Capitalism: a failing system

A new book, The Rise and Fall of American Growth, analyses the downward course of the US economy – and the limits of the whole capitalist system

A new book, The Rise and Fall of American Growth, analyses the downward course of the US economy – and the limits of the whole capitalist system. From the boom years to today’s slow growth and stagnant wages, the obscene wealth at the top and company cash piles, to capitalism’s inability to harness new technology fully. It all points to the need for socialist change, writes PETER TAAFFE.

The Rise and Fall of American Growth: the US standard of living since the civil war

By Robert J Gordon

Published by Princeton University Press, 2016, £27.95

The title of Robert J Gordon’s impressive book, The Rise and Fall of American Growth, explains everything he wants to say about the past and future prospects for capitalism. If he is right – and we believe he is – then prospects for the US, and thereby the world because it is still the biggest economy, are indeed bleak. This and other critical works – see reviews of The Zero Marginal Cost Society (Jeremy Rifkin) and PostCapitalism (Paul Mason) in Socialism Today, issues 183 and 191 – have been prompted by the clear failure of capitalism to deliver jobs, wealth and a sense of wellbeing and optimism for the future, not just in the US but internationally. Leon Trotsky’s prognosis, which he applied to Britain in the past, about “the religion of capitalist progress” being decisively over, is as relevant, if not more so, to the US today.

This book does not deal directly with the current economic conjuncture, but is organically linked to it. The clear implication is that the world is looking at a prolonged period of stagnation at best. Facing a repeat of the 2007-08 crisis – already indicated by the tremors in China and on the world’s stock exchanges – capitalist institutions such as the International Monetary Fund (IMF) are desperately searching for measures to avoid this. Global growth prospects have been drastically reduced as the IMF’s earlier estimates of 3.5% for 2016 have been trimmed to 2.5% and could go lower. The IMF has characterised economic prospects as the ‘new mediocre’ of persistent low growth, with the attendant economic social and political consequences that flow from that. This is also a theme of Gordon’s book. If global growth falls back to 2%, the world will be technically in recession, the economic ‘experts’ inform us.

In order to avoid this, Christine Lagarde, the IMF chief, out of one side of her mouth demands ‘growth’ through the rapid introduction of ‘anti-austerity’ measures by governments. Meanwhile, from the other side, she supports vicious austerity in Greece and other countries. The Greek government is currently attacking pensions – up to now, the last lifeline of millions of impoverished workers and their families – and has approved a devastating privatisation programme involving airfields and ports being sold off to international financial sharks. Lagarde questions ‘the norms of international institutions’, demands that the US, in particular, should immediately raise the minimum wage, and even criticises Germany because it is not pursuing ‘fiscal expansion’.

Moreover, with the release of the unprecedented Panama papers – millions of documents involving 200,000 companies – there is a rising clamour against the searing inequality which has been revealed. The deception and corruption of the bourgeois are typified by prime minister David Cameron, whose reign has seen a record increase in the numbers of poor and a huge increase in food banks, while he and his government of millionaires think there is ‘nothing wrong’ with salting away ill-gotten gains in secret offshore accounts. As the American comedian, Chris Rock, once said: “If poor people knew how rich rich people are, there would be riots in the street”. Cameron is no different to the corrupt oligarchs in the ‘underdeveloped’ world who have been responsible for a staggering $1 trillion leaving poor countries each year for ‘tax havens’, described by the Financial Times as ‘getaway cars’!

Skyrocketing inequality

A new crisis will compound the anger of the masses at this colossal inequality, which is a world phenomenon, and put socialism back on the agenda. Gordon charts this process, which is now familiar to most. Nonetheless, the figures he gives are absolutely stunning. In contrast to the post-1945 period of the so-called ‘great compression’ – when the differences between the top and bottom in society were large but nowhere near as great as they are today – we are now confronted with a ‘wealth gap’ of Grand Canyon proportions.

Gordon comments: “Even within the top 1%, income gains are much faster the higher one rises into the stratosphere of the top 0.1% and the top 0.01%”. This 0.01% is probably the 62 rich individuals – who could get into a London bus – who have an income equivalent to 50% of the world’s population, or 3.5 billion people! One of the ways the American and world bourgeois have been able to get away with this is through the weakness of the trade unions in the US and worldwide, combined with the cowardice of the trade union leadership internationally, who have been incapable of standing up to and defeating the onslaught against the working class.

Even the language used indicates the underlying class antagonisms which have always been present in the US, despite the fact that the ruling class up to recently denied that there was even a working class in the country. Everybody was supposedly ‘middle-class’. Yet Gordon describes the ‘Detroit consensus’ of the late 1940s. This was an agreement between ‘labour and capital’ that resulted in “highly progressive taxes, with 90% marginal tax rates for top bracket earners in the 1940s and 1950s, which sent a signal that high incomes were ‘unacceptable’.”

