Reset this!

This was supposed to be the great reset. As the U.S. economy recovered from the Pandemic Depression, millions of jobs were being created, unemployment was falling, and the balance of power between workers and capitalists would shift toward wage-earners and against their employers.

That, at least, was the promise (or, for capitalists, the fear).

But greedflation has delivered exactly the opposite: workers’ real wages are barely rising while corporate profits are soaring. There’s been no reset at all. That’s exactly what was happening before the coronavirus pandemic hit, and that trend has only continued during the recovery. It should come as no surprise then that the already grotesque levels of inequality in the United States continue to worsen.

And who are the beneficiaries? According to a recent study by the Institute for Policy Studies, it’s the Chief Executive Officers of American corporations who have managed to capture a large share of the resulting surplus.

Especially the CEOs of the largest low-wage employers in the United States. While median worker pay increased by 17 percent last year, CEO compensation rose by 31 percent. The result was that the ratio of CEO to average worker pay rose by 11 percent, to 670 to 1!*

American workers are struggling with rising prices, having risked their lives and livelihoods throughout the pandemic. Now, they’re forced to watch as their corporate employers, who have benefited from federal contracts and used their profits to buyback stocks, reward their CEOs with lucrative contracts and massive bonuses—far exceeding the small amount some workers have been able to claw back.

Who’s at the top? Amazon leads the list. Its new CEO, Andy Jassy, raked in $212.7 million last year, which amounts to 6,474 times the pay of Amazon’s median 2021 worker. Then there’s Estee Lauder’s CEO, Fabrizio Fred, who managed to secure a 258-percent pay increase in 2021—leading to compensation that amounted to 1,965 times that of the average worker. Third on the list was the CEO of Penn National Gaming, Jay Snowden, whose $65.9 million payout was 1,942 times that of the gambler’s typical worker’s wage.

So, how did they manage to capture so much surplus and distribute it to their CEOs? Like the other firms in the study, they all took the low road, paying their employees a pittance (in the low $30,000s for the median worker). And they’ve mostly succeeded in opposing and undermining union-organizing efforts.** But Amazon is the only one of the three to secure large federal contracts (over $10 billion between 1 October 2019 and 1 May 2022), like other low-wage corporations (such as Maximus, at $12.3 billion and TE Connectivity, at $3.3 billion), which means the taxes paid by ordinary Americans and being used to support such an inequitable corporate order.***

The report also highlights the extent of stock buybacks—which serve to inflate the value of a company’s shares and thus the value of executives’ stock-based compensation—among firms where median worker pay did not keep pace with inflation in 2021. Thus, for example, Lowe’s, the home-improvement chain, spent more than $13 billion in purchasing its own stock while median worker compensation fell by 7.6 percent to $22,697. Similarly, both Target and Best Buy increased workers’ pay by less than the rate of inflation but still spent millions of dollars in stock buybacks ($7.2 billion and $3.5 billion, respectively). In each case, a windfall to stock owners—including the CEOs—came at the expense of raises for the employees. For example, if the funds Lowe’s used to buyback its own stock had been divided among the company’s 325,000 employees, each worker would have received a $40,000 bonus.

Clearly, this economic order needs a fundamental reset.

And most Americans agree. According to a recent survey by Just Capital (pdf), more than eight in 10 respondents (83%) agree that the growing gap between CEO compensation and worker pay is a problem in the United States today. Moreover, according to the authors,

The message from the public is clear: responsibility lies with corporate leaders – including chief executives – to address income inequality in America today. Closing the gap requires action at the highest and lowest rungs of the corporate ladder.

The IPS suggests a range of options for doing something about the problem, including giving corporations with narrow pay ratios preferential treatment in government contracting, an excessive CEO pay tax, and a ban on stock buybacks (in addition to a wide variety of CEO pay reforms). If enacted, all such changes would serve to nudge such corporations out of the low road of poor worker pay and high CEO compensation and reduce the now-obscene level of inequality in the U.S. economy.

But giving employees a say in how those corporations are managed and operated would do even more to change the balance of power, within those firms and the entire economy, between workers and capitalists. The workers would then be able to participate in deciding how much surplus there would be and how it would be utilized—not only for their benefit but for the society as a whole.**** Employees would then become or participate in choosing the corporate leaders, including chief executives, who could actually go a long way toward solving the problem of inequality in America today.

