Workers Vanguard No. 1125
12 January 2018
Ideologues of Decaying Capitalism
The Bankruptcy of Liberal Economists
By Joseph Seymour and Bruce André
“This expropriation [of capitalist property] will make it possible for the productive forces to develop to a tremendous extent. And when we see how incredibly capitalism is already retarding this development, when we see how much progress could be achieved on the basis of the level of technique already attained, we are entitled to say with the fullest confidence that the expropriation of the capitalists will inevitably result in an enormous development of the productive forces of human society.” [emphasis in original]
—V.I. Lenin, The State and Revolution (1917)
Lenin thus summarized Karl Marx’s fundamental critique of the capitalist system as well as the ultimate goal of socialism. Marxists gauge human progress by the development of mankind’s productive forces, from the stone tools of primitive society to present-day science, technology and the modern factory. With the advent and development of industrial capitalism beginning in the late 18th and early 19th centuries, one could envisage for the first time a future end to scarcity and class divisions. However, the private ownership of the means of production increasingly acted as a brake on the further development of the productive forces, not least through periodic economic crises. The emergence of modern imperialism at the end of the 19th century marked the onset of an epoch of global capitalist decay. The major capitalist powers, having divided the world through imperial conquest, embarked on a series of wars for its redivision, seeking to expand their colonial holdings and spheres of domination at the expense of their rivals.
The goal of proletarian revolution is to resolve the contradiction at the heart of capitalism, in which production for private profit stifles overall productive growth. Collectivizing the means of production and making the bounty of society available to all, a workers state will organize all of industry in the way that an individual assembly line is today conceived: according to a rational plan. An international socialist economy, by applying scientific planning to the entire economic system, will unleash a qualitative development of the productive forces and of labor productivity. This will liberate the productive capacities of mankind, ultimately eliminating economic scarcity and, with that, laying the material basis for the disappearance of classes and the withering away of the state.
In contrast to that Marxist view, the equation of capitalism with unlimited economic growth was an article of faith for bourgeois economists of the post-World War II generation. Today, that faith has largely faded. In the eyes of liberal economists, the meager rate of economic growth experienced in the U.S. in the past few decades has become the “new normal.” Lawrence Summers, a key economic operator in the Bill Clinton administration in the 1990s, sees the advanced capitalist countries as having entered a prolonged period of “secular stagnation,” reviving a notion that originated among liberal Keynesians like Alvin Hansen during the Great Depression of the 1930s.
That view was reflected in the 2016 presidential election as Hillary Clinton offered nothing except more of the same—“America is great”—with maybe some minor tinkering. Even her left-liberal (“progressive”) Democratic Party challenger Bernie Sanders did not claim that his policies would lead to a substantial boost in economic output but only that they would bring about a somewhat more equitable redistribution of income. Right-wing demagogue Donald Trump promoted the patent lie that he would double the current annual rate of economic growth from 2 percent to 4 percent, or even triple it.
Now, Trump and the Republican-dominated Congress, resurrecting Ronald Reagan’s supply-side economics, have pushed through a massive tax cut for corporations and the ultrarich. The idea that the benefits resulting from tax breaks for the wealthy will “trickle down” to the rest of the population in the form of increased investment, more jobs and higher wages is even more ludicrous today than it was in the 1980s, when it was the centerpiece of Reaganomics. American businesses are already sitting on an unprecedented stockpile of more than $2.4 trillion in cash. Apple and General Motors are hoarding almost 30 percent of their total value in cash. Why are companies not investing those staggering sums in new plants, machinery and additional workers? The obvious answer is that they lack confidence that such investment would generate an acceptable rate of return.
Meanwhile, the Democrats do not even pretend to offer a policy alternative that might significantly increase the rate of growth. Paul Krugman, probably the country’s best-known “progressive” economist because of his regular column in the New York Times, defended Hillary Clinton during the presidential campaign on the grounds that government policy has little effect on economic growth, a supposedly mysterious process beyond the ken of his profession to understand, much less change:
“What do we know about accelerating long-run growth? According to the [Congressional] budget office, potential growth was pretty stable from 1970 to 2000, with nothing either Ronald Reagan or Bill Clinton did making much obvious difference. The subsequent slide began under George W. Bush and continued under Mr. Obama. This history suggests no easy way to change the trend.”
