Tale of two capitalisms

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” This, like the previous post, is for chapter 1, Marxian Economics Today.

A Tale of Two Capitalisms

Marxian economists recognize, just like mainstream economists, that capitalism has radically transformed the world in recent decades, continuing and in some cases accelerating long-term trends. For example, the world has seen spectacular growth in the amount and kinds of goods and services available to consumers. Everything, it seems, can be purchased either in retail shops, big-box stores, or online. And, every year, more of those goods and services are being produced and sold in markets.

That means the wealth of nations has expanded. Thus, technically, Gross Domestic Product per capita has risen since 1970 in countries as diverse as the United States (where it has more than doubled), Japan (more than tripled), China (almost ten times), and Botswana (where it has increased by a factor of more than 22).

International trade has also soared during the same period. Goods and services that are produced in once-remote corners of the world find their way to customers in other regions. Both physical commodities— such as smart phones, automobiles, and fruits and vegetables—and services—like banking, insurance, and communications—are being traded on an increasing basis between residents and non-residents of national economies. To put some numbers on it, merchandise trade grew from $318.2 billion dollars in 1970 to $19.48 trillion in 2018. And exports of services have become a larger and larger share of total exports—for the world as a whole (now 23.5 percent, up from 15 percent) and especially for certain countries (such as the United Kingdom, where services account for about 45 percent of all exports, and the Bahamas, where almost all exports are services).

The world’s cities are the hubs of all that commerce and transportation. It should come as no surprise that the urbanization of the global population has also expanded rapidly in recent decades, from about one third to now over half. In 2018, 1.7 billion people—23 per cent of the world’s population— lived in a city with at least 1 million inhabitants. And while only a small minority currently reside in cities with more than 10 million inhabitants, by 2030 a projected 752 million people will live in so-called megacities, many of them located in the Global South.

We’re all aware that, during recent decades, many new technologies have been invented—in producing goods and services as all well as in consuming them. Think of robotics, artificial intelligence, and digital media. And, with them, new industries and giant firms have emerged and taken off. Consider the so-called Big Four technology companies: Amazon, Google, Apple, and Facebook. They were only founded in the last few decades but, as they’ve continued to grow, they’ve become intertwined with the lives of millions of companies and billions of people around the world.

The owners of those tech companies are, to no one’s amazement, all billionaires. When the first Forbes World Billionaires List was published in 1987, it included only 140 billionaires. Today, they number 2825 and their combined wealth is about $9.4 trillion. That works out to be about $3,300,000,000 per billionaire. Their wealth certainly represents one of the great success stories of capitalism in recent decades.

Finally, capitalism has grown in more countries and expanded into more parts of more countries’ economies over the course of the past 40 years. Both large countries and small (from Russia, India, and China to El Salvador, Algeria, and Vietnam) are more capitalist than ever before. As we look around the world, we can see that the economies of rural areas have been increasingly transformed by and connected to capitalist ways of producing and exchanging goods and services. Global value chains have incorporated and fundamentally altered the lives of millions and millions of workers around the world. Meanwhile, areas of the economy that had been formerly outside of capitalism—for example, goods and services provided by households and government—can now be bought and sold on markets and are the source of profits for a growing number of companies.

But, unlike mainstream economists, Marxists recognize that capitalism’s extraordinary successes in recent decades have also come with tremendous economic and social costs.

All that new wealth of nations? Well, it’s been produced by workers that receive in wages and salaries only a portion of the total value they’ve created. The rest, the surplus, has gone to those at the top of the economic pyramid. So, the distribution of income has become increasingly unequal over time—both within countries and for the world economy as a whole.

According to the the latest World Inequality Report, income inequality has increased in nearly all countries, especially in the United States, China, India, and Russia. In other countries (for example, in the Middle East, sub-Saharan Africa, and Brazil), income inequality has remained relatively stable but at extremely high levels.

At a global level, inequality has also worsened. Thus, for example, the top 1 percent richest individuals in the world captured more than twice as much of the growth in income as the bottom 50 percent since 1980. Basically, the share of income going to the bottom half has mostly stagnated (at around 9 percent), while the share captured by the top 1 percent has risen dramatically (from around 16 percent to more than 20 percent).

And it’s no accident. Inequality has increased because the surplus labor performed by workers, in both rich and poor countries, has not been kept by them but has gone to a small group at the top of the national and world economies.

So, we really are talking about a tale of two capitalisms: one that is celebrated by mainstream economists (but only benefits those in the top 1 percent) and another that is recognized by Marxian economists (who emphasize the idea that the growing wealth of nations and increasing inequality are characteristics of the same economic system).