That, in my view, is a reset of the U.S. economy worth imagining and enacting.

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*Forty-nine of the 300 firms analyzed by the Economic Policy Institute had ratios above 1000-1. And, in 106 companies in their sample, median worker did not keep pace with the 4.7 percent average U.S. inflation rate in 2021.

**Amazon has spent millions of dollars in fighting union campaigns and, to date, have lost only one battle, in a Staten Island warehouse. (That’s in the United States. Some Amazon warehouses in Europe are unionized, with strikes being most frequent in Germany, Italy, Poland, France and Spain.) None of Estee Lauder’s U.S. workers have union representation, and less than 20 percent of Penn’s employees are unionized.

***Of the 300 companies in the IPS study, 119 — 40 percent — received federal contracts, totaling $37.2 billion. Their average CEO-worker pay ratio was 571-to-1 in 2021.

****Even Thomas Piketty now defends the idea of workplace democracy or co-determination, since workers “sometimes, they are more serious and committed long-run investors than many of the short-term financial investors that we see. And so getting them to be involved in defining the long-run investment strategy of the company can be good.”

Inflation, wages, and profits

Inflation continues to run hot—and now, finally, the debate about inflation is heating up.

On one side of the debate are mainstream economists and lobbyists for big business, the people Lydia DePillis refers to as having a simple mantra: “Supply and demand, Economics 101.” In their view, inflation is caused by supply and demand in the labor market, which is allowing workers’ wages to increase at an unsustainable rate (a story that, as I showed in April, has no validity), and supply and demand in the economy as a whole, with too much money chasing too few goods.

Simple, straightforward, and. . .wrong.

Fortunately, there’s another side to the debate, with heterodox economists and progressive activists arguing that increasingly dominant corporations are taking advantage of the current situation (the pandemic, disruptions in global supply-chains, the war in Ukraine, and so on) to jack up prices and rake in even higher profits than they’ve been able to do in recent times.

Josh Bivens, of the Economic Policy Institute, has offered two arguments that challenge the mainstream story: First, while “It is unlikely that either the extent of corporate greed or even the power of corporations generally has increased during the past two years. . .the already-excessive power of corporations has been channeled into raising prices rather than the more traditional form it has taken in recent decades: suppressing wages.” Second, inflation can’t simply be the result of macroeconomic overheating. That would suggest, at this point in a classic economic recovery, that profits should be shrinking and the labor share of income should be rising. As Biven notes, “The fact that the exact opposite pattern has happened so far in the recovery should cast much doubt on inflation expectations rooted simply in claims of macroeconomic overheating.”*

So, we have dramatically different analyses of the causes of the current inflation, and of course two very different strategies for combatting inflation. The mainstream policy (as I also wrote about in April) is to slow the rate of growth of the economy (for example, by raising interest rates) and increase the level of unemployment, thus slowing the rate of increase of both wages and prices. And the alternative? Bivens supports a temporary excess profits tax. Other possibilities—which, alas, are not yet being raised in the debate—include price controls (especially on commodities that make up workers’ wage bundles), government provisioning of basic wage goods (including, for example, baby formula), and subsidies to workers (which, while they wouldn’t necessarily lower inflation, would at least make it easier for workers to maintain their current standard of living).

What we’re witnessing, then, is an important debate about the causes and consequences of inflation. But, as DePillis understands, the debate is about much more than that: “The real disagreement is over whether higher profits are natural and good.“

In the end, that’s what all key debates in economics are about. Profits are the most contentious issue in economics precisely because the analysis of profits reflects both a theory and ethics about two things: whether capitalists deserve the profits they capture and what they can and should do with those profits. For example, profits can be theorized as a return to capital (and therefore natural and fair, as in mainstream economics) or they are the result of price-gouging (and therefore social and unfair, as in Bivens’s theory of corporate power).**

Similarly, capitalists can be seen as investing their profits (and therefore making their firms and the economy as a whole more productive, with everyone benefitting) or they can distribute a significant portion of their profits toward other uses (such as pursuing mergers and acquisitions, engaging in stock buybacks, and offering higher dividends, which do nothing to increase productivity but instead lead to more corporate concentration and make the distribution of income and wealth even more unequal).

