Kids These Days

January 31, 2018

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Malcolm Harris. Kids These Days: Human Capital and the Making of Millennials. New York: Little, Brown and Company, 2017.

This is an unusual book, a portrait of a particular generation’s experience, interpreted in the context of a changing capitalist society. I found it reminiscent of Paul Goodman’s Growing Up Absurd from the 1950s, a book that resonated with many young Baby Boomers. Here the focus is on the Millennial generation, who were born between 1980 and 2000 and make up today’s young adults 18 to 38. Malcolm Harris himself is one of them.

Here he describes the book’s goal:

The only way to understand who we are as a generation is to look at where we come from, and the social and economic conditions under which we’ve become ourselves. What I’m attempting in this book is an analysis of the major structures and institutions that have influenced the development of young Americans over the past thirty to forty years.

Harris is not a social scientist, but just a “committed leftist and a gifted polemicist with a smart-aleck bent,” according to one reviewer. He provides no deep analysis of capitalism, but makes a broad claim that the frenetic quest for profits is now bringing society to some kind of breaking point:

Lately, this system has started to hyperventilate: It’s desperate to find anything that hasn’t yet been reengineered to maximize profit, and then it makes those changes as quickly as possible. The rate of change is visibly unsustainable. The profiteers call this process “disruption,” while commentators on the left generally call it “neoliberalism” or “late capitalism.” Millennials know it better as “the world,” or “America,” or “Everything.” And Everything sucks.

The burden of this supercharged capitalism is falling most heavily on Millennials. They will either by crushed by it, as America becomes some sort of fascist dystopia, or else lead a revolution against it. Harris sees little middle ground.

Human capital and hypercompetition

For Harris, the key to understanding what is happening to the younger generation is the idea of human capital. “We need to think about young people the way industry and the government already do: as investments, productive machinery, ‘human capital’.” Human capital is the economic value placed on the capacity for future work. New technologies can reduce that value by making existing capacities obsolete, most obviously when manual labor is replaced by machinery. But future workers can enhance their value by acquiring new capacities, enabling them to master technologies or provide some essential human input. This puts young people under pressure to become one of the value-enhanced winners instead of the devalued losers.

Isn’t this just the same old competition for success that has been a hallmark of modern society? Harris obviously sees it as more than that. As the development of human capital has become more extensive and more costly, paying for it has become a systemic problem. Society is currently organized in such a way that the benefits of human capital formation go primarily to capitalist organizations and their shareholders, while the costs fall primarily on individuals and their families. Investment in human capital is good for society, but it is risky for individual employers, since they do not normally own their workers and their future labor. Workers can leave and take their newly acquired human capital with them. So employers find it more profitable to hire workers who are already capable–or nearly capable–of doing the job; or just replace workers with robots, whose future labor they do own.

The intensified competition for good jobs becomes more than an individual competition to demonstrate merit. It is a competition among families to raise the most accomplished children they can, with the most expensive educations and all the trimmings–the music lessons, science projects, field trips, SAT prep classes, and so forth. Families of limited means are at a big disadvantage.

The paradox of productivity

In theory, the higher productivity resulting from new technologies and skills could lead to higher wages and/or more leisure. If people are more productive, why shouldn’t they enjoy a higher standard of living? And why shouldn’t the most tech-savvy generation be on its way to the highest standard of living of all? There’s little sign of that so far. “As it turns out, just because you can produce an unprecedented amount of value doesn’t necessarily mean you can feed yourself under twenty-first-century American capitalism.”

The problem goes to the heart of the capitalist system. Producing more per hour doesn’t translate into higher pay per hour if the extra output and its economic value belong solely to the employer. In that case the employer gets the benefits, in the form of higher revenues and lower labor cost per unit of output.

On the one hand, every kid is supposed to spend their childhood readying themselves for a good job in the skills-based information economy. On the other hand, improvements in productive technology mean an overall decrease in labor costs. That means workers get paid a smaller portion of the value they create as their productivity increases. In aggregate, this operates like a bait and switch: Employers convince kids and their families to invest in training by holding out the promise of good jobs, while firms use this very same training to reduce labor costs.

We may wonder why competition among employers for good workers doesn’t force them to raise wages. It does, but mainly in specialized occupations where needed skills are actually in short supply. What is remarkable is how little wages have risen in recent decades, even for college graduates. “Wages for college-educated workers outside of the inflated finance industry have stagnated or diminished, with real wages for young graduates down 8.5 percent between 2000 and 2012.” What seems to be working in favor of employers is a system that delivers a large enough supply of human capital to hold wages down, while making families bear the costs of developing that capital.

Harris notes that men and women have experienced this situation differently. “Median wages for men (50th percentile) have remained stagnant, at nearly $18 per hour, while median wages for women have increased from $11.28 in 1973 to $14.55 in 2009.” Women’s improvement in labor force participation and wages is a mixed blessing. Putting wives as well as husbands into the labor force is one way for families to try and get ahead. But it places the burden on families to work harder instead of on employers to pay better. “All work becomes more like women’s work: workers working more for less pay. We can see why corporations have adapted to the idea of women in the labor force.”

