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. . .

Whither global capitalism?

Mainstream economists and commentators, it seems, are worried that the global economy is going to come crashing down as a result of the COVID crisis. That’s why they’re willing now to consider the possibility that the current crisis is more than a normal recession, more serious even than the so-called Great Recession; in their view, it’s an economic depression.

That, at least, is the argument they present up front. But there’s something else going on, which haunts their analysis—that capitalism itself is now being called into question.

But before we get to that alarming specter, let’s take a look at the logic of their analysis about the current perils to the global economy—starting with the Washington Post columnist Robert J. Samuelson, who is basically taking his cues from a recent essay in Foreign Affairs by Carmen Reinhart and Vincent Reinhart.*

Their shared view is that the current slowdown is both more severe and more widespread than the crash of 2007-08, and the recovery will be much slower. Therefore, they argue, the COVID crisis represents the worst economic downturn since the Great Depression of the 1930s.

This is a big deal: mainstream economists and commentators are uneasy about invoking the term “economic depression.” They certainly resisted it for the crisis that occurred just over a decade ago, eventually devising a Goldilocks nomenclature, dubbing it the Great Recession (not as hot as the Great Depression but not as cold as a normal recession). As regular readers know, I had no compunction about calling it the Second Great Depression. And, according to their own logic, neither Samuelson nor the Reinharts should have either.

According to Barry Eichengreen and Kevin O’Rourke, the financial crisis and recession had led to as big a downward shock to global industrial production in 2008 as the 1929 financial crisis, and had pounded stock market values and world trade volumes harder in 2008-09 than in 1929-30. Thus, from the perspective of the magnitude of the initial shock, the global economy was in at least as dire shape after the crash of 2008 as it had been after the crash of 1929.

Moreover, the downturn that began in 2007-08 was “largely a banking crisis” (as the Reinharts put it) only if they ignore the grotesque levels of inequality that preceded the crash (based on stagnant wages and rising profits)—which in turn fueled the need for credit on the part of workers and the growth of the finance sector that both recycled corporate profits to workers in the form of loans and led to even higher profits, creating in the process a veritable house of cards. At some point, it would all come crashing down. And, eventually, it did.

In any case, Samuelson and the Reinharts are now willing to take the next step and use the dreaded d-word to characterize current events. Here’s how the Reinharts see things:

In its most recent analysis, the World Bank predicted that the global economy will shrink by 5.2 percent in 2020. The U.S. Bureau of Labor Statistics recently posted the worst monthly unemployment figures in the 72 years for which the agency has data on record. Most analyses project that the U.S. unemployment rate will remain near the double-digit mark through the middle of next year. And the Bank of England has warned that this year the United Kingdom will face its steepest decline in output since 1706. This situation is so dire that it deserves to be called a “depression”—a pandemic depression.

And Samuelson does them one better:

In one respect, the Reinharts have underestimated the parallels between the today’s depression and its 1930s predecessor. What was unnerving about the Great Depression is that its causes were not understood at the time. People feared what they could not explain. The consensus belief was that business downturns were self-correcting. Surplus inventories would be sold; inefficient firms would fail; wages would drop. The survivors of this brutal process would then be in a position to expand.

Something similar is occurring today.

Clearly, Samuelson and even more the Reinharts are worried that the global economy—their cherished vision of the free movement of capital (but not people) and expanding trade according to comparative advantage—is currently being imperiled and may not recover for years to come. The volume of world trade is down; the prices of many exports have fallen; corporate debt is climbing; and the reserve army of unemployed and underemployed workers is massive and still growing. The prospects for a return to business as usual are indeed remote.

That’s pretty straightforward stuff, and anyone who’s looking at the numbers can’t but agree. What we’re witnessing is in fact a Pandemic—or, in my view, a Third Great—Depression.

But that’s when things start to get interesting. Because the Reinharts do understand (although I doubt Samuelson does, since he’s really only concerned about government deficits) that, when you resurrect the term depression and invoke the analogy of the 1930s, you also call forth widespread discontent, massive protest movements, and challenges to capitalism itself. Here’s how they see it:

The economic consequences are straightforward. As future income decreases, debt burdens become more onerous. The social consequences are harder to predict. A market economy involves a bargain among its citizens: resources will be put to their most efficient use to make the economic pie as large as possible and to increase the chance that it grows over time. When circumstances change as a result of technological advances or the opening of international trade routes, resources shift, creating winners and losers. As long as the pie is expanding rapidly, the losers can take comfort in the fact that the absolute size of their slice is still growing. For example, real GDP growth of four percent per year, the norm among advanced economies late last century, implies a doubling of output in 18 years. If growth is one percent, the level that prevailed in the shadow of the 2008–9 recession, the time it takes to double output stretches to 72 years. With the current costs evident and the benefits receding into a more distant horizon, people may begin to rethink the market bargain.