Mainstream economists and capitalists have long sought to convince us that profits are both natural and good. In other words, when it comes to corporate profits and escalating charges of “greedflation,” they prefer to see, hear, and say no evil. The rest of us know what’s actually going on—that corporations are taking advantage of current conditions to raise prices, both to increase their profits and to lower workers’ real wages. We also know that traditional attempts to contain inflation through monetary policy will hurt workers but not their employers or the tiny group that sits at the top of the economic pyramid.

It’s clear then: the debate about inflation is actually a debate about profits. And the debate about profits is, in the end, a debate about capitalism. The sooner we recognize that, the better off we’ll all be.

———

*Even the Wall Street Journal admits that the wage share is not in fact growing: “The labor share of national output is roughly where it was before the pandemic.” Moreover, the current situation represents just a continuation of the trend of recent decades: “Over the last two decades. . .the share of U.S. income that goes to labor has fallen, despite periods of low unemployment.”

**Corporate profits can also be theorized as the result of exploitation (and thus a different kind of social determination and unfairness, as in Marxian theory).

Oligarchs—American style

There’s been a lot of talk about oligarchs these past couple of months. Russian oligarchs, that is—the billionaires who have accumulated vast amounts of wealth, including large stakes in Russian industries, mines, and banks, as well as superyachts, private jets, investment accounts, and real estate in the West. We’ve even learned their names: Vladimir Potanin, Leonid Mikhelson, Alexey Mordashov, and so on.*

They’re a pretty easy target, given Russia’s savage war on Ukraine. But what about the other oligarchs out there, why aren’t we talking about them? They also capture and keep massive amounts of the surplus produced by workers around the globe, and then accumulate even larger amounts of wealth, which they can live off of and utilize as they see fit. Why aren’t they on our radar?

Oh, they do pop up periodically. When Telsa founder Elon Musk engages in a hostile takeover of Twitter or workers manage to organize a union in one of Jeff Bezos’s Amazon warehouses or Michael Bloomberg decides to run for president. But there’s really no sustained attention paid to them or how they have managed to become billionaires. Which is why ProPublica’s recent investigation into the finances of the wealthiest Americans is so important.

The report is the latest in a series ProPublica started in June 2021 that examines the tax records of the top 0.001-percent wealthiest Americans—400 individuals all of whom earn more than $110 million a year.** In this installment, they show that U.S. oligarchs contrive to pay taxes at a lower rate than other Americans, even very wealthy ones just below them on the economic pyramid, for two reasons: first, because much of their income is derived from investments, like stocks, which is taxed at a lower rate; and second, they are able to use large charitable donations to obtain huge deductions. Most American workers don’t own much in the way of stocks, and their gifts to charity do little to lower their taxable incomes.

So, who are these oligarchs? Some of them (10 of the top 15) are tech billionaires, whose incomes generally came from selling stock—including the usual suspects like Bill Gates, Jan Koum, and Larry Ellison. About one fifth of the top 400 earners are managers of hedge funds—with names perhaps less familiar for those of us outside financial circles, people like Ken Griffin, Jeffrey Yass, and David Siegel—whose income comes from trading stocks, options and other financial instruments that flows directly to them. Executives and founders of private-equity firms also stand out: people like Stephen Schwarzman, Stephen Feinberg, and George Roberts, who generally make their money by buying companies and reselling them for a profit. And then there are the heirs of large fortunes, including the eleven heirs of Walmart founders Sam and Bud Walton and four of Amway founder Richard DeVos; these inheritors of great wealth generally receive their income from dividends or other forms of investment income.

All of them, in one way or another, have figured out how to capture portions of the surplus produced by workers in the United States and around the world. They’re not necessarily capitalists (in the sense of directly appropriating the surplus through a process of exploitation)—although some of them clearly are, such as Jeff Bezos (who sits on and is the Executive Chairman of the board of directors of Amazon)—but they do occupy positions that allow them to capture distributions of the surplus produced and appropriated by others. And they did quite well in sharing in the capitalist booty: each of the top eleven averaged over $1 billion in income annually from 2013 to 2018!