To summarize:

Technological development leads to increased worker productivity, declining labor costs, more competition, a shift in the costs of human capital development onto individual competitors, and increased productivity all over again. Millennials are the historical embodiment of this cycle run amok….

Education: The labor of enhancing one’s labor

One of my graduate school professors used to say that the social function of higher education was not to produce and disseminate knowledge, but to keep young people out of the labor force so they could serve the economy as needed consumers rather than unneeded producers. Maybe that made sense at a time when people were enjoying the new prosperity and leisure of the post-Depression, postwar era. Having recently achieved good wages and a shorter work week, unions weren’t eager to see a horde of young people enter the labor force and drive wages and working conditions down.

Harris’s take on youth and education is very different, and probably more relevant to our times. Not only are a large percentage of young people in the labor force already–70% of college students, for example–but they are working very hard at their own human capital development, primarily for the benefit of their future employers. As a result of the economic conditions described, “Every child is a capital project.”

…It’s cheaper than it used to be to hire most workers, and extraordinarily hard to find the kind of well-paying and stable jobs that can provide the basis for a comfortable life. The arms race that results pits kids and their families against each other in an ever-escalating battle for a competitive edge, in which adults try to stuff kids full of work now in the hope that it might serve as a life jacket when they’re older.

In theory, new information technologies ought to make it easier to learn. My generation could have saved many hours digging for information in the library if we could have accessed a whole world of knowledge on a laptop (not to mention the time we could have saved on a term paper if we had word processing). Paradoxically, Harris reports that American children spend more time in school, more time on homework, and less time on unsupervised play than they used to. And they are producing a lot: “Nongrade measures of educational output–like students taking Advanced Placement classes or tests, or kids applying to college–have trended upward….” Grades have risen too, and Harris is not so quick to dismiss that as mere grade inflation.

A government study reported that “the number of applicants to four-year colleges and universities has doubled since the early 1970s, [but] available slots have changed little.” That form of intensified competition allows schools to raise tuition and fees dramatically. Only part of this increase is due to reduced public funding, since the increase by private schools is almost as great. The additional revenue has not gone into instruction; on the contrary, the ample supply of graduates seeking academic employment has allowed colleges to hire more lower-paid, part-time and temporary teachers. Instead it goes mainly toward administrative salaries or amenities to attract well-heeled students.

What this all amounts to is a clear tendency for both public and private colleges to behave like businesses, passing off a lower-quality product at a higher price by tacking on highly leveraged shiny extras unrelated to the core educational mission. Stadium skyboxes, flat-screen monitors, marble floors, and hors d’oeuvres for the alumni association. Consultants of all flavors and salaried employees to make sure it’s all efficient. Competition hasn’t improved the quality of higher education, it has made colleges more like sleepaway camps or expensive resorts.

Because they are defined as students rather than real workers, students can be made to work very hard for someone else’s profit. College sports generate substantial revenue, but not for the athletes, who regularly spend thirty to forty hours a week on their sports without being paid. Many students try to enhance their credentials with unpaid internships, although research has found no more than a slight impact on job offers.

Even the time spent on social media can be seen as exploitable unpaid labor. “These technologies promise (and often deliver) connectivity, efficiency, convenience, productivity, and joy to individual users….” Older adults may see them as a frivolous form of leisure. But they are also a way that young people self-publish their creative work and build an audience for it. That also generates profits for others, most obviously for the big companies that run the sites, but also for record producers that are spared the costs and risks of developing talent themselves. They can wait and see who is becoming popular, and only then offer a recording contract.

Not only do students get little immediate reward for their hard work, but most of them have to borrow against their future earnings to finance their higher education. They have to indenture themselves to obtain an enhancement in earning power that may or may not materialize. If their schools educate them poorly–and some for-profit schools seem to make that part of their business model–borrowers are still on the hook for the money. Excessive debt is one of the reasons why today’s young adults have relatively low net worth, not just in comparison to today’s older adults, but also in comparison to young adults of an earlier time. Between 1983 and 2010, net worth dropped 21% for the 29-37 age group.

Overall, Malcolm Harris finds that the pressure to develop their own human capital has forced Millennials to compete harder for a limited supply of rewards. What they get for their harder work is the mere promise of a higher standard of living–someday. So far at least, someday has not arrived.

Continued


Viking Economics (part 2)

June 26, 2017

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How did the Nordic countries, which are in many ways similar to other developed countries, arrive at their unusual blend of economic equality and prosperity? Lakey tries to answer that question with a narrative featuring some of the key events and personalities, but he does not attempt any serious comparative analysis of countries to sort out causes and effects.

One thing that is clear is that the Great Depression of the 1930s was a significant turning point, as it was in the United States. Strong pro-labor parties succeeded in moving politics to the left and gradually building mass support for egalitarian policies. For some reason, those policies went further in the Nordic countries, perhaps because those countries were economically weaker to begin with and more vulnerable to economic downturns. Once a distinctive Nordic model became established, it was able to weather some counterattacks from more conservative elements, as well as financial crises that forced governments to make tough political choices.