But that’s not the end of the story. All that capitalist growth has been anything but steady. The two most severe economic downturns since the Great Depression of the 1930s have happened in the new millennium: the Second Great Depression (after the crash of 2007-08) and the Pandemic Depression (with the outbreak and spread of the novel coronavirus). In both cases, hundreds of millions of workers around the world were laid off or had their pay cut. Many of them were already struggling to get by, with stagnant wages and precarious jobs, even before economic conditions took a turn for the worse.

And then those same workers had to look up and see one part of the economy recovering—for example, the profits of their employers and shares in the stock market that fueled the wealth of the billionaires—while the one in which they earned their livelihoods barely budged.

Meanwhile, those stunning global cities and urban centers, the likes of which the world has never seen, also include vast slums and informal settlements—parking lots for the working poor. According to the United Nations, over 1 billion people now live in dense neighborhoods with unreliable and often shared access to basic services like water, sanitation and electricity. Many don’t have bank accounts, basic employment contracts, or insurance. Their incomes and workplaces are not on any government agency’s radar.

They’re not so much left behind but, just like their counterparts in the poor neighborhoods of rich countries, incorporated into capitalism on a profoundly unequal basis. They’re forced to compete with one another for substandard housing and low-paying jobs while suffering from much higher rates of crime and environmental pollution than those who live in the wealthy urban neighborhoods. In countries like the United States and the United Kingdom, a disproportionate number are ethnic and racial minorities and recent immigrants.

The working poor in both urban and rural areas are also the ones most affected by the climate crisis. A product of capitalism’s growth, not only in recent decades, but since its inception, global warming has created a world that is crossing temperature barriers which, within a decade, threaten ecosystem collapse, ocean acidification, mass desertification, and coastal areas being flooded into inhabitability.

Meanwhile, the democratic principles and institutions that people have often relied on to make their voices heard are being challenged by political elites and movements that are fueled by and taking advantage of the resentments created by decades of capitalist growth. The irony, of course, is many of these political parties were elected through democratic means and call for more, not less, unbridled capitalism as the way forward.

Clearly, the other side of the coin of capitalism’s tremendous successes have been spectacular failures.

So, it should come as no surprise that there’s more interest these days in both criticisms of and alternatives to capitalism. And Marxian economics is one of the key sources for both: for ways of analyzing capitalism that point to these and other failures not as accidents, but as intrinsic to the way capitalism operates as a system; and for ideas about how to imagine and create other institutions, fundamentally different ways of organizing economic and social life.

Young people, especially, have become interested in the tradition of Marxian economics. They’re trying to pay for their schooling, find decent jobs, and start rewarding careers but they’re increasingly dissatisfied with the effects of the economic system they’re inheriting. Mainstream economics seems to offer less and less to them, especially since it has mostly celebrated and offered policies to strengthen that same economic system. Or, within more liberal parts of mainstream economics, offer only minor changes to keep the system going.

Marxian economics offers a real alternative—in terms of criticizing capitalism and the possibility of creating an economic system that actually delivers longstanding promises of fairness and justice.

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.”

China syndrome

As Donald Trump and his band of “hacks and grifters” are preparing to prematurely reopen the U.S. economy, they’re also rehearsing the language they’ll use to justify their irresponsible decisions.

Here’s how Peter Navarro, the White House trade adviser, is discussing the terms of the reopening:

“The unfair China trade shock that hit so many of America’s communities in the 2000s not only destroyed over five million manufacturing jobs and 70,000 factories; it killed tens of thousands of Americans,” Mr. Navarro said.

“As numerous academic studies have documented, economic shocks like China’s trade shock can increase mortality rates associated with suicide, drug overdoses, alcohol poisoning, liver disease, lung cancer, poor diet and cigarettes,” he said, “while destroying families through higher rates of single-parent households, child poverty, and divorce and lower rates of fertility and marriage.”

He added, “This new China virus shock threatens similar mortal dangers and threats to the American family that may be magnitudes larger than those triggered by the China trade shock.”

Then, there was the “China trade shock,” referring to the loss of manufacturing jobs in the United States after China was admitted to the World Trade Organization in the early 2000s. Now, it’s the “China virus shock,” which poses similar economic and social problems.

It’s a language that Navarro hopes to sell to both Trump (given the president’s well-known China syndrome when it comes to both international trade and the coronavirus) and to the American people.

What Navarro and his language hide from view is the fact that the so-called China trade shock was actually initiated by U.S. manufacturing corporations that, based on the development of capitalism in China, decided to outsource production and jobs to Chinese factories and workers. That was soon followed by U.S. merchants, who were able to import the commodities they sell, at much cheaper prices, from China.