Not only do these oligarchs manage to capture distributions of the surplus. As ProPublica explains, they also get to keep a higher portion than many other wealthy people. Thus, for example, the top 400 paid an average tax rate of 22 percent, while those who “only” took home $2-5 million were taxed at a higher rate, 29 percent. In other words, those in the top 400 (and their armies of accountants and financial advisers) have managed to find the “sweet spot” of high incomes and low taxes.

How do they manage to do that? One reason is because much of their income is derived from business investments, not wages or salaries, and in the United States income from financial assets (including, starting in 2003, most stock dividends) is generally taxed at a lower rate.*** Thus, the top 400 saved an average of $1.9 billion in taxes each year—due solely to the lower rate on dividends. The second reason is because U.S. oligarchs often take huge charitable deductions that reduce their income subject to tax. A particularly generous provision of the U.S. tax code allows them to deduct the full value of any stock they donate at its current price—without ever having to sell it and pay capital gains tax. According to ProPublica,

Those two factors—the amount of income taxed at the advantageous rate and the ability to muster large deductions—are the main drivers of lower tax rates for those with the highest incomes.

Now, of course, that 22-percent tax rate is still much higher than the 5-percent effective income tax rate on people who earn $40-50 thousand per year. Except. Workers actually pay more in taxes for Social Security and Medicare than income taxes. The oligarchs, meanwhile, tend to pay proportionally little of these types of taxes because wages are a tiny portion of their total incomes. Factor those payments in and the rates are almost equal: a 21-percent total tax rate for a single worker earning $45 thousand and 23 percent for those in the top 400 (by income).****

The U.S. tax system is often referred to as progressive, meaning the tax rate rises the further you go up the income ladder. As it turns out, it is anything but. The few at the top who occupy positions that allow them to receive distributions of the surplus end up paying taxes at just about the same rate as all those people at the bottom who actually work for a living.

And the result of U.S. oligarchs’ ability to capture and keep their share of the surplus? Well, the gap between them and workers at the bottom of the economic pyramid continues to grow.

As is clear from this chart, the shares of pre-tax national income captured by those in the top .001 (the red line in the chart) and bottom 50 percent (the blue line) have been steadily moving in opposite directions since 1980. And the linear trend lines show that their respective shares continue to diverge. By 2021, the oligarchs’ share had soared to 1.7 percent, while the share of all the workers in the bottom 50 percent had fallen to 13.6 percent.

And the American oligarchs’ response to criticisms of this obscene inequality? Well, at least one of them—Musk, during a fawning interview with Chris Anderson, the head of Ted—offers a simple response: “At this point, it’s water off a duck’s back.”*****

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*The fifth-richest man in Russia, Alisher Usmanov, owns Dilbar, the largest motor yacht in the world by gross tonnage. The boat is 512-feet long and reportedly cost $800 million, employing 84 full-time crew members.

**Just to put things in perspective, a typical American worker making $40,000 a year (a dot smaller than a pixel in the chart at the top of the post) would have to work for 2,750 years to make what the lowest-earning person in this group made in just one.

***Since 2013, the long-term capital gains tax rate has been 20 percent, just under half the top rate on ordinary income (37 percent in 2018).

****The tax rate for the 25 richest oligarchs (by wealth) is even lower: just 16 percent.

*****Musk’s income tax bill in 2018 was exactly zero. He responded to ProPublica’s request for comment with a lone punctuation mark—“?’’—and did not answer any detailed follow-up questions.

Capitalism and workers’ power

You don’t have to read Marx to understand the lack of power workers have under capitalism. But you do have to read beyond mainstream economists and economic pundits. You might turn, for example, to the business school.

Yes, I know, that’s a strange assertion. But let me explain.

The usual argument these days is that workers have acquired a lot more power because of the scarcity of labor. When labor is scarce (basically, when the quantity supplied of labor is less than the quantity demanded), workers can fetch higher wages and be pickier about the jobs they’re willing to accept. That, of course, drives employers crazy and, as usual, mainstream economists and commentators just echo those concerns.

So, is it true? Well, look at the data they cite:

The blue line represents the number of job openings, while the red line is the number of unemployed workers. And, look, way over on the right-hand side of the chart the blue line is slightly higher than than the red line! (Numerically, there were 10.1 million job openings recorded at the end of June and 9.5 million unemployed workers.In other words, for every available 100 jobs, there are only 94 unemployed people available.) And that scares the bejesus out of employers and those who always take the side of employers: they might have to pay workers more to take the terrible, low-paying jobs they are offering.