That was in direct opposition to the neoliberal ‘Washington consensus’ of the early 1980s, initiated by president Ronald Reagan. As a result of the neoliberal, anti-working class programme he presided over, CEO ‘compensation’ – inflated salaries – surged ahead, from 20 times the average worker’s pay in 1973 to 257 times higher in 2007, when the average ‘worth’ of a company CEO had reached $10.5 million.

A particularly blatant example was the chief of the Target company. He was replaced in May 2014 after a massive credit-card hacking scandal, yet received a retirement package of $47 million, about 1,000 times the average balance that workers at Target had saved through the company’s pension plan. Gordon also points out: “The Caterpillar Corporation has become a poster child for rising inequality. It has broken strikes in order to enforce a two-tier wage system in which new hires are paid half of existing workers, even though both groups are members of the same labour union. In contrast, there was an 80% increase during 2011-13 in the compensation of Caterpillar’s CEO, whose quoted mantra is ‘we can never make enough money… we can never make enough profit’.” This skyrocketing worldwide inequality, including drastically reduced real wages, has acted to severely cut ‘demand’, as we have pointed out many times, thereby enormously compounding the problems of capitalism.

Industrial revolutions

However, the central theme of Gordon’s book – an analysis specifically of the US – is that latter-day capitalism no longer has at hand the technological means of revolutionising the means of production compared to the past. What Gordon and others call the ‘special century’ – 1870 to 1970 – represents the high point for US growth, powered by truly revolutionary inventions arising from the first and second industrial revolutions – approximately, 1760-1840, and 1870-1914. What followed was meagre growth, at best, accompanied by persistently low productivity (output per worker), which continues today and will remain so in the foreseeable future.

The shocking drop in productivity growth, which forms an important part of Gordon’s analysis, indicates a deep crisis for capitalism. “All economy comes down in the last analysis to an economy of time”, wrote Karl Marx. The only justification for capitalism – its ‘mission’ – is that it did perform this task by raising productivity in the past, leading to the development of the productive forces. But, as the author shows, it is no longer capable of doing so. Gordon concedes that, since the end of the ‘great leap forward’, which he maintains came to an end in the 1970s, there have been bursts of growth and increased productivity – for instance, during the dotcom bubble which burst in the early 2000s. As Gordon persuasively argues, however, these have been short-term, confined to a few industries and unsustainable.

Although not a Marxist, he empirically comes to the same conclusion as the Socialist Party and Socialism Today in the 1990s, when some hailed the ‘digital revolution’ and the new technology associated with this as heralding a ‘new economic paradigm’. This, they argued, would result in a long-term boost to capitalism. In opposition to this idea, we wrote in June 1999: “The average growth in productivity is less than it was in the 1980s, which in turn was less than it was during the structural upswing of capitalism between 1950 and 1975”. (New Technology and Globalisation: Can a Capitalist Slump Be Avoided? – This is, in essence, what Gordon explains in his book. We argued that new technology was concentrated in some industries, such as information technology, and was not capable of an overall ‘revolutionising’ of production. It could not have similar effects as the first and second industrial revolutions.

Gordon confirms this when he contrasts the past to the present: “The year 1870 represented modern America at dawn. Over the subsequent six decades, every aspect of life experienced a revolution. By 1929, urban America was electrified and almost every urban dwelling was networked, connected to the outside world with electricity, natural gas, telephone, clean running water, and sewers. By 1929, the horse had almost vanished from urban streets, and the ratio of motor vehicles to the number of households reached 90%… This epochal transformation began slowly, and its pace picked up after 1900 as electrification and the motor vehicle spread rapidly… Electric light, the first reliable internal combustion engine, and wireless transmission were all invented within the same three-month period at the end of 1879. Within the same decade, the telephone and phonograph were also invented. The second industrial revolution was on its way to changing the world beyond recognition”.

Equally, the transformation in diet, and improved production and sale of food, were exponential. Prior to this, even in the wide-open spaces of the US, there were urban ‘nightmares’ – similar to those in Europe, graphically described by Marx in the chapter on the working day in Capital. In terms of squalor, New York and Chicago were similar to London. This actually resulted in a reduction in the average height of people in the US in the 19th century.

Gordon quotes liberally from Upton Sinclair’s description of the Chicago meat ‘trade’ – in his monumental novel, The Jungle – to illustrate the hellish conditions of many US workers at that time. In fact, there is fascinating detail in every one of the chapters in this lengthy book which are invaluable in providing new insights into the evolution of US society, the labour movement and the rhythm of historical development.