—New York Times, 15 August 2016
The Falling Rate of Profit
A recent, book-length version of the “there’s not much we can do about economic growth” school of thought is Marc Levinson’s An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy (2016). A former economics and finance editor of the Economist, house organ of Anglo-American bankers, Levinson strikes a contrarian pose, gleefully debunking the economic policy doctrines of both wings of the bourgeois political spectrum: Keynesianism on the left and monetarism and supply-side economics on the right. He contends that the relatively high rates of growth experienced by the advanced capitalist countries in the three decades after World War II amounted to a fortuitous historical accident that cannot be replicated by any kind of government policy.
A much weightier expression (in every respect) of historical pessimism with regard to the American economy is a recent book by a prominent liberal academic economist, Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (2016). Unlike An Extraordinary Time, which has a slapdash, journalistic quality, Gordon’s book (a 700-plus-page tome) is a work of serious scholarship. While Gordon’s argumentation differs somewhat from that of Levinson, as does the historical scope of his study, his conclusion is basically the same:
“This is a book about the drama of a revolutionary century when, through a set of miracles, economic growth accelerated, the modern world was created, and then after that creation the potential for future inventions having a similar impact on everyday life of necessity was inevitably diminished. The implications for the future of U.S. and world economic growth could not be more profound....
“The economic revolution of 1870 to 1970 was unique in human history, unrepeatable because so many of its achievements could happen only once.”
Gordon’s use of the term “miracles” underscores his belief that mere mortals cannot consciously control the quantity and content of the material wealth created by their labor.
In the introductory section of An Extraordinary Time, Levinson defends Obama against a charge leveled by right-wing scribe George F. Will, who stated: “Making slow growth normal serves the progressive program of defining economic failure down.” To this Levinson replies, “as if the rate of economic growth were a matter of presidential discretion.” It is, of course, true that in capitalist America the policies of a given administration usually have a marginal effect on economic growth.
The expansion (or contraction) of the production of marketable goods and services under capitalism is mainly determined by the extent to which the executives of large corporations and Wall Street financiers invest profits in new productive facilities, especially those embodying more advanced (labor-saving) technologies. What drives capitalist investment is not the impulse to maximize output or labor productivity but rather to maximize the rate of profit (i.e., the ratio of profit to the market value of the means of production).
However, Marx, in one of his key insights, demonstrated that there is an inherent tendency for the rate of profit, the driving force of the capitalist system, to decline over time. By prompting capitalists to cut back their investments, a falling rate of profit generates periodic crises, usually triggered in financial markets. The result is a contraction of output and increased unemployment.
Marx’s explanation for the falling tendency of the rate of profit flowed from his understanding that surplus value—the unpaid portion of workers’ labor—is the source of profit, not the capitalists’ expenditures on the means of production (e.g., machinery and raw materials). Marx observed that especially in periods of economic boom, when workers can feel emboldened to demand higher wages, individual capitalists invest an increased amount of capital in plant upgrades and such in order to cut labor costs. By doing so, the capitalist gains a competitive advantage. However, as all capitalists follow suit, the total amount of surplus value generated per amount of capital invested—i.e., the average profit rate—declines.
Capitalists invest in expanding productive capacity on the assumption that they will be able to sell the goods produced at a particular rate of profit. However, as the profit rate drops, they find themselves unable to sell their products at the expected profit rate. They cut back investments and slash production, resulting in an economic downturn. Workers are thrown out onto the street; entire factories become rusted relics.
Bourgeois economic ideologues, from Keynesians to monetarists and supply-siders, identify the laws governing the capitalist mode of production with the laws governing production as such. In the absence of a revolutionary working-class alternative, the appeal of Trump’s right-wing populist demagogy is enhanced by the fact that both liberals, like Krugman and Gordon, as well as centrists on the bourgeois political spectrum, like Summers and Levinson, insist that it is not possible to overcome the decades-long stagnation in the living standards of American working people.
From Kennedy’s “New Economics” to Obama’s “New Normal”
In the past, Democratic politicians, especially those on the more liberal wing of the party, promised to deliver a new era of economic prosperity. John F. Kennedy’s successful 1960 presidential campaign against Richard Nixon, who had been vice president in the Republican Eisenhower administration (1953-61), was dominated by Cold War tensions with the Soviet Union and fears among the ruling class that the U.S. was falling behind in science and technology. In its economic message, Kennedy’s campaign resembled Trump’s. His platform called for boosting economic growth and dynamism under the slogan “Let’s get this country moving again.” He pointed to the sluggish economic performance, punctuated by two recessions, during Eisenhower’s second term. In this respect, the campaign tactics used by Kennedy against Nixon and Eisenhower were similar to those used by Trump against Hillary Clinton and Barack Obama.