The result is an increase in workers’ power, as Ben Popken explains:

A pandemic-tightened labor market has given willing and able workers more of an upper hand with their employers for the first time in generations. . .

Worker power is the ability of an employee to command higher wages and benefits and set terms about their working conditions.

Not so fast! Yes, some workers might benefit from the current tight labor market but certainly not all of them, especially at the bottom of the economic pyramid.

Moreover, as Julie Battilana and Tiziana Casciaro remind us, while “it’s understandable” that some claim that workers have more power now than they did during the worst months of the pandemic, it’s still the case that “power remains highly unbalanced in most American workplaces.”

In non-unionized, hierarchical organizations, it is still concentrated in the hands of top executives and shareholders who control all company decisions and priorities, from pay levels to hiring (and firing), and company strategy and policies. Workers continue to have no representation on most corporate boards of directors and have no or very little say over any of these decisions even though they affect their work lives and livelihoods. This lack of control has detrimental effects on worker health and well-being: It has been associated with job dissatisfaction, greater mental strain and damaged physical health. The philosopher Elizabeth Anderson has written that American “workplaces are small tyrannies,” resembling dictatorships more than democracies.

In other words, workers have two positions within capitalism: they sell their ability to work in markets for labor power and then, after those exchanges are concluded, they leave the market and enter another realm, where they perform labor. And inside the enterprises where they work, they have no power at all. There, in the realm of production, their employers—the corporate boards of directors or capitalists—have all the power. That’s why capitalists enterprises are dictatorships, not democracies.

And if workers did have power inside the enterprises—if, for example, the enterprises were organized instead as worker-owned cooperatives?

giving workers more power means giving them the right to collectively validate or reject important decisions that affect their work lives, including the choice of the CEO, how profits are shared, what strategies to pursue and what to prioritize in the face of a health crisis like the pandemic.

And if employers and mainstream economists don’t attempt “to reduce the extreme power imbalance that so clearly puts workers at a disadvantage”? Then, Battilana and Casciaro warn, workers might take matters into their hands:

when the distribution of rewards in an economic system is so unequal as to appear blatantly unfair, those with less power are more likely to upend the current system entirely.

That, of course, would mean the end of capitalism. . .

Mainstream economics then: classical political economy

James Sanborn, Adam Smith’s Spinning Top (1998)

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (here, here, here, here, and here) will serve as the basis for chapter 1, Marxian Economics Today. The text of this post is for Chapter 2, Marxian Economics Versus Mainstream Economics (following on from the previous posts, here, here, here, here, and here).

Classical Political Economy

Marxian economists have been quite critical of contemporary mainstream economics. As we saw in Chapter 1, and will continue to explore in the remainder of this book, Marxian economists have challenged the general approach as well as all of the major conclusions of both neoclassical and Keynesian economics.

But what about Marx, who wrote his critique of political economy, let’s remember, before neoclassical and Keynesian economics even existed?

Marx, writing in the middle of the nineteenth century, trained his critical eye on the mainstream economic theory of his day. He read Adam Smith’s Wealth of Nations and David Ricardo’s Principles of Political Economy and Taxation, as well as the writings of other classical political economists, such as Thomas Robert Malthus, Jean-Baptiste Say, and John Stuart Mill.

Marx’s critique of political economy can rightly be seen as both an extension of and break from the work of those late-eighteenth-century and early-nineteen-century mainstream economists. So, in order to understand why and how Marx proceeded in the way he did, we need to have a basic understanding of classical political economy.

Before we begin, however, we have to recognize that Marx’s interpretation of the classical economists was very different from the way they are referred to within contemporary mainstream economics. Today, within non-Marxian economics, the classicals are reduced to a few summary ideas. They include the following: a labor theory of value (which mainstream economists reject, in favor of utility), the invisible hand (which, as it turns out, Smith mentioned only three times in his writings, once in the Wealth of Nations), and comparative advantage (but not the rest of Ricardo’s theory, especially his theory of conflict over the distribution of income).

We therefore need a good bit more in order to make sense of Marx’s critique of political economy.