From conflict to consensus in Norway and Sweden

Lakey emphasizes that the more egalitarian Nordic model did not emerge without a struggle. He describes the countries a century ago as having huge wealth gaps and politically dominant elites.

In Norway, the early twentieth century was a period of trade union organization, formation of cooperatives, and rising nationalism. Norway dissolved its union with Sweden in 1905. The Norwegian Labor Party flirted with radicalism, joining the Communist International in 1918. Five years later, however, the movement split over the communist issue. Some workers left to form the Communist Party of Norway, but the Norwegian Labor Party became more dominant by attracting many farmworkers, small farmers and students as well as politically moderate workers.

During the Depression, some business owners and right-wing politicians supported violent measures to suppress the labor movement, but the movement proved too popular for them. In 1935, owners and labor leaders forged the “Basic Agreement” recognizing the rights of both capital and labor. “Labor leaders agreed that the owners could continue to own and guide their firms. Labor expected that their political instrument, the Labor Party, would restrict owners through government regulation and control the overall direction of the economy.”

For the next three decades, labor dominated politics. By the time the Conservatives got a change to govern, the basic elements of the Nordic model were established, with policies to promote full employment, regulate markets, and provide universal benefits paid for by taxpayers.

Similarly in Sweden, a violent government crackdown on striking workers in 1931 led to the fall of the government and the election of the labor-based Social Democrats. “Swedish voters reelected the Social Democrats to lead their society almost without a break until 1976, by which time the Nordic model was firmly established.”

Counter-movements and financial crises

In the 1980s, around the same time that Ronald Reagan and Margaret Thatcher were promoting tax cuts, reductions in government spending, and financial deregulation, similar policies were tried in Nordic countries. The failure of the Labor government to curb “stagflation,” a period of high unemployment and inflation, helped the Norwegian Conservative Party take control. In Sweden, the Social Democrats continued to govern, but also adopted some conservative measures to limit the power of government.

Lakey sees a direct link between financial deregulation in the 1980s and financial crisis in the 1990s. Banks had more freedom to make riskier and more speculative investments, often resulting in asset bubbles with prices reaching unsustainable levels. When the bubbles burst and banks experienced massive losses, Nordic governments moved to re-regulate banks and protect depositors, but not to bail out the banks and their shareholders. Both Norway and Sweden nationalized some of the largest banks, at least temporarily. By the time of the 2008 financial crisis, both countries were in a relatively strong position to handle it. “By 2011, the Washington Post was calling Sweden ‘the rock star of the recovery,’ with a growth rate twice that of the United States, much less unemployment, and a strong currency.”

The story in Iceland is different because it was less an exemplar of the egalitarian Nordic model than Norway or Sweden. Its labor-based political party, the Social Democratic Alliance, had always been a minority party, and the government spent less on health and education. Iceland did have collective ownership of major banks, through government and cooperatives, but they moved toward financial deregulation and privatization in the late 1990s. “The now-private banks leveraged their capital base [that is, used it to borrow and speculate] to buy up assets worth several times Iceland’s gross national product.” When the crash came in 2008, the entire banking sector collapsed, taking the country’s currency with it. The political result was Iceland’s first left-wing government, a coalition of the Social Democratic Alliance and the Left Green Movement. Although Iceland needed assistance from the International Monetary Fund and other countries, the new government resisted IMF demands for austerity, insisting on a deal that protected workers, homeowners and depositors while letting banks fail. Lakey describes the Icelandic recovery as an economic success, getting unemployment down to 3.2% by 2015.

Having come through a time of political and financial upheaval with their social democratic principles largely intact, Nordic countries may now be in a good position to tackle the challenges of the global, high-tech economy.

Continued

 

 


Postcapitalism (part 4)

May 18, 2016

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The last part of Paul Mason’s Postcapitalism discusses how the transition out of capitalism might unfold, with special attention to the role of the state in facilitating change.

To review, Mason expects information technology to liberate people from the capitalist market economy. We will be liberated as workers because fewer hours of paid work will be required to produce the necessities of life. We will be liberated as consumers because goods and services will be more abundant and less expensive. We will be able to devote more of our time to voluntary activity and sharing.

A rough road

If this sounds too rosy and idealistic, readers should take a close look at Chapter 2, “Long Waves, Short Memories,” and Chapter 9, “The Rational Case for Panic.” Mason does not expect a smooth, leisurely and pleasant transition beyond capitalism, but something more tumultuous. As the historical material in the book makes clear, the history of capitalism is not just a story of steady progress through technological innovation and rising productivity. It is a story of periodic crises as the profitability of existing industries wanes and capital has to find new opportunities elsewhere. The transition now underway is especially difficult because it calls into question the viability of capitalism itself. As production becomes more knowledge-based, the means of production become harder to own and maintain as sources of private profit. Since the 1970s, capitalists have been counteracting the tendency for profits to fall by holding wages down in the developed countries and exploiting the cheap labor of poorer countries, but at the cost of increasing inequality and social resistance.

