Capitalism in crisis – the apologia

by Michael Roberts

The Financial Times recently launched a series of articles on “Capitalism in Crisis”.  As we enter the fourth year of the global banking collapse and the long depression in real output for the major capitalist economies, the strategists of capital are trying to understand what went wrong with capitalism and what to do about it. They realise that confidence in the capitalist mode of production has plummeted, whether that is expressed in the global “we are the 99% campaign” or in the opposition of many Greeks to the austerity packages of the IMF – according to a recent poll, around one in three Greeks asked now want a social revolution.

So the FT decided to kick off a campaign to defend the capitalist system with articles by various apologists.  It started with Lawrence Summers (FT,8 January). Summers, is a former employee of Goldman Sachs and was US Treasury Secretary under Clinton before he became a university professor at Harvard.  Summers tells us that disillusionment with capitalism had reached highs even in the bastion of the ‘free market’: America.  A recent poll, he tells us, found that 40% of Americans asked no longer felt positive about capitalism and there was majority against capitalism among young people, ethnic minorities and the poor.  Summers asked the question: are these negative attitudes justified?  His answer was that it depends on whether the current crisis is due to the nature of capitalism and on whether there are any solutions within the capitalist system.  For Summers, the answer to the first question is no and to the  second, yes.  Surprise!

Summers admitted that the Great Recession has created such a level of unemployment that the hope of getting everybody who has lost a job or seeks one back into work over the next five years is low as “the economies of US or Europe are likely to be constrained for a long time”.   But nevertheless, having admitted that we are in a long depression, he argues that this slump is not due to an “inherent flaw in capitalism”.  It is due to what Keynes called a “magneto problem”, like a failure of a car part that can be fixed and then the car will spring back into life.  Just give the current economic policies more time and all our concerns wil soon fade.  It is unclear what these policies are that will work: is it fiscal stimulus or austerity?; printing money and bailing out the banks or not?

Summers knows that one in six Americans aged between 25 and 54 years are out of work while the top 0.1%  have been living the good life.   And, “unlike cyclical concerns (ie the recession), there is no obvious solution at hand”.  But apparently, this is nothing to do with the failure of capitalist mode of production but due to problems “deep within the evolution of technology”.  You see, agriculture gave way to industry in the 19th century and as it did so, people lost their livelihoods in the transition and inequality rose.  Then in 20th century, industry gave way to services and the same thing happened.  Now in the 21st century, all the jobs and incomes are to be found in the sectors raising the quality of human capital, namely health, education (where Summers now plies his trade) and housing and not in goods or other low-value services.   The problem is, says Summers, is that these jobs are found mainly in the public sector and are not subject to the profit motive.  Thus “in many of these new areas, the traditional case for market capitalism is weaker”.  His conclusion is that we need to “shrink or at least slow the growth of the public sector” to allow the provision of these services for profit.  Summers implies that profitability is no longer good enough in the existing private sector and so, to save capitalism, we must destroy public services and marketise them.  It’s not a good advert for the capitalist mode.

John Plender is a regular columnist in the FT (FT, 8 January).  He is worried about the growing inequality of wealth and incomes over the last three decades in the major OECD economies.  We have documented the evidence for this in many posts in this blog (see Inequality, poverty and riots, 6 December 2011 and Inequality in Britain, 28 January 2010).  But Plender cites a new book by Stewart Lansley (The cost of inequality) that reveals the fast track rise for the super-rich and the stalled track for everyone else.  Led by the financial sector, capitalism has become “a cash cow for a global super elite”.  Plender points out that this development is nothing new – indeed capitalism has an inherent tendency to increase inequality (see my post, 1% versus 99%, 21 October 2011).  But Plender is optimistic – at least in this current slump, we don’t have soup queues and degradation as we did in the 1930s.  Unemployment in the US may be near 9% officially or even 15% on fairer measures, but it is nowhere near 25% as in the Great Depression.  There’s thanks for small mercies!

What’s wrong with capitalism is not the capitalist mode of production for profit, says Plender, but the particular form it has taken with the dominance of the banking sector.  The bankers have become pirates or profiteers stealing from the decent capitalists.  Thus we hear the usual argument of the Keynesians that it is the finance sector that is the problem, not capitalism.  This idea of robber barons has been taken up opportunistically by the Republican rivals to Mitt Romney, the favourite for the US presidential nomination.  Romney is accused by the likes of Newt Gingrich and Rick Perry of being such a ‘profiteer’ because he ran one of the largest private equity companies in America.  Bain Capital was engaged in buying out companies, stripping their assets, sacking much of the workforce  and then selling them on.  Apparently 22 out of the 77 companies that Romney bought were put out of business.  And yet what Bain Capital did is nothing more than capitalism at work: the strong win and the weak fail.  It is an illusion perpetuated by Keynes, echoed by Plender, that there is a capitalism that can operate without speculation and without ‘profiteering’ and thus deliver economic growth, jobs and incomes without inequality or slumps.