However, because Robert J Gordon is not a Marxist, he never really explains the material base for these ‘revolutions’ and why they took place at each stage. It was the development of capitalist industry which drew the rural population and immigrants into the towns. Together with the lust for profit by the capitalists and, as a consequence, the intense competition arising between them, this drove the search for new inventions and their application. But, as Gordon demonstrates, it took a considerable time for these inventions to be applied by the capitalists. Only towards the end of the ‘special century’ were electricity and cars available to most people. Contrast this with today. The first smart phone was sold in 2007, yet there are now 1.5 billion of them in use around the world.

Moreover, Gordon is a capitalist economist. So he charts the historical development of the system but is, ultimately, incapable of seeing beyond the limits of capitalist private ownership and the nation state. He does not give a full explanation of why there are barriers on the full application of new technology now – even though he describes them empirically very well.

Boom-time to slowdown

The lust for profits – “the werewolf-like hunger for surplus value”, as Marx described it – is the raison d’être, the driving force for capitalism. This prompted the search for new profitable inventions and their application. The situation following the ‘special century’ was entirely different. From the 1970s, capitalism failed to repeat the spectacular economic achievements of the preceding period, particularly those between 1950 and 1975.

In fact, the seeds of the devastating economic crisis of 2007-08 were laid after 1975 and were reflected in the ‘depressionary’ tendencies manifested then: generally lower growth and a contraction in productive industries, particularly in manufacturing. Gordon reveals that US manufacturing now makes up roughly the same percentage of gross domestic product as in Britain, down to 10%. With this has come the drastic undermining of jobs, through offshoring, the creation of the ‘rust belt’ and the decline of living standards.

He details the impressive gains by the working class in the US, even in the latter part of the 1930s following the great depression: “Real wages grew faster than output per hour – that is labour productivity – before 1940 but more slowly thereafter, particularly after 1980”. He recognises that the upward curve in living standards was halted by the great depression but began to recover partially in the late 1930s. Then, in the 25 years after the second world war, “benefits spread to the entire population. Working hours decreased in general from 60 hours a week to the normal 40-hour week”. He observes that “not all of human history, either before or since, combined so many elements from which the standard of living increased as quickly and in which the human condition was transformed so completely”.

For millennia, the economic forms of society meant that the overwhelming majority wanted for the basic needs of food and shelter. Between the fall of the Roman empire and the Middle Ages there was no substantial improvement. Then it increased slowly: “England’s per capita income doubled between 1300 and 1700 – the rate so slow as to be imperceptible. Life for most people was unimaginably stunted”.

Gordon argues: “The extent of change created by the modern conveniences to the American home, together with the transportation revolution made possible by the internal combustion engine, radically improved the standard of living through a series of changes that could happen only once”. This transformation was so vast and on such a scale, feeding through to Europe and the rest of the world, that it resulted “in the highest living standards in history”. Future technological improvements would pale before them. The latter’s qualitative change – intensive in some fields (notably in information technology), rather than extensive as before – was less life-changing and is summed up in the quip, ‘Which would you first give up, your iPhone or the flush toilet?’

Moreover, the slowdown in productivity growth is reflected in the drop in US household income, argues Gordon. In 2014 in the US, median household income was over $50,000. Had the pre-1970 productivity growth been maintained, it would have been over $97,000. Gordon concludes that the “decline in productivity growth by almost half reflects the ebbing tide of the productivity stimulus provided by the great inventions of IR#2 [the second industrial revolution]. Its successor, the ICT-orientated IR#3, was sufficiently potent to cause a revival… during the decade 1995-2004. But the power of ICT-related innovations to boost productivity growth petered out after 2004. For the decade 2005-2014, average trend productivity growth was just 1.3% and by the end of 2004 had reached only 0.6% per year”. He quotes the work of another economist, Robert Solow: “We can see the computer age everywhere but in the productivity statistics”.

These are not dry-as-dust statistics but help to explain the profound changes in the conditions of the American people arising from capitalism and its economic decline. This is fuelling the revolt taking place in the US today – symbolised in the muffled class discontent behind Bernie Sanders’ presidential campaign affecting not just the working class but big sections of the middle class as well. No matter how things pan out in the presidential elections, things will never be the same again.

Students are crippled collectively with $1.2 trillion of debt, some of them being compelled to attempt to pay this off at $400-$500 a month. US educational achievements have slumped. The parents of students forced to help them through college are angry for their children and because of the change for the worse in their conditions and life prospects. The mass anger is deepened by the awareness of the colossal advantages today of new technology and yet the impossibility of these being used to lighten the burden of workers and improve living standards. But it doesn’t have to be like this.

Harnessing technology

Capitalist economists, particularly when approaching new technology and its application, are broadly divided three ways. There are the techno-optimists, who fully anticipate huge benefits accruing from its application within the framework of capitalism. They expect that human beings will be freed from humdrum tasks and lead a more fulfilling life through the pursuit of art and culture. Then there are the pessimists, who expect mass unemployment and joblessness to result from technological breakthroughs. Those like Robert J Gordon occupy a position in between these two camps. They say that substantial and rapid growth is over and that all we can expect is limited development and economic stagnation.