To make matters worse, new environmental and demographic conditions are delivering “external shocks” to the economic system. The prime example is climate change, a problem that Mason does not believe the market can solve on its own. When the price of fossil fuels goes up, energy companies take that as a signal “that it’s a good idea to invest in new and more expensive ways of finding carbon.” When the price goes down, consumers conclude that they can drive more or buy less fuel-efficient vehicles. However the market fluctuates, the price does not factor in the externalities, the true costs of environmental impacts on the global economy.

Another shock is the “demographic timebomb,” the addition of another two billion people to the planet by mid-century, most of them in poorer countries. In the richer countries, falling birth rates and rising longevity are creating rapidly aging populations. With fewer working-age people to support more retirees, workers are under pressure to generate enough wealth to save for their own long retirement as well as contribute to the support of today’s retirees through payroll taxes. Demographic change puts additional stress on the economy in several ways: requiring the financial system to deliver high investment returns for retirement accounts, increasing the demands on public spending for the elderly, and increasing the flow of migrants from rapidly growing poor countries to slower growing but aging rich countries.

The world cannot afford a leisurely transformation to the postcapitalist economy Mason foresees. The world needs a rapid deployment of new technologies to produce as much as we can, but do it in a cleaner, greener way that mitigates environmental damage. The potential benefits are enormous, but the task of getting from here to there is daunting.

“Project Zero”

Because of the urgency of the situation, Mason believes that a spontaneous process of increasing information-based activity is not enough. The process needs to become a conscious project, based on the insight that “a new route beyond capitalism has opened up, based on promoting and nurturing non-market production and exchange, and driven by information technology.” He calls it “Project Zero” because “its aims are a zero-carbon energy system; the production of machines, products and services with zero marginal costs; and the reduction of necessary labour time as close as possible to zero.”

The state has a special role to play in Project Zero because only the state is “centralized, strategic and fast” enough to address the urgent problems. However, Mason rejects the old socialist idea of a centrally planned economy, arguing that a centralized bureaucracy cannot respond to new data fast enough to keep up with the pace of change in the information society. Recall the earlier point that the key agent of change will be the educated and networked individual, which implies a high degree of decentralization.

Limits on private capital

So what can the state do to facilitate the transition to postcapitalism? First, it can curb private economic power in industries where it has become a danger to the public good. The energy industry would be one, as the discussion of the climate issue illustrates. The state should actively discourage fossil fuel production and encourage cleaner sources of energy. Mason also sees a much larger role of government in the financial industry. One proposal sure to provoke controversy is that the state take control of the central bank in order to implement a monetary policy that helps debtors more than creditors. That would be a looser monetary policy that keeps interest rates low but allows the inflation rate to be somewhat higher. Over time, that erodes the real value of debt, in contrast to a strict monetary policy that protects wealthy lenders by placing primary emphasis on fighting inflation. Since government itself is a large debtor, that would help governments recover from the fiscal crisis resulting from demands for both low taxes on capital and high spending on social programs to assist struggling wage-earners.

Mason would also reorganize the banking system to make it less profit-driven, by encouraging non-profit banks, credit unions, peer-to-peer lenders, and “a comprehensive state-owned provider of financial services.” He would regulate the remaining profit-oriented banking to curb wasteful speculation and encourage its proper role of efficiently allocating capital to productive activities.

In the economy as a whole, the state would act to insure that what profits remain would be a reward for entrepreneurship, and not just a “rent” based on ownership. Creators of new knowledge would get the rewards of intellectual property rights, but those rights would be short-lived to encourage the flow of knowledge and the continued incentive for further innovation.

Liberating workers

Another thing the state can do is strengthen the legal rights and protections of workers to give them more bargaining power in their relationship with capital. This will indirectly encourage the fuller application of new technologies that can produce economic abundance. “If we legally empowered the workforces of global corporations with strong employment rights, their owners would be forced to promote high-wage, high-growth, high-technology models, instead of the opposite.” Owners would try to make each worker as productive as possible if they could no longer profit from paying such low wages.

An obvious objection is that higher wages and productivity would have the downside of less employment. But for Mason, less employment in capitalist workplaces where owners profit by overworking and/or underpaying workers is ultimately a good thing. Ideally, workers would be better paid for the hours they worked, but also have the option of working fewer hours. They could then experience the decline of paid employment as a liberation, not an involuntary displacement.

The other side of the transformation of work is the increasing opportunities for work outside of traditional profit-centered firms, such as in non-profits and co-ops. Mason recommend that the state “reshape the tax system to reward the creation of non-profits and collaborative production.”

Liberating consumers

The replacement of millions of workers by automated systems is unlikely to be experienced as a good thing unless it has benefits for people as consumers, not just as workers. Here the state can facilitate the transition by providing a basic income to all households, to support those who are voluntarily or involuntarily outside the system of paid employment. That can improve the safety net for those who are displaced by new technologies. It also “gives people a chance to build positions in the non-market economy” by subsidizing participation in volunteer work, co-ops and adult learning opportunities. Market work would still be rewarding as long as minimum wages were higher than the basic income.

In the long run, the abundance of things made available by hi-tech production methods would bring the monetary cost of living down and reduce consumers’ dependency on earned income. People could rely more heavily on non-market forms of sharing, since they would have more time for unpaid but socially useful activity. As the income tax base became smaller, government’s ability to pay a basic income would decline, but so would people’s need for one.