By the same token, referring to the “China virus shock” overlooks the manner U.S. corporations were allowed to respond to the government-mandated shutdowns, by furloughing and laying off tens of millions of American workers, thereby devastating them, their families, and their communities. No effort has been made to retain those workers, along with their pay and benefits. That’s the real virus shock, and it wasn’t exported from China.

We need to be aware of the language that will be deployed to justify the decisions of the Trump administration and their corporate backers, on both Main Street and Wall Street, in the days and weeks ahead. It’s that language and the decisions for which they serve as cover that represent the real “mortal dangers and threats to the American family” in the midst of the COVID-19 pandemic.

Cartoon of the day

Special mention

Cartoon of the day

Special mention

 

Cartoon of the day

Special  mention

 

Cartoon of the day

Econ 101

It’s time to get back to blog writing—after a 6-month hiatus during which I taught my final two courses at the University of Notre Dame (A Tale of Two Depressions and Marxian Economic Theory) and prepared for my retirement (which involved, among other things, sorting through, packing up, and moving decades of “stuff”). Now, after 38 years of teaching, I am officially Professor of Economics Emeritus. But, rest assured, I plan to continue this blog and other writing projects. 

For the first time in almost four decades (aside from a few research sabbaticals), I don’t face the prospect of returning to campus and teaching economics. But, I can’t help it, I still worry about what millions of students in the United States and around the world will learn—or at least be subjected to—when they enroll in their economics classes this fall.

One of the major issues for any economics class, especially an introductory or principles course, is how to make it useful for students. My own approach has always been to teach the basics of mainstream economics—the key assumptions, the standard models, the relevant conclusions—and then to teach the critique of mainstream economics (including alternative theories within the discipline of economics). Two for one, I used to tell the students. In my view, they would be better students and citizens of the world when they understood both how mainstream economics affected their lives and how they could criticize and explore alternatives to the hegemonic theories within economics.* And I updated the content, and made it more useful to students, as mainstream economic theories changed and as particular issues were taken up in the media and political discourse.

That’s certainly not how mainstream economists approach teaching. For example, Justin Wolfers, a liberal mainstream economist at the University of Michigan, recently announced that he wants to make introductory economics useful to students by teaching them “a set of tools that can empower them, providing insight that will guide them toward better decisions.” And those “better decisions”? Exactly the presumptions and pronouncements that mainstream economists have celebrated since their approach was invented by Adam Smith and then reinvented in the late nineteenth century as neoclassical economics. It’s the entire arsenal of comparative advantage, rational choice, opportunity cost, given scarcity, and so on.

The approach introduced by Wolfers with such fanfare is no different from the miserable and misleading analogy invoked by Harvard’s Greg Mankiw between international trade and hiring someone to shovel snow. And it accomplishes nothing more than demonstrating that current economic arrangements are exactly as they should be because, in the view of mainstream economists, free trade is always mutually beneficial:

Start thinking this way and you’ll quickly see that the ideas that guide your everyday decisions also propel international trade, which is why American engineers design iPhones, while foreign workers — who have fewer alternative opportunities — do the laborious work of putting them together. By assigning tasks this way, Americans have gotten cheaper iPhones, and Chinese and Indian consumers have gotten greater access to advanced technology.

Fortunately, there are many other economists who are devising courses that are much more useful to today’s students. Last year, Aditya Chakrabortty wrote about one such course, in which students learned that the rules of the economy “aren’t laws of nature.” And just last week, Andrew Simms and David Boyle published a new beginners’ guide to economics for non-experts:

In it we ask some heretical questions that that could get us expelled from most university economics departments, such as: is the price mechanism so clever, or rising productivity always a good thing? We talk about the trouble with growth, and why working less might be better. Our common starting point is that the economy should serve rather than dominate people, and that it must work within planetary ecological boundaries.

As against what Wolfers, Mankiw, and so many other mainstream economists teach their students, these approaches are useful to students because they serve to denaturalize both existing economic thought and economic arrangements, thereby creating space for alternative ways of thinking about how the economy is organized and creating other possibilities.

I’ll only be able to rest easy in my retirement when the teaching of economics is taken out of the hands of mainstream economists and the millions of students who enroll in economics classes are taught to think critically and creatively about the economic dimensions of their lives and the world around them.

 

*So, I was heartened and gratified when, on the occasion of my retirement, some of my former students shared their thoughts about what they’d learned along the way:

Cartoon of the day

Special mention

 

Cartoon of the day

Special mention