Now, it’s true, their stated fear is that “populist nationalism” will disrupt multilateralism, open economic borders, and the free flow of capital and goods and services across national boundaries. That’s as far as their stated thinking can go.

But the apparition that lurks in the background is that rethinking the “market bargain”—what elsewhere I have called the “pact with the devil,” that is, giving control of the surplus to the top 1 percent as long as they made decisions to create jobs, fund schools and healthcare, and be able to tackle problems like the novel coronavirus pandemic so that the majority of people could lead decent lives—will mean expanding criticisms of capitalism and the search for radical alternatives.

That’s the real specter that haunts the Pandemic Depression.

 

*Samuelson sees the wife-and-husband Reinharts as “heavy hitters” among economists:  “She is a Harvard professor, on leave and serving as the chief economist of the World Bank; he was a top official at the Federal Reserve and is now chief economist at BNY Mellon.”

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Uncertainty—pandemic edition

Jean-Pierre Roy, “The Sultan and the Strange Loop” (2016)

The U word has once again reared its ugly head.

I’m referring of course to uncertainty, which at least a few of us are pleased has returned to occupy a prominent role in relation to scientific discourse. The idea that we simply do not know is swirling around us, haunting pretty much every pronouncement by economists, virological scientists, epidemiological modelers, and the like.

How many people will contract the novel coronavirus? How many fatalities has the virus caused thus far? And how many people will eventually die because of it? Do face masks work? How many workers have been laid off? How severe will the economic meltdown be in the second quarter and for the rest of the year?

We read and hear lots of answers to those questions but, while individual forecasts and predictions are often presented as uniquely “correct,” they differ from one another and change so often we are forced to admit our knowledge is radically uncertain.

Uncertainty, it seems, erupts every time normalcy is suspended and we are forced to confront the normal workings of scientific practice. It certainly happened during the first Great Depression, when John Maynard Keynes used the idea of radical uncertainty—as against probabilistic risk—to challenge neoclassical economics and its rosy predictions of stable growth and full employment.* And it occurred again during the second Great Depression, when mainstream macroeconomics, especially the so-called dynamic stochastic general equilibrium approach, was criticized for failing to take into account “massive uncertainty,” that is, the impossibility of predicting surprises and situations in which we simply do not know what is going to happen.

The issue of uncertainty came to the fore again after the election of Donald Trump, which came as a shock to many—even though polls showed a race that was both fairly close and highly uncertain. FiveThirtyEight’s final, pre-election forecast put Hillary Clinton’s chance of winning at 71.4 percent, which elicited quite a few criticisms and attacks, since other models were much more confident about Clinton, variously putting her chances at 92 percent to 99 percent. But, as Nate Silver explained just after the election,

one of the reasons to build a model — perhaps the most important reason — is to measure uncertainty and to account for risk. If polling were perfect, you wouldn’t need to do this. . .There was widespread complacency about Clinton’s chances in a way that wasn’t justified by a careful analysis of the data and the uncertainties surrounding it.

In my view, Silver is one of the best when it comes to admitting the enormous gap between what we claim to know and what we actually know (as I argued back in 2012), which however is often undermined in an attempt to make the results of models seem more accurate and to conform to expectations.

And that’s just as much the case in social sciences (including, and perhaps especially, economics) and the natural sciences as it is in weather forecasting. Many, perhaps most, practitioners and pundits operate as if science is a single set of truths and not a discourse, with all the strengths and failings that implies. What I’m referring to are all the uncertainties, not to mention indeterminisms, linguistic risks and confusions, referrals and deferences to other knowledges and discourses, embedded assumptions (e.g., in both the data-gathering and the modeling) that are attendant upon any practice of discursive production and dissemination.

As Siobhan Roberts recently argued,

Science is full of epistemic uncertainty. Circling the unknowns, inching toward truth through argument and experiment is how progress is made. But science is often expected to be a monolithic collection of all the right answers. As a result, some scientists — and the politicians, policymakers and journalists who depend on them — are reluctant to acknowledge the inherent uncertainties, worried that candor undermines credibility.