Can democracy survive the transition?

Just about every one of Mason’s political suggestions goes against conservative thinking, which sees the free market as the creator of wealth and the limited state as its supporter. In the conservative view, the state should tax and regulate capital as little as possible, protect wealth against inflation with tight monetary policy, and keep people dependent on paid employment by providing only the most meager welfare benefits. Mason ends his book by warning that if the democratic state tries to facilitate a transition beyond capitalism, the economic elite may decide that preserving capitalism is more important than preserving the democratic state!

How long will it take before the culture of the Western elite swings toward emulating Putin and Xi Jinping? On some campuses, you can already hear it: “China shows capitalism works better without democracy” has become a standard talking point. The self-belief of the 1 per cent is in danger of ebbing away, to be replaced by a pure and undisguised oligarchy.”

We can already see the beginnings of an alliance between right-wing autocrats and blue-collar workers fearful of losing their jobs, especially in doomed occupations like coal mining or pipeline construction. If such alliances succeed in taking over the governments of developed countries such as the United States, then things could get pretty ugly in the next few decades.

In the last great transition of capitalism, in the early twentieth century, authoritarian politics had to be defeated before the democratic state could help create a broader-based prosperity. (Third-world peoples and racial minorities remained excluded however.) We should not be surprised if the same turns out to be true of the twenty-first century, as we struggle to create a more inclusive and sustainable prosperity.


Postcapitalism (part 3)

May 5, 2016

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Profit and Intrinsic Value

Paul Mason’s interpretation of the long cycles of capitalism relies heavily on the idea that profits tend to fall during the latter half of each cycle. “Fifty-year cycles are the long-term rhythm of the profit system.”

In past cycles, profits have recovered when new waves of innovation have begun, so falling profits have not been as fatal to capitalism as Marx predicted. Mason thinks that the latest wave of innovation will be different.

The key to understanding the rise and fall of profits is the relationship between profit and intrinsic value. Market prices fluctuate, but “there has to be a more intrinsic price around which the selling price moves up or down.” A house is too costly and too useful to sell for the price of a paper clip. Well I say “useful” anyway. Mason would just say “costly in human labor,” since he subscribes to a labor theory of value. I will keep returning to that distinction throughout the discussion, although my difference with Mason doesn’t keep me from reaching many of the same conclusions.

Mason’s crisis theory vs. mainstream economics

In Oscar Wilde’s Lady Windermere’s Fan, one of the characters defines a cynic as “a man who knows the price of everything and the value of nothing.” Mason makes a similar accusation against the economic theory of marginal utility, that “there is no intrinsic value to anything, except what a buyer will pay for it at a given moment.” And so economics becomes preoccupied with “capitalism’s inner tendency towards equilibrium” as prices adjust to fluctuations in supply and demand. Economists have trouble explaining periodic crises, which are dramatic departures from equilibrium.

Without being able to distinguish market price from intrinsic value, mainstream economics also has trouble dealing with social issues like injustice, exploitation, discrimination, fraud, or class struggle. To say that workers have been underpaid or consumers overcharged, one has to judge the price of something against some standard of value. An economic theory that treats the market price as the “right” price is implicitly conservative, although it may hide its conservatism behind a veneer of scientific detachment or value neutrality.

Labor as the standard of value

Mason’s theory of value uses labor as the standard of value, in the tradition of David Ricardo and Karl Marx. Human labor is the source of value, and “a commodity’s value is determined by the average amount of labour hours needed to produce it.”

That has the virtue of simplifying the problem, but I think it leaves too much out. The labor theory focuses on the cost of something in terms of human effort, but not the benefit of something in terms of human need or enjoyment. From the buyer’s perspective, two things produced by similar amounts of labor could have very different use values. Two medical researchers could put in the same hours, but only one might come up with a cure for cancer. When the FDA evaluates a drug, it doesn’t ask how many hours of labor it represents; it asks whether it is safe and effective. Both its cost in labor and its benefit to the consumer can reasonably affect its price.

The greater the human cost of making something, the greater the scarcity and the lower the supply. But the greater the human benefit from making something, the greater the desire to have it and therefore the greater the demand. Considering both sides might seem to bring us back to the conventional free-market view that the only measure of value is the actual price that buyers and sellers negotiate, that is, the equilibrium price where supply and demand meet. However, one can save the idea of intrinsic value by regarding it as the value that buyers and sellers can recognize when the interests of both parties (costs to sellers and benefits to buyers) are fairly represented. To the extent that they are not, then prices will deviate from underlying value.

Why wouldn’t the interests of both parties be fairly represented in a free-market economy? In reality, the free market is a somewhat ideological notion, and participants are not as free as the ideology likes to pretend they are. To understand why, some notions of power and control need to be incorporated into the theory. While mainstream economists have tended either to ignore power or to regard as benign, sociologists have certainly appreciated its darker side. Power can be used cooperatively, on behalf of an entire group or organization, as when a responsible adult exercises economic power on behalf of a child. But where consensus is lacking and collective norms are weak, power is likely to be employed to have one’s way without regard to the interest of others. It is naïve to think that in an unregulated market, concentrated economic power won’t be used to take advantage of the less powerful, by tricking consumers into paying more than a product is worth, or by paying workers less than their labor is worth.