In An Extraordinary Time, Levinson retrospectively criticizes liberal Keynesians like Walter Heller, chief economic adviser to both the Kennedy and Lyndon Johnson administrations. Heller claimed that fiscal policy (taxation and government expenditure) could be fine-tuned so as to maintain full employment and maximize economic growth. By the late 1970s, Democratic politicians and their intellectual apologists were singing a different, more downbeat, tune.
Capitalizing on the downfall of Nixon resulting from the Watergate scandal, in 1977 Jimmy Carter, a centrist Southern Democrat (like Bill Clinton), entered the White House. A few years later, the hapless Carter administration confronted an unusual condition termed “stagflation”: rapidly rising prices combined with a recession. Levinson describes the widespread economic insecurity that propelled the right-wing Republican Reagan to the presidency in 1981: “The conservative ascendance came only as mortgage interest rates above 11 percent made young people despair of ever buying a home and as layoff notices went out to ironworkers on construction sites and toolmakers in auto plants.”
Surveying those dismal times, a mainstream liberal academic economist, Lester C. Thurow, published a book in 1980 on the state of the U.S. economy titled The Zero-Sum Society: Distribution and the Possibilities for Economic Change. As indicated by the title, Thurow argued that it was no longer possible to substantially increase the size of the economic pie so that everyone would get a somewhat bigger piece. Economic policy now involved recutting the existing pie such that some people would get a larger slice and others a smaller one:
“For most of our problems there are several solutions. But all these solutions have the characteristic that someone must suffer large economic losses. No one wants to volunteer for this role, and we have a political process that is incapable of forcing anyone to shoulder this burden. Everyone wants someone else to suffer the necessary economic losses, and as a consequence none of the possible solutions can be adopted.”
In fact, the almost four decades since Thurow wrote those lines have seen an unremitting war by the bourgeoisie to force workers, minorities and the poor to “suffer the necessary economic losses” to bolster capitalist profits. That one-sided war on workers has been facilitated by the trade-union bureaucracy, which maneuvers for crumbs while peddling a mythical “partnership” of labor with the bosses and their parties, particularly Democrats who falsely pose as “friends of labor.”
Technological Innovation and Capitalist Investment
The main theme of Levinson’s An Extraordinary Time is that economic growth, based on increasing labor productivity through technological innovation, is impervious to government policy. After listing several explanations offered by academic economists for the slower growth of labor productivity in the advanced capitalist countries since the 1970s, Levinson concludes:
“None of these explanations sufficed to explain the productivity bust afflicting countries with vastly different economies and divergent approaches to economic policy. The more deeply the scholars mined the data, the more confused they became. What the data could not yet show was that the world had moved to a new stage of economic growth, one that would develop in a far different way....
“Future advances in well-being would depend heavily on developing innovations and putting them to effective use.”
The last statement is manifestly true. Increases in labor productivity under capitalism are determined by two main factors: the extent to which capitalists invest their profits in new productive facilities (plant and equipment) embodying more advanced technology and the degree to which the new technology increases output per unit of labor input.
Levinson does recognize a causal link between the slowdown in the growth of labor productivity and a decline in the rate of capital investment:
“Across the wealthy economies, business investment, which had increased an average of 5.6 percent per year between 1960 and 1973, grew at a far slower rate, barely 4 percent per year, for the next two decades. Sluggish investment left steel mills operating antiquated blast furnaces and insurance offices using high-speed computer printers to spit out form upon form for clerks to organize in file cabinets. Technological innovations usually arrive in the business world incorporated in new equipment and facilities. With firms deferring such investments at every turn, their workers’ productivity improved at less than half the rate in the decades after 1973 as in the decades before.”
However, Levinson makes no effort to explain why the rate of investment has declined to such an extent. In particular, he does not consider the interrelationship between capital investment, technological innovation and the rate of profit.
As Marx underlined, capitalists will invest in new facilities incorporating more advanced technology if, and only if, they believe the increase in profit per worker will be greater than the increased market value of capital per worker. If capitalists discover that their investments are not generating a competitive rate of profit, they will halt or cut back their investments, often triggering an economic downturn.
Marx thus proved that capitalist production increasingly puts the brakes on historical development, at the same time that it creates capitalism’s own gravedigger, the proletariat. He and Friedrich Engels explained that the only way to end the boom-bust cycles inherent to capitalism is for the working class to take control of the means of production through socialist revolution and institute a planned, collectivized economy.
[TO BE CONTINUED]