Adam Smith

Let’s start with Adam Smith, the so-called father of modern economics. The author of, first, the Theory of Moral Sentiments and, then, the Wealth of Nations, Smith asserted that people have a natural “propensity to truck, barter, and exchange one thing for another.” In other words, according to Smith, the ability and willingness to participate in markets were natural, and not social and historical, aspects of all humanity.

That’s not unlike contemporary mainstream economists’ insistence on presuming the existence of markets, and thus writing down supply and demand functions (or drawing them on a graph), without any further evidence or argumentation. They’re presumed to be natural.

Smith then proceeds by showing that the division of labor (such as with his most famous example, of the pin factory) has two effects: First, it leads to increases in productivity, and therefore an increase in production. Second, the extension of the division of labor within factories propels a division of labor within capitalism as a whole, as firms specialize in the production of some goods, which they can then trade with other producers in markets. In turn, the expansion of markets leads to more division of labor and higher productivity, thus increasing the wealth of nations.

Again, the parallel with contemporary mainstream economics is quite evident, which is recognized in the “classical” portion of the name for neoclassical economic theory. Using Gross Domestic Product as their measure of the wealth of nations, contemporary mainstream economists celebrate capitalism because higher productivity results in more output, which is then traded on markets. This is the basis of contemporary mainstream economists’ definition of development as an increase in GDP per capita, that is, more output per person in the population.

However, unlike contemporary mainstream economists, Smith analyzed the value of commodities in terms of the amount of labor it took to produce them. With increasing productivity, more goods and services could be produced and sold in markets, each containing less labor—and therefore available at lower prices to consumers. The nation’s wealth would therefore grow, especially as the number of workers grew.

Still, Smith worried about whether capitalist growth would persist in an uninterrupted fashion. The division of a nation’s production into “natural” rates of wages, profits, and rent to workers, capitalists, and landlords was not sufficient. What if, Smith asked, a large portion of capitalists’ profits was used to hire more “unproductive” labor, that is, the labor of household servants and others that did not contribute to increasing productivity? Purchasing labor involved in what we now call conspicuous consumption represented, for Smith, a slowing of the accumulation of additional capital. Therefore, it created a problem, an obstacle to future capitalist growth.

David Ricardo

David Ricardo picked up where Smith left off. He extended the celebration of capitalist markets to international trade. His argument was that if nations specialized in the production of commodities for which they had a relative advantage, and traded them for goods from other countries (his most famous example was British cloth and Portuguese wine), both countries would benefit. Their wealth would increase.*

That’s the only reason Ricardo’s work is cited by contemporary mainstream economists. However ironically, they ignore the fact that Ricardo made his argument based on the labor theory of value—just as they never mention Ricardo’s concern that conflicts over the distribution of income might slow capitalist growth.

In particular, Ricardo was worried that, as capitalism developed, the profits received by capitalists would be squeezed from two directions: an increase in workers’ wages and a rise in rent payments to landlords. Lower profits would mean less capital accumulation and slower growth—and, in the limit, capitalism would grind to a halt.

We can see how this might happen in the chart above. At a certain point (a level of population P, which is the pool of workers), total output (the red line) would be divided into workers’ wages, capitalists’ profits, and landlords’ rent).

It is easy to see that, at any point in time, if the wage rate paid to workers increased (which would mean an increase in the slope of the blue line), that would cut into profits (the vertical distance between the blue and green lines would decrease). That’s the major reason Ricardo supported free trade (and thus a repeal of the so-called Corn Laws): so that cheaper wheat could be imported from abroad, thus lessening the upward pressure on workers’ wage demands.

Even if the rate paid to workers remained the same over time (and thus the total amount of wages rose at a constant rate, with an increase in population), capitalists’ profits would be squeezed from the other direction, by an increase in the rents paid to the class of landlords (the vertical distance between the green and red lines). Basically, as agricultural production was moved to less and less fertile land, the rents on more productive land would rise, siphoning off a larger and larger portion of profits.

At a certain point (e.g., at a level of population P*), the entire output would be divided between workers’ wages and landlords’ rent, and nothing would be left in the form of capitalists’ profits. As a result, capitalists would be forced to stop investing and capitalist growth would cease.