But that brings us to the question, what is the value of labor itself? Here again, the answer depends on whether both sides of a transaction are considered (costs to the sellers of labor and benefits to the buyers of labor), or only the cost side. In Mason’s labor theory of value, the value of a commodity is the labor needed to produce it. So the value of a worker’s labor would be the labor needed to produce that labor, which is the labor performed by other workers to provide whatever the worker in question needs to live and to work. That would be the labor value of labor. This definition of value leads to one conception of a just wage or living wage, the wage needed by the worker to buy not only the means of sheer survival, but the education and other inputs needed to do the work of a modern society.

Again, I find this incomplete because I would want to take into account the use value of labor as well as the labor value of labor. A simple example shows how the failure to do so can lead to illogical valuations. My first job was a summer job doing clerical work in a government office. At first I was slow to complete certain tasks, and I remember one particular occasion when a more experienced worker made a suggestion that allowed me to speed up my work considerably. The use value of my labor certainly clearly increased, but the labor theory would miss that since the labor value of my labor as defined in the previous paragraph wouldn’t have changed.

The use value of labor is its value to the buyer of labor, the consumer or employer. Two workers who require the same support in order to live and to work may differ greatly in their value to the employer. One may be put to work more productively than the other. Employers can add to the use value of labor by innovations in work organization or technology. This has implications for the discussion of profit and the cycles of rising and falling profits.

Where does profit come from?

The labor theory of value takes a rather critical view of profits from the start. Including use value as well as labor value in the discussion changes the picture a bit, although it does not place profits entirely above criticism.

Mason adopts the classic Marxian position that businesses generate profits by extracting surplus value from labor.

If we forget money and measure everything in ‘hours of necessary work’, we can see how profit is generated. If the cost of putting Nazma at the factory gate six days a week is thirty hours work by other people spread across the whole of society (to produce her food, clothing, energy, childcare, housing and so on), and she then works sixty hours a week, her work is providing double the amount of output for the inputs. All the upside goes to the employer. Out of an entirely fair transaction comes an unfair result. This is what Marx calls ‘surplus value’, and is the ultimate source of profit.

Although Mason states the problem in terms of hours, it could also be expressed in terms of wages. The pay required for the worker to purchase the necessary labor of others could be considered a living wage, and profit would come from paying workers less than that wage. Workers put up with this because they are in too weak a bargaining position to be truly free to say no.

Does that mean that workers should receive all the revenue produced by their labor, leaving nothing for capitalist owners and investors? Many socialists have arrived at that conclusion, seeing value only in the labor of an owner-manager, but not in the contribution of capital as such. If capital makes no distinct contribution to value, that makes it rather easy to look forward to the demise of capitalism!

Suppose, however, the owner uses some capital to buy the workers new and improved tools, enabling them to turn out products faster. As in the example where I worked faster in my clerical job, the labor value of the labor hasn’t changed. (The labor value of each unit of product has actually declined, but that’s another matter.) What has changed is the use value of labor, since capital has added value to that. The labor theory of value is blind to this added value, insisting that only labor generates surplus value.

Who should get the profit resulting from this added value? I think that ideally it should be a win-win. The provider of the capital should get a return on capital. But since working with the new tools requires the cooperation of labor, labor should share the rewards as well. This yields a somewhat different conception of a just wage, one that requires giving workers a share of the benefits of their own increasing productivity.

If businesses can add to the use value of labor by innovations in work organization or technology, then the return on capital can be a fair reward for adding value, and not all profit derives from the exploitation of labor. Nevertheless, where workers are weak and unorganized, and social norms governing economic behavior are weak or poorly enforced, capital can derive excess profit from paying workers less than they are worth. That remains true whichever way worth is considered: from the cost side as the labor value of labor, or from the benefit side as the use value of labor. And the theory can also relate power and profit in a vicious circle. The greater the power of capital over labor, the greater the potential for excess profits. Those profits in turn contribute to the accumulation of still more power. The process would continue until the social costs become too great to bear, generating movements for social reform.

Productivity and profits

Hopefully, this theoretical discussion will shed additional light on capitalist cycles and the future of capitalism. Bearing in mind that the cycles are “the long-term rhythm of the profit system,” what happens to profits when capital flows into new industries employing new technologies?

According to the labor theory of value, businesses can profit from new technologies and rising productivity only in the short run. Once a labor-saving technology is fully implemented across an industry, the reduction of labor in that industry will cause profits to fall. That rather strange conclusion follows from the assumption that labor is the sole source of value, and that surplus labor value is the only source of profit. Mason explains:

To increase productivity, we increase the proportion of ‘machine value’ to the living human labour employed. We drive human beings out of the production process and in the short term – at the level of the firm or sector – profits rise. But since labour is the only source of extra value, once an innovation has been rolled out across the whole sector, and a new, lower social average set, there’s less labour and more machine; the part of the operation producing the added value has got smaller; and if unchecked that would place downward pressure on the profit rate of the sector.

