Can Caring Capitalists or Progressive Policies Save the American Economy?

The Occupy movement forced the issue of economic inequality into American political discourse.

The most common diagnosis, which comes from mainstream economics, is that inequality has risen over the last 40 years because technical change, notably computers and the Internet, has favored highly-educated workers and left lower-skilled workers behind.  The cure is to increase education levels in the workforce.

This argument, of course, ignores class structure.  Yet, no matter how educated the workforce is, there remains substantial structural demand for low-skill, labor-intensive services such as cashiers and clerks, warehouse and delivery workers, cooks, dishwashers, and janitors.  If everyone is trained to be a doctor, computer programmer, or investment banker, who is going to sell and deliver all the goods, cook all the food, do all the dishes, and clean up?

Like the economists’ calls for more education, facile talk about “job creators” by Republican politicians obscures fundamental class relations.  Underneath these market discourses are real class struggles, such as the vehement anti-unionism of America’s largest employer, Wal-Mart, or the ideology of shareholder value, which is presented as the only legitimate goal of corporations.

Even commentators who acknowledge the class struggle at work, however, continue to think within the liberal framework which sees capitalism as a fundamentally sound system that simply needs better regulation and more equal distribution of incomes.

Thus, the journalist Hedrick Smith recently proposed his solution in the op-ed pages of the New York Times: Capitalists just need to be more caring!

In this remarkable piece of starry-eyed nostalgia, Smith recounts the story of Ford’s famous five-dollar day, which was implemented in 1914, noting that Ford “was one of the first business leaders to articulate what economists call ‘the virtuous circle of growth’: well-paid workers generating consumer demand that in turn promotes business expansion and hiring.”

Smith takes Ford at his word, as written in the latter’s autobiography, in which he claims to have implemented high wages as a matter of “social justice,” in addition to being good business.  Smith conveniently forgets to note that Ford was facing extremely high turnover and a union drive of the Industrial Workers of the World.

Smith also failed to indicate that the five-dollar day was, as John Bellamy Foster noted in Monthly Review, administered in part as a “profit-sharing” agreement for which workers had to qualify by meeting certain conditions including “thrift; having a home that was worthy of a Ford worker; not letting out rooms in one’s house to boarders; . . . not associating or allowing one’s children to associate with the wrong people; . . . cleanliness; ‘good manhood’; good citizenship; demonstrating proof of marriage; [and] not drinking or smoking excessively.”

But more important than noting Ford’s regressive paternalism is acknowledging that the virtuous circle of growth to which Smith alludes only occurred during a two-decade period — sometimes referred to as Fordism — under historically-unique conditions that cannot easily be recreated.

Smith notes correctly that the Fordist system was not institutionalized economywide until the “Treaty of Detroit” in 1950, when the UAW and Big Three auto companies negotiated contracts in which wages were indexed to productivity, providing the basis for real wage growth.  He also notes correctly that

America enjoyed its best period of sustained growth in the decades after World War II, from 1945 to 1973, even though income tax rates were far higher than today.  It created not only unprecedented middle-class prosperity but also far greater economic equality than today.

Although productivity increased by 80.1 percent from 1973 to 2011, average wages rose only 4.2 percent and hourly compensation (wages plus benefits) rose only 10 percent over that time. . . .  American business and political leaders have dismantled the dynamics of the “virtuous circle” in pursuit of downsizing, offshoring and short-term profit and big dividends for their investors.

Where Smith goes wrong, however, is in assuming that “[g]ive the middle class a better share of the nation’s economic gains, and the economy will grow faster,” is a proposal that is structurally possible in today’s global economy, let alone something that enlightened capitalists would do voluntarily.

Smith is in good company, however.  Indeed, progressive heavyweight Robert Reich has proposed essentially the same tonic.  Also writing in the opinion pages of the New York Times, in September 2011, Reich argued that “[t]he economy cannot possibly get out of its current doldrums without a strategy to revive the purchasing power of America’s vast middle class.”

Reich too makes the business case for high wages, although, more realistically, he notes this will require a mass movement: “Even the executive class has an enlightened self-interest in reversing the trend; just as a rising tide lifts all boats, the ebbing tide is now threatening to beach many of the yachts.  The question is whether, and when, we will summon the political will.”

To his credit, Reich has been a vocal supporter of the Occupy movement, and has called for the public at large to “make a ruckus.”

It is hard to disagree with much of what Reich writes and says.  But what I want to take issue with is his determination that the problem of inequality is fundamentally a political problem.

Underneath the politics and class struggle are structural economic processes that make the return to Fordist levels of equality unlikely.

Without getting too technical here, we need to consider the profit rate, which was central to Marx’s analysis.  (For a lot of technical detail and data, see the long academic version of my argument here, or email me if you cannot access the article.)

The profit rate in the US remained historically high from 1947 to 1966 (between 17.1% and 19.1%), declined to a low of 10.7% in 1982, and then rose back to 17.3% by 1997.  The profit rate in the Fordist period was high initially because it followed a massive decline in the value of physical capital and the nominal value of financial assets during the Great Depression and WWII, and remained high for an extended period because of a continuous rise in manufacturing productivity.  This structural context, coupled with oligopolistic competition, made the Treaty of Detroit possible and allowed rising real wages for two decades.

By the end of the 1960s, however, international competition increased, a growing capital-labor ratio outstripped productivity (leading to a rise in what Marx called the organic composition of capital), and real wages grew, all of which combined to force a decline in the profit rate.  Capital could thus no longer afford to fund the relatively high wages that supported effective demand, and the corporate assault on labor began.  The wage share of national income dropped from over 65% in 1960 to less than 60% in 2009.  Ultimately, profits were recovered because they were taken out of wages.  And demand has been maintained through skyrocketing household debt.

In short, the Fordist period was a temporary respite from the ravages of capitalism.

In the context of a post-Fordist economy — that is, a service-based economy subject to intense international competition — profit rates can be maintained only at the expense of wages, and the possibility for class compromise of the sort institutionalized in the Treaty of Detroit is effectively nil.

Agitating for more equality through better wages is, of course, a worthy cause.  But at some point we have to begin taking seriously the reality that reforming capitalism so that the prosperity it creates is widely shared by the majority of the working population will require cutting into the profits of capital.  This, in turn, will require the working class to begin fighting back in the class war in order to move beyond capitalism.

Matt Vidal is Lecturer in Work and Organizations at King’s College London, Department of Management.  He is the chief blogger for the blog of the Organizations, Occupations and Work section of the American Sociological Association.  You can follow Matt on Twitter @ChukkerV.

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