Other Classicals

The Reverend Thomas Malthus was, if anything, more pessimistic than Ricardo. But he foresaw capitalism’s problems coming from the other direction, from the working masses. In his Essay on the Principle of Population, he argued that population would likely grow faster than the expansion in food production, especially in times of plenty. With such an increase in the supply of workers and a rise in the price of available food, workers’ real wages would inevitably fall and poverty would rise. The only solution was for capitalists and landlords to hire all the additional labor, and for workers’ wages to be restored to their “natural” level.

If Malthus focused on the up-and-down cycles of population and wages, and both Smith and Ricardo the potential limits to capitalist growth, the French classical economist Jean-Baptiste Say emphasized the inherent stability of capitalism. Why? Say’s argument was that the production of commodities causes incomes to be paid to suppliers of the capital, labor, and land used in producing these goods and services. And because the sale price of those commodities was the sum of the payments of wages, rents, and profit, the incomes generated during the production of commodities would be used to purchase all the commodities brought to market. Moreover, entrepreneurs were rewarded for correctly assessing the needs reflected in markets and the means to satisfy those needs. The result is what was later coined as Say’s Law: “supply creates its own demand.”

Finally, it was John Stuart Mill who added utilitarianism to classical political economy. Extending the work of Jeremy Bentham, especially the “greatest-happiness principle” (which holds that one must always act so as to produce the greatest aggregate happiness among all sentient beings), Mill argued that the greatest happiness and the least pain could be achieved on the basis of free markets, competition, and private property—with the proviso that everyone should be afforded an equal opportunity, however unequal the actual results might turn out to be. In particular, Mill defended the profits of capitalists as a just recompense for their savings, risk, and economic supervision.*

Marx’s Critique of Mainstream Economics

That, in a nutshell, is the mainstream economic theory Marx confronted while sitting in the British Museum in the middle of the nineteenth century. Marx both lauded the classical political economists for their efforts—especially Ricardo, who in his view “gave to classical political economy its final shape” (Critique of Political Economy)—and engaged in a “ruthless criticism” of their theory.

In this sense, Marx took the classical political economists quite seriously. Even as he broke from their work in a decisive manner, many of the themes of Marx’s critique of political economy stem directly from the issues the classicals attempted to tackle. That’s why the overview provided in previous sections of this chapter is so crucial to understanding Marxian economics.

Still, the question remains, how does Marx’s critique of the mainstream economics of his day transfer over to contemporary mainstream economists? As we will see, although neoclassical and Keynesian economists reject the labor theory of value and other crucial elements of classical political economy, both the basic assumptions and conclusions of their approach are so similar to those of the classicals as to make it a relatively short step from Marx’s critique of the mainstream economic theory of his day to that of our own.

However, before we look at that theoretical encounter, in the next chapter, we will see how Marx’s critical engagement with classical political economy emerged over the course of his writings before, in the mid-1860s, he sits down to write the three volumes of his most famous book, Capital.

———

*Mill did defend various redistributive tax measures, in order to limit intergenerational inequalities that would otherwise constrain equality of opportunity. Moreover, he argued in a later edition of his Principles of Political Economy in favor of economic democracy: “the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves” (Principles of Political Economy, with some of their Applications to Social Philosophy, IV.7.21).

Cartoons of the day

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Wage-labor and capital—pandemic edition

It’s clear, at least to many of us, that if the United States had a larger, stronger union movement things would be much better right now. There would be fewer cases and deaths from the novel coronavirus pandemic, since workers would be better paid and have more workplace protections. There would be fewer layoffs, since workers would have been able to bargain for a different way of handling the commercial shutdown. And there would be more equality between black and white workers, especially at the lower end of the wage scale.

But, in fact, the American union movement has been declining for decades now, especially in the private sector. Just since 1983, the overall unionization rate has fallen by almost half, from 20.1 percent to 10.3 percent. That’s mostly because the percentage of private-sector workers in unions has decreased dramatically, from 16.8 percent to 6.2 percent. And even public-sector unions have been weakened, declining from a high of 38.7 percent in 1994 to 33.6 percent last year.