If, on the other hand, commodities have a use value as well as a labor value, and profit does not derive solely from exploiting labor, then the explanation for falling profits is less straightforward. In fact, why profits have to fall at all may not be immediately obvious. Consumers who value a particular product may willingly pay just as much for it, whether it’s produced by human labor or by machinery. True, less labor means fewer workers to overwork and underpay; but it also means fewer workers with whom to share the revenues from mechanized production. Productivity gains could translate into corporate profits for a long time.

That means that I have a somewhat more positive view of capitalism, at least during the upswings of long cycles. Capital investments and productivity gains can produce win-win solutions for capital and labor, with both profits and wages rising for many years. That would explain why long-cycle upswings such as the postwar prosperity are periods of relative domestic tranquility and capital-labor accommodation.

Although I do not regard labor-saving technology as inherently unprofitable, as Marxians do, I can see two reasons from a more Keynesian point of view why profits would eventually fall in a mature, more automated industry:

  1. Overproduction: The industry becomes so good at producing goods in high quantity but low cost that it cannot find a big enough market for them.
  2. Under-consumption: The industry reduces its demand for labor to the point that employment and wages fall, leaving too many workers too poor to afford the products being marketed.

Even without Mason’s pure labor theory of value, I can see how mature industries could eventually become victims of their own success in raising productivity and lowering labor costs. Then the rest of Mason’s theory of cycles applies: Profits are threatened, capital tries to compensate by squeezing labor, cooperation breaks down, and eventually social unrest forces the system to adapt. Then in order for capitalism to continue, profits have to be found primarily in new industries.

Profits in a service economy

Today, there is some question of what those new industries would be, since the manufacturing sector is becoming so automated that it can no longer create jobs for the millions of workers entering the global labor force. Last week’s New York Times had a good article by Eduardo Porter, “The Mirage of a Return to Manufacturing Greatness,” questioning Donald Trump’s promise to bring back manufacturing jobs. Porter quotes Joseph Stiglitz, who says, “Global employment in manufacturing is going down because productivity increases are exceeding increases in demand for manufactured products by a significant amount.” Porter draws the logical conclusion that “strategies to restore manufacturing jobs in one country will amount to destroying them in another, in a worldwide zero-sum game.” Putting stiff tariffs on foreign goods, as Donald Trump proposes, is a formula for global conflict, but not global progress.

If there is to be another capitalist upswing in profits and prosperity, it would have to be centered in the service sector of the economy. Mason is pessimistic about turning enough services into paid work to compensate for the decline in manufacturing work.

At a certain level, human life and interaction resist commercialization. An economy in which large numbers of people perform micro-services for each other can exist, but as a form of capitalism it would be highly inefficient and intrinsically low-value. You could pay wages for housework, turn all sexual relationships into paid work, mums with their toddlers in the park could charge each other a penny each time they took turns to push the swings.

As I’ve said before, I expect people with specialized skills to continue to offer their services on the market for the foreseeable future. The more we invest in education and other forms of human capital development, the greater the number of people who will have something valuable to market. But since services by their very nature are labor intensive, there may not be much that financial capital can do to add value and justify a profit. What profits exist in service industries may depend too much on holding down wages, at least until low-wage services are automated too. In this area, the labor theory of surplus value may work very well.

For skilled workers, added value will come primarily from human capital, which will depend on inputs from the community (“It takes a village…”). In order to make those workers dependent on financial capital, capitalists would have to find ways to own the new informational means of production. “Capital has to extend its ownership rights into new areas; it has to own our selfies, our playlists, not just our published academic papers but the research we did to write them. Yet the technology itself gives us the means to resist this, and makes it long-term impossible.” Knowledge is sharable at such low cost that owning it for long is very difficult.

And so we remain poised between an old world of dwindling manufacturing jobs and low-wage service jobs, and a new world of self-capitalized skilled work. There might not be enough such work to keep people as employed as they used to be, but goods and services might be so cheap and abundant that not so much paid work would be necessary anyway. I don’t know whether to call such a system “postcapitalism” or “selfcapitalism” (the spell checker doesn’t like either term), but it certainly will be different.

Continued

 


Postcapitalism (part 2)

May 4, 2016

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Paul Mason’s perspective on the current plight of capitalism develops from his understanding of the crises that have occurred periodically in the history of capitalism. The current crisis resembles past crises in many respects, but differs from them in ways that are crucial to his central argument. The current crisis has taken shape more slowly and been resisted more successfully for a time, but will ultimately result in a more profound transformation.

Long cycles of capitalism

The historical part of the book focuses on the “long cycles” of capitalism first described by Nikolai Kondratieff. He discovered a roughly fifty-year cycle of economic activity, divided about evenly between an upswing and a downswing. He described the upswing as a period of technological innovation and high investment, followed by a period of slower growth or contraction, usually ending with a depression. Mason uses these dates for the first four long cycles:

  1. 1790 to 1848
  2. 1848 to mid-1890s
  3. 1890s to 1945
  4. Late 1940s to 2008

Each cycle has its key industries where innovation and growth are centered, such as the steam-powered factory in cycle 1, railroads and machine-made machinery in cycle 2, mass production and electrical engineering in cycle 3, and mass consumer goods like automobiles in cycle 4.