What that means, in my view, is science is always subject to discussion and debate within and between contending positions, and therefore decisions need to be made —about facts, concepts, theories, models, and much else—all along the way.

As it turns out, acknowledging that uncertainty, and therefore openly disclosing the range of possible outcomes, does not undermine public trust in scientific facts and predictions. That was the conclusion of a study recently published in the Proceedings of the National Academy of the Sciences.

In the “posttruth” era where facts are increasingly contested, a common assumption is that communicating uncertainty will reduce public trust. . .Results show that whereas people do perceive greater uncertainty when it is communicated, we observed only a small decrease in trust in numbers and trustworthiness of the source, and mostly for verbal uncertainty communication. These results could help reassure all communicators of facts and science that they can be more open and transparent about the limits of human knowledge.

Even if communicating uncertainty does decrease people’s trust in and perceived reliability of scientific facts, including numbers, that in my view is not a bad thing. It serves to challenge the usual (especially these days, among liberals, progressives, and others who embrace a Superman theory of truth) that everyone can and should rely on science to make the key decisions.*** The alternative is to admit and accept that decision-making, under uncertainty, is both internal and external to scientific practice. The implication, as I see it, is that the production and communication of scientific facts as well as their subsequent use by other scientists and the general public is a contested terrain, full of uncertainty. 

Last year, even before the coronavirus pandemic, Scientific American [unfortunately, behind a paywall] published a special issue titled “Truth, Lies, and Uncertainty.” The symposium covers a wide range of topics, from medicine and mathematics to statistics and paleobiology. For those of us in economics, perhaps the most relevant is the article on physics (“Virtually Reality, by George Musser).

Musser begins by noting that “physics seems to be one of the only domains of human life where truth is clear-cut.”

The laws of physics describe hard reality. They are grounded in mathematical rigor and experimental proof. They give answers, not endless muddle. There is not one physics for you and one physics for me but a single physics for everyone and everywhere.

Or so it appears.

In fact, Musser explains, practicing physicists operate with considerable doubt and uncertainty, on everything from fundamental theories (such as quantum mechanics and string theory) to bench science (“Is a wire broken? Is the code buggy? Is the measurement a statistical fluke?”).

Consider, for example, quantum theory: if you

take quantum theory to be a representation of the world, you are led to think of it as a theory of co-existing alternative realities. Such multiple worlds or parallel universes also seem to be a consequence of cosmological theories: the same processes that gave rise to our universe should beget others as well. Additional parallel universes could exist in higher dimensions of space beyond our view. Those universes are populated with variations on our own universe. There is not a single definite reality.

Although theories that predict a multiverse are entirely objective—no observers or observer-dependent quantities appear in the basic equations—they do not eliminate the observer’s role but merely relocate it. They say that our view of reality is heavily filtered, and we have to take that into account when applying the theory. If we do not see a photon do two contradictory things at once, it does not mean the photon is not doing both. It might just mean we get to see only one of them. Likewise, in cosmology, our mere existence creates a bias in our observations. We necessarily live in a universe that can support human life, so our measurements of the cosmos might not be fully representative.

Musser’s view is that accepting uncertainty in physics actually leads to a better scientific practice, as long as physicists themselves are the ones who attempt to point out problems with their own ideas.

So, if physicists are willing to live with—and even to celebrate—uncertain knowledge, and even if the general public does lose a bit of trust when a degree of uncertainty is revealed, then it’s time for the rest of us (perhaps especially economists) to relinquish the idea of certain scientific knowledge.

Then, as Maggie Koerth recently explained in relation to the coronavirus pandemic, instead of waiting around around for “absolute, unequivocal facts” to decide our fate, we can get on with the task of making the “big, serious decisions” that currently face us.

 

*Although, as I explained back in 2011, the idea of fundamental uncertainty was first introduced into mainstream economic discourse by Frank Knight.

**And later central bankers (such as the Bank of England’s Andy Haldane) discovered that admitting uncertainty might actually “enhance understanding and therefore authority.”

***The irony is that “the Left” used to be skeptical about and critical of much of modern science—from phrenology, craniometry, and social Darwinism to the atom bomb, sociobiology, and evolutionary psychology.