Undoubtedly, there is a real possibility that the application of new technology – which, through the introduction of robotics, already significantly affects workers, not only in ‘lights-out’ production – can also lead to growing unemployment in what were formerly ‘middle-class’ jobs. This is a factor in provoking mass opposition to capitalism, indicated by the rise of the Occupy movement and now by the deepening anti-capitalist mood. The argument of the ‘optimists’, that jobs will be created to fill the gap for those lost through the introduction of new technology, is overly optimistic.

It is true that agricultural labour was replaced by the creation of millions of industrial jobs during the spectacular upsurge of capitalism. But, on the basis of present-day crisis-ridden capitalism, it is unlikely that the same thing will happen today. True, some new jobs will be created in robotics, and in building and maintaining new technology. But these are unlikely to be enough to prevent rising unemployment. Other trends within capitalism will reinforce this, as Gordon recognises, particularly because of the cuts in living standards which, in turn, will cut ‘demand’. This means there is no real productive outlet for the capitalists to invest in, their growing profits leading to a spiral of decline. This stagnation of capitalism is manifested in the more than $7 trillion which presently lies fallow in the ‘savings’ – idle profits – of the big banks and monopolies worldwide.

On the other hand, however, Gordon is mistaken when he concludes that, because there are no ‘big inventions’ immediately to hand that can perform the economic revolutions of the past, we cannot fundamentally alter the situation. There is sufficient new technology – through robotics, in health, gene and green technology, and to secure a shorter working week, etc – to free humankind from poverty, war, disease and environmental disaster.

But this can only be properly achieved on the basis of liberating the productive forces through the socialist revolution. There is every reason to believe that, on the basis of a socialist reorganisation of society, the results would equal – indeed, significantly exceed – the most spectacular deeds of capitalism in driving industry and society forward. Democratic socialism worldwide is the real answer to the issues posed in Gordon’s important book on how to harness technology for the good of all.

Systemic limits

His programme for the here and now is very limited. Like Thomas Piketty before him – in Capital in the Twenty-First Century (see: Thomas Piketty, the new Marx? The Socialist, No.816) – he decries the scale of inequality. Ultimately, however, he accepts it because he does not argue against capitalist ownership and control. Instead, he is for limited reformist measures along the lines of Franklin D Roosevelt’s New Deal in the 1930s.

Gordon demonstrates the crucial character of Roosevelt’s measures in laying the basis for the ‘great leap forward’ in post-second world war capitalism. This was through state intervention, investment in infrastructure, the minimum wage, and so on – measures which, the IMF states, need to be repeated. It stands in marked contrast to today’s brutal austerity. These measures – together with the harnessing of new technology, plastics, etc, which had largely laid dormant in the 1930s – could only be applied fully in the new situation in the US, Europe and the world after the destruction wreaked by the war.

Today, however, along with the IMF, Gordon comes up against the limits of capitalism in this era. At the time of the New Deal, US capitalism, with its ‘plump savings’ and privileged economic position, was in a position to take serious state measures to alleviate the crisis. Even then it was running out of steam and faced another serious downturn by 1938, partly brought on by a premature increase in interest rates in 1937. This was much like the eruptions on the world’s stock exchanges after the US Federal Reserve recently introduced a small increase in interest rates. The war preparations cut across the looming crisis and, indeed, laid the basis for the US and the world economies’ turbocharged post-war growth.

Today, there is a bigger barrier to a serious Keynesian policy, even in the US, particularly because of the huge debt hangover from the 2007-08 crisis. Accumulated world debts presently stand at over $200 trillion, three times world GDP! Any new stimulus measures, arising from significantly increased state expenditure, on a scale able to begin to solve the endemic problems of capitalism, would add considerably to this debt, most of which will never be repaid. This in turn could lead to a new financial crisis, which could precipitate a collapse along the lines of 2007-08. It is a measure of the panic in the ranks of bourgeois economists and strategists that they are prepared to risk this, with the IMF’s call for more ‘stimulus measures’.

In reality, the parlous state of world capitalism – illustrated by this book, notwithstanding the lectures of Christine Lagarde, the IMF chief – precludes a programme on a scale big enough to solve the underlying problems, and which are leading to a mass revolt of youth and workers, as events in the US, France, Africa, Latin America and elsewhere indicate. The real programme of the bourgeois for the coming period was outlined by the head of Prudential at the World Economic Forum in Davos, in 2012. He branded the minimum wage legislation across Europe “an enemy of young people and a machine to destroy jobs”. Robert J Gordon’s book provides sufficient ammunition to show the colossal problems facing capitalism. Only through socialism, organised and run democratically by working people, will it be possible to utilise the full benefits of new technology.

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April 2016