“On Guard”

The labour extraction problem facing employers requires them to invest in often-expensive systems of monitoring, supervision, and discipline. That effort can itself consume enormous resources – and this constitutes a substantial inefficiency in the overall economic system.

US economists Arjun Jayadev and Samuel Bowles have attempted to measure the amount of real effort required to monitor, supervise, discipline, and frighten workers in the US economy. This includes supervisors, monitors, security guards, police and military personnel, prison guards (as well as prisoners), the unemployed (who discipline other workers through their own visible hardship), and others. They come to the surprising conclusion that one-quarter of all working-age adults in the US economy are engaged in one or another of these “guard” duties. More equal societies don't need to devote as many resources to keeping the less-well-off in line; they estimate that in Switzerland, for example, only one-tenth of workers serve guard functions. Too much reliance on the stick, and not enough on the carrot, undermines real productivity and well-being.

That’s why the stick, not just the carrot, must always be present, and the biggest stick of all is the threat of dismissal. Employers crave the power to fire workers whose performance is judged inferior – not just to be rid of those particular workers, but more importantly to motivate and discipline the rest of the workforce. Indeed, in the eyes of the boss, provisions limiting their power to fire indiscriminately are among the most hated features of union contracts; by the same token, winning some protection against arbitrary dismissal is one of the greatest benefits of belonging to a union. But to make the threat of job loss meaningful, several conditions must be met:

• Employers must have the legal and contractual right to fire staff. Even if they don’t use that power often, it has to be there (to motivate frightened workers).
• Employers have to be able to distinguish well-performing workers from undesirable workers. So employers spend heavily on supervision and monitoring systems – everything from shop-floor supervisors looking over workers’ shoulders, to sophisticated electronic monitoring technologies (which can measure the speed of cashiers and typists, spy on telephone and e