 

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United States of inequality

Obscene levels of economics inequality in the United States are now so obvious they’ve become one of the main topics of public and political discourse (alongside and intertwined with two others, the climate crisis and the impeachment of Donald Trump).*

Most Americans, it seems, are aware of and increasingly incensed by the grotesque and still-growing gap between a tiny group at the top—wealthy individuals and large corporations—and everyone else. And this sense of unfairness and injustice is reflected in both the media and political campaigns. For example, Capital & Main, an award-winning nonprofit publication that reports from California, has launched a twelve-month long series on economic inequality in America, “United States of Inequality: 2020 and the Great Divide,” leading up to next year’s presidential election. And two of the leading presidential candidates in the Democratic Party, Bernie Sanders and Elizabeth Warren, have responded by making economic inequality one of the signature issues of their primary campaigns, regularly describing the devastating consequences of the enormous gap between the haves and have-nots and proposing policies (such as a wealth tax) to begin to close the gap and mitigate at least some of its effects.**

As if on cue, we’re also seeing a pushback. It should come as no surprise that America’s billionaires—from Starbucks CEO Howard Schultz to multi-billionaire hedge-fund manager Leon Cooperman—have gone on the offensive, complaining about how the various tax proposals, if enacted, would reduce what they consider to be the fortunes they’ve earned and undermine two areas they alone control: private philanthropy and corporate innovation.*** And ironically, as Paul Waldman has claimed,

the more billionaires keep talking about how their taxes shouldn’t be raised, the more likely it is that their taxes will in fact be raised, one way or another.

Similarly predictable is the attempt to rejigger the numbers so that inequality in the United States appears to be much less than official sources report. For example, according to the Census Bureau [pdf], in 2018, the top quintile of households (with an average income of $233.9 thousand) had 17 times more than the bottom quintile (whose average income was only $13.8 thousand).**** Phil Gramm and John F. Early argue that “this picture is false” because it focuses only on money income and excludes both taxes and transfer payments.***** Their conclusion?

America already redistributes enough income to compress the income difference between the top and bottom quintiles. . .down to 3.8 to 1 in income received.

There is one kernel of truth in Gramm and Early’s analysis: while the rich pay more in taxes, government transfers make up a much larger share of income of those at the bottom.****** But their calculations dramatically overstate the extent to which taxes and transfers decrease the degree of economic inequality in the United States. That’s because they fail to include unreported capital income, including dividends and interest paid to tax-exempt pension accounts and corporate retained earnings (which are included in other data sets, such as G. Zucman, T. Piketty, and E. Saez, “Distributional National Accounts: Methods and Estimates for the United States” [http://gabriel-zucman.eu/usdina/]).

As is clear in the table above, in 2014 (the last year for which data are available), the system of taxes and transfers only reduces the degree of inequality (measured as the ratio of top 10 percent average incomes to bottom 50 percent average incomes) from 18.7 to 1 to 10.1 to 1. And if we focus on post-tax cash incomes (thus excluding non-cash transfers, essentially Medicaid and Medicare), the resulting correction is even less: to 11.8 to 1. In both cases, the decrease in inequality is much less than in the Gramm and Early calculations.

The fact is, there are severe limits on what taxes and transfers can achieve in the face of the massive changes in the pre-tax distribution of income that have occurred in the United States since 1979. 

As readers can see in the table above, while the average pre-tax incomes of the bottom 50 percent of Americans stagnated from 1979 to 2014, those of the top 10 percent increased by 100 percent and the incomes of the top 1 percent soared by even more, 183 percent.

If we compare the real incomes of the same groups after taxes and transfers, it’s clear that while the incomes of the bottom 50 percent of Americans did in fact inch upward from 1979 to 2014 (by a total of 18 percent, or only 0.5 percent a year), progressive taxes and transfers did not hamper the upsurge of income at the top: the average post-tax incomes of the top 10 percent doubled (by 2.86 percent a year) and those of the top 1 percent grew by more than 160 percent (by 4.8 percent a year).*******

The small group at the top continues to pull away from everyone else, both before and after taxes and transfers.

In my view, the degree of economic inequality in the United States is so severe that it can’t be sidetracked by billionaire complaints or swept away by the calculations of conservative economists. And, for that matter, it can’t be solved by enacting more taxes on the ultra-rich and more transfer payments for the rest of Americans. The problem is simply too large and systemic.

Only by understanding and attacking the roots of the inequality that has characterized the U.S. economy for decades now will we be able to close the enormous gap that has undermined the American Dream and shredded the fabric of political and social life in the United States.