The situation is so dire that even Harvard economist Larry Summers (along with his coauthor Anna Stansbury) has had to recognize that the “broad-based decline in worker power” is primarily responsible for “inequality, low pay and poor work conditions” in the United States.*

Summers is, of course, the extreme mainstream economist who has ignited controversy on many occasions over the years. The latest is when he was identified as one as one of Joe Biden’s economic advisers back in April. Is this an example, then, of a shift in the economic common sense I suggested might be occurring in the midst of the pandemic? Or is it just a case of belatedly identifying the positive role played by labor unions now that they’re weak and ineffective and it’s safe for to do so?

I’m not in a position to answer those questions. What I do know is that the theoretical framework that informs Summers’s work has mostly prevented him and the vast majority of other mainstream economists from seeing and analyzing issues of power, struggle, and class exploitation that haunt like dangerous specters this particular piece of research.

Let’s start with the story told by Summers and Stansbury. Their basic argument is that a “broad-based decline in worker power”—and not globalization, technological change, or rising monopoly power—is the best explanation for the increase in corporate profitability and the decline in the labor share of national income over the past forty years.

Worker power—arising from unionization or the threat of union organizing, firms being run partly in the interests of workers as stakeholders, and/or from efficiency wage effects—enables workers to increase their pay above the level that would prevail in the absence of such bargaining power.

So far, so good. American workers and labor unions have been under assault for decades now, and their ability to bargain over wages and working conditions has in fact been eroded. The result has been a dramatic redistribution of income from labor to capital.

Clearly, as readers can see in the chart above, using official statistics, the labor share of national income fell precipitously, by almost 10 percent, from 1983 to 2020.**

Not surprisingly, again using official statistics, the profit rate has risen over time. The trendline (the black line in the chart above), across the ups and downs of business cycles, has a clear upward trajectory.***

Over the course of the last four decades is that, as workers and labor unions have been decimated, corporations have been able to pump out more surplus from their workers, thereby lowering the wage share and increasing the profit rate.

But that’s not how things look in the Summers-Stansbury world. In their view, worker power only gives workers an ability to receive a share of the rents generated by companies operating in imperfectly competitive product markets. So, theirs is still a story that relies on exceptions to perfect competition, the baseline model in the world of mainstream economic theory.

And that’s why, while their analysis seems at first glance to be pro-worker and pro-union, and therefore amenable to the concerns of dogmatic centrists, Summers and Stansbury hedge their bets by references to “countervailing power,” the risk of increasing unemployment, and “interferences with pure markets” that “may not enhance efficiency” if measures are taken to enhance worker power.

Still, within the severe constraints imposed by mainstream economic theory, moments of insight do in fact emerge. Summers and Stansbury do admit that the wage-profit conflict that is at the center of their story does explain the grotesque levels of inequality that have come to characterize U.S. capitalism in recent decades—since “some of the lost labor rents for the majority of workers may have been redistributed to high-earning executives (as well as capital owners).” Therefore, in their view, “the decline in labor rents could account for a large fraction of the increase in the income share of the top 1% over recent decades.”

The real test of their approach would be what happens to workers’ wages and capitalists’ profits in the absence of imperfect competition. According to Summers and Stansbury, workers would receive the full value of their marginal productivity, and there would be no need for labor unions. In other words, no power, no struggle, and no class exploitation.

That’s certainly not what the world of capitalism looks like outside the confines of mainstream economic extremism. It’s always been an economic and social landscape of unequal power, intense struggle, and ongoing class exploitation.

The only difference in recent decades is that capital has become much stronger and labor weaker, at least in part because of the theories and policies produced and disseminated by mainstream economists like Summers and Stansbury. Now, as they stand at the gates of hell, it may just be too late for their extreme views and the economic and social system they have so long celebrated.

*The link in the text is to the column by Summers and Stansbury published in the Washington Post. That essay is based on their research paper, published in May by the National Bureau of Economic Research.

**We need to remember that the labor share as calculated by the Bureau of Labor Statistics includes incomes (such as the salaries of corporate executives) that should be excluded, since they represent distributions of corporate profits.

***I’ve calculated the profit as the sum of the net operating surpluses of the nonfinancial and domestic financial sectors divided by the net value added of the nonfinancial sector. The idea is that the profits of both sectors originate in the nonfinancial sector, a portion of which is distributed to and realized by financial enterprises. The trendline is a second-degree polynomial.

Cartoon of the day

Special mention

 

Cartoon of the day

Special mention

Cartoon of the day

Special mention