their incomes — and thus their ability to afford the mortgages. According to Gretchen Morgenson (NY Times, April 6), most lenders never checked with the IRS because they deliberately ignored borrowers’ limitations. Because lenders profitably resold mortgages immediately after borrowers signed them, they cared little about risky borrowers. The corporations that bought those mortgages packaged them into securities they resold globally to banks and other investors. High ratings and insurance policies attached to those securities hid their riskiness. Profits were the carrot and competition was the stick driving each corporate player in the system.
Past reforms (such as IRS Form 4506T) failed, not because some shaky borrowers and a few shady lenders evaded them, but because our economic system drives all players to take and hide risks that markets then spread globally. The system generates crises, then ineffective reforms, and then crises again. It is a systemic failure when 90 percent of lending corporations ignore past reforms aimed to control their behavior and thereby prevent economic disaster. However, the system that failed is not primarily the market. The roots of dysfunction lie elsewhere in the corporate structure of capitalist enterprises.
Contemporary lenders are chiefly large corporations (banks, brokerages, mortgage lenders, etc.) whose boards of directors (usually comprising 15 to 20 individuals) appropriate an immense mass of profits. Competition presses them to seek ever more profits. So they lend unwisely, producing financial crises. Then reforms are passed to cope with these crises. Invariably, the affected corporations use their profits to minimize the reforms’ effect on their profitable activities, or to evade the reforms, or to persuade politicians to “adjust” or repeal the reforms. Past “reforms” always failed because they left in place the old corporate structure with the same incentive (profits) and the same resources (profits) to undermine those reforms one way or the other. This then set the stage for the next crisis.
Given the inadequacy of past reforms, will yet another set of them be passed now? Or can we finally make the necessary systemic changes to both the corporate structure of business and the relationship between business and society? And what might they be?
The first systemic change would affect productive workers — those who actually make the goods and services that corporations then sell to get “their” profits. Such workers would become their own collective board of directors. Corporations would then no longer have tiny boards of directors (elected by and accountable to shareholders) that extract profits, control workers, and dominate politics and culture. By making productive workers and directors the same group of people, wages and working conditions would suddenly become as important as profits to decision-makers.
The second systemic change would subject these new workers/directors to a social system of checks and balances governing their economic decisions. They would have to share the power to decide how much work will be done, how much profit will be made, and how the profits will be distributed and used across the society. The workers/directors would share such decision-making with several groups, other “stakeholders” who likewise depend on the results of such decisions.
These other groups include, firstly, all those workers who do not directly produce goods and services, but rather provide the conditions for — enable — production to occur. Such enablers include, for example, the clerks, sales, and purchasing personnel, wholesale and retail merchants, secretaries, bank workers, and so on. Other enablers are workers in government and social welfare enterprises (public schools, hospitals, military, etc.). Beside such workers, local, state, and national communities would also join in democratically co-determining job conditions, the sizes of profits, and their disposition. Finally, just as community members would share decision-making power inside enterprises with the workers, the latter would share decision-making powers over community affairs. Such a worker-community system of checks and balances would democratize society’s basic economic decisions — for the first time in history — as well as link them intimately with similarly organized social decisions
With such a system of checks and balances, “transparency,” and thus “accountability” might genuinely characterize economic decisions rather than being empty slogans covering corporate misdeeds. If, instead of making such systemic change, we lapse into another “reformism” during this present global economic downturn, we invite yet another systemic failure.
Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006).