Plender argues that the problem with capitalism is that shareholders have lost power to the management of companies.  This is called the “agency problem”, which means that managers enrich themselves at the expense of employees and shareholders alike and productive investment.  The answer is to restore the power of the shareholders.  Unfortunately, even if this were true, Plender does not offer us any way of doing this.  He recognises that regulating the banking system has failed and the role of ‘entrepreneurs’ as opposed to ‘get-rich quick’ managers has not been restored.  But anyway, this is a myth.  Even back in the days of 19th century capitalism, when shareholders were supposedly in full charge, economic crises were just as rife and so were banking crises.   Plender ends up with an argument in favour of capitalism that is often trotted out; reformulating Winston Churchill’s aphorism on democracy, “capitalism is the worst form of economic management except for all those other forms that have been tried”.  Or as Margaret Thatcher once said, “there is no alternative”.

John Kay (FT, 10 January) is an Oxford economist who regularly writes for the FT.  He points out that Marx never used the word ‘capitalism’ and what Marx attacked as a mode of production in the 19th century has disappeared or metamorphosed into something else.  And here we go again.  The owners of the means of production (now pension funds, insurance companies, banks etc) no longer control their companies or hire or fire people.  That’s left up to the managers now. Ownership and control are now “divorced”.  So business leaders are “no longer capitalist” in the sense that Marx described them.   So the answer to the current crisis is not to end the private ownership of the means of production, as the Marxists say, but to find ways of making control of companies more democratic.

This is pretty much the same argument as Plender.  What is wrong with capitalism is that there is not enough of it.  If the owners of capital took more control, things would be better.  Apart from the fact that there is no evidence in the past that this was the case, for what purpose would owners do this but to boost profits and in particular dividends?  How would that help growth and jobs, unless you reckon that in some way owners would invest more than the managerial elite?   And anyway, that does not explain why there a regular cycles of boom and slump, whether companies are ‘controlled’ by their shareholders or not, whether they are multinational or not, or whether executives are overpaid or not.  The private ownership of the means of production matters because, in the last analysis, the owners decide investment, employment and incomes paid to the top and the bottom.  No top manager survives if he or she cannot deliver an increased dividend (or higher share price) to the shareholders and that means making higher profits.  That is literally the bottom line.

Samuel Brittan is a long-time FT columnist and closet Keynesian (FT, 13 January).  Brittan tells us that market capitalism fails to reward on “personal merit” i.e. you don’t get paid a lot of money or have a lot of wealth under capitalism because you are clever or work hard.  However, capitalism is the best system because “it promotes personal and political freedom” as the “individual is free to use his abilities in line with his own choices”.   Really!  Tell that to the majority of people toiling away in a very modestly paid jobs in an office or shop, working long hours, with limited holidays and a poor pension. Would they agree that they have plenty of life choices as a result?  What would the poor of Africa, Asia and elsewhere make of the idea that they are free to make their own choices?

Yet Brittan tells us that, under capitalism, we can choose whether to spend our incomes in “personal pleasure or social service at home or the relief of poverty abroad” as we wish.  The individual makes the decision, not the government.  Brittan quotes the liberal apologist for capitalism of the mid-19th century, John Stuart Mill, who argued that if everything was in state hands, there would be no personal freedoms. Thus Brittan invokes the alternative to capitalism with its ‘free personal choices’ against the model of Stalinism and state authoritarianism.  There  are no other models, according to him. Yes, a few cooperatives might be more democratic, but that’s it.

To end his piece, Brittan tells us that he is shocked at the role of the financial sector and how its “activities could undermine the capitalist order”.  Yet again, there is nothing wrong with the capitalist mode of production in its production sphere; it’s the monetary or financial sector that is flawed and causes instability and inequality.  As if economic cycles of boom and slump and inequality did not exist before the financial sector became a hegemonic force in modern capitalism.  So the answer, for Brittan, is international regulation of the financial sector and “the retention for quite a long time in public ownership of the banks and other institutions that have had to be rescued by government”.  Thus the financial sector must remain under the ‘authoritarian’ grip of the dreaded state sector, but not the rest of ‘productive’ capitalism.

To sum up, Marx was wrong.  Capitalism is the best of alternative systems of human organisation; and it has changed significantly since Marx criticised it.  Unfortunately, some of those changes are for the worse (managers stealing profits; the finance sector undermining stability).  Apparently, we can correct those flaws either by going back to 19th century capitalism where owners not managers ruled (Plender and Kay); or by having state control of the financial sector (Brittan); or by increasing the role of private sector in running public services for a profit (Summers).   Not very convincing, is it?