 

*But, contra New York University historian Timothy Naftali, this is not the first time “we are having a national political conversation about billionaires in American life.” In fact, I’d argue, it’s a recurring debate in American history, stretching back at least to the rise of populism in the late-nineteenth century (and perhaps earlier, for example, to Shays’ Rebellion) and including the strike wave after the Panic of 1873, the anti-trust movement of the early-twentieth century, the crash of 1929 and the First Great Depression, and most recently the attacks on finance and the Occupy Wall Street movement during the Second Great Depression. In all those cases, Americans engaged in an intense national discussion of inequality and the role of the economic elite in political and social life.

**Even centrist Democrats have taken up, if only timidly, the banner of the anti-inequality campaign. For example, Rep. Brendan Boyle (D-PA), who has endorsed Joe Biden for the Democratic nomination, told The Washington Post he is crafting a new wealth tax proposal to introduce in the House of Representatives. And Rep. Don Beyer (D-VA), who last month endorsed South Bend Mayor Pete Buttigieg, has released a plan (with Sen. Chris Van Hollen of Maryland) for a new surtax on incomes over $2 million.

***The one area they don’t mention, which they also seek to control, is American politics—through lobbying, campaign donations, and the like. Wealthy individuals and large corporations attempt to exert such control although, as we just saw in Seattle—with Amazon’s $1.5 million campaign to unseat a socialist member of Seattle’s city council, Kshama Sawant—they’re not always successful.

****Money income includes the following categories: earnings; unemployment compensation; workers’ compensation; Social Security; supplemental security income; public assistance; veterans’ payments; survivor benefits; disability benefits; pension or retirement income; interest; dividends; rents, royalties, and estates and trusts; educational assistance; alimony; child support; financial assistance from outside of the household; and other income. The ratio of top to bottom rises to an astounding 60 to 1 in terms of only earnings. 

*****The Wall Street Journal column doesn’t explain how the alternative calculations were conducted. But Early, in a Cato Institute report [pdf], does explain their methodology.

******According to my calculations from the most comprehensive source (from G. Zucman, T. Piketty, and E. Saez, “Distributional National Accounts: Methods and Estimates for the United States” [http://gabriel-zucman.eu/usdina/]), in 2014, the bottom 50 percent of Americans received 74 percent of their post-tax income from transfers while, for the top percent, it was 19.5 percent.

*******What of the billionaires? Between 1979 and 2014, the average real post-tax incomes of the top .001 percent grew by 387 percent (or 11.1 percent a year), almost as much as their pre-tax incomes.

Impoverishing economics

I cringe when I listen to or watch these interviews. But here it is, with the Real News Network.

The interview was based on my recent blog post, “Economics of poverty, or the poverty of economics.”

I also want to recommend a recent piece by Ingrid Harvold Kvangraven [ht: ms], who argues that

The interventions considered by the Nobel laureates tend to be removed from analyses of power and wider social change. In fact, the Nobel committee specifically gave it to Banerjee, Duflo and Kremer for addressing “smaller, more manageable questions,” rather than big ideas. While such small interventions might generate positive results at the micro-level, they do little to challenge the systems that produce the problems.

For example, rather than challenging the cuts to the school systems that are forced by austerity, the focus of the randomistas directs our attention to absenteeism of teachers, the effects of school meals and the number of teachers in the classroom on learning. Meanwhile, their lack of challenge to the existing economic order is perhaps also precisely one of the secrets to media and donor appeal, and ultimately also their success.

Exactly!

It’s the revenge of neoclassical economics, as reflected in this year’s prize in economics, which focuses attention on poor people’s “bad” decisions and away from the structural causes of poverty.

As I argued the other day on Twitter, it’s like saying the climate crisis will be solved by individuals turning off lights and recycling their garbage. Not bad things to do, certainly. But, together, all those individual efforts make up only 1-2 percent of the solution. The climate crisis cannot be solved unless and until we direct attention to the real, structural causes. Here, I’m thinking not only of the fossil fuel industry, but also the way the rest of contemporary capitalist economies are organized around the use of fossil fuels—in the production of goods and services, cars as well as digital information. Such a system generates enormous profits, which flow to a tiny group at the top, and continues to destroy the commons, where most of us live and work.

It’s that system that needs to be radically transformed. And as long as economists are lauded for focusing on technical issues around the margins and not on the real causes—of Third World poverty, global warming, and much else—the discipline of economics will continue to be impoverished.