In the late 1990s, a fifth cycle began, “driven by network technology, mobile communications, a truly global marketplace and information goods.” But instead of transforming production, it has stalled out, while the previous cycle has hung on longer than normally expected. Mason’s theory of cycles tries to explain why.

A theory of cycles

In very brief form, Mason’s theory says this: During the upswing of a long cycle, capital that has built up in the financial system flows into new technologies and markets, “fueling a golden age of above-average growth with few recessions.” Because the economic pie is expanding so rapidly, achieving social peace by giving everyone a piece of it is easier. Workers who are displaced by labor-saving improvements can usually find employment in expanding industries.

At some point, the upswing peaks out. “When the golden age stalls, it is often because euphoria has produced sectoral over-investment, or inflation, or a hubristic war led by the dominant powers.” There are limits to how much capital can be invested productively in the same technologies and industries. As for “hubristic wars” I assume he means that nations foolishly squander their wealth trying to grab too large a share of the world’s markets and raw materials. I will add that although military spending can stimulate the economy in times of recession, wars have had devastating effects on many healthy economies, with the impact of World War I on Europe the prime example. “War is good for the economy” is not a very safe bet.

When  dominant industries stop expanding and profits stop rising, employers become more resistant to wage demands, and they may also try to reorganize production to replace skilled workers with lower-skilled workers and machines. Worker resistance increases as displaced workers have fewer alternatives. If profits continue to fall, “capital retreats from the productive sector and into the finance system, so that crises assume a more overtly financial form.” I take that to mean that capital that is not invested productively can only finance debt and inflate the value of stocks and other assets beyond their earnings value. Financial panics and depressions occur when the debtors default and the asset bubbles burst.

Mason thinks that traditional descriptions of long cycles focus too exclusively on waves of technological innovation (not to say those are not important), and not enough on falling profits, class conflict, and the intervention of the state. In the first three historic cycles, businesses tried but ultimately failed to maintain profits by squeezing the workers. When economic conditions and social unrest got out of hand, the state acted to facilitate the transition to the next cycle.

In each long cycle, the attack on wages and working conditions at the start of the downswing is one of the clearest features of the pattern. It sparks the class warfare of the 1830s, the unionization drives of the 1880s and 90s, the social strife of the 1920s. The outcome is critical: if the working class resists the attack, the system is forced into a more fundamental mutation, allowing a new paradigm to emerge….The history of long cycles shows that only when capital fails to drive down wages and when new business models are swamped by poor conditions is the state forced to act: to formalize new systems, reward new technologies, provide capital and protection for innovators.

The issue of falling profits deserves additional attention, but I’ll save that for when I discuss Mason’s theory of value in the next post.

The prolonged fourth cycle

Something different happened during the downswing of the fourth cycle, beginning in the 1970s. As in previous cycles, the growth in productivity slowed. The initial responses were inflationary rather than deflationary. Businesses kept giving in to the wage demands of highly organized workers, and government social spending also increased, although both wages and benefits were eroded by rising consumer prices. As wages went up faster than productivity, profits were squeezed. Business then launched a very successful attack on workers and government, blaming both of them for inflation. Globalization enabled corporations to eliminate high-wage, unionized manufacturing jobs in the developed countries, while finding new sources of revenue in the developing countries.

All this meant that profits could be maintained without transitioning beyond fourth-cycle capitalism. There was a twenty-five-year surge of productivity in the developing world, between 1981 and 2006. But in the developed countries, productivity growth continued to fall, and yet profits remained high because of stagnating wages. Inequality rose to Gilded Age levels, but until recently popular resistance has not been strong enough to force serious systemic change.

So we have been living in a strange time, suspended between an old system that no longer works for enough people and a new one that can’t quite get going. “Alongside higher profits, the overall rate of investment after the 1970s is low.” There is something odd about an economy in which capitalists make so much money while investing so little in the economic progress of their own countries. But another major transition cannot be put off forever.

A fifth cycle?

Twenty-five years ago, I taught a course on Social Change using Daniel Chirot’s Social Change in the Modern Era as a text. Chirot used long-cycle theory as a framework, and he said this about the fifth cycle he saw emerging at the time:

We can expect that the present fifth industrial cycle will gain ground, transform economies and societies, make life ever more materially comfortable, and then come to some sort of end in a half-century or so. Then, a new crisis will come, and a sixth as yet quite unknowable, industrial cycle will begin.

I gave a lecture which began, according to my notes, “Chirot may be right, but I want to raise the possibility that we are coming to the end of an era, not just a transition between cycles.” I based that suggestion on several far-sighted books of the 1980s, such as Christopher Chase-Dunn’s Global Formation: Structures of the World Economy, and James Robertson’s Future Work: Jobs, Self-Employment and Leisure after the Industrial Age.

Mason’s position is basically the same. The new cycle that has begun without yet coming to fruition represents a more fundamental threat to capitalism. That would explain why resistance is so strong, and why capitalists would prefer to export existing forms of production to other countries rather than improve upon them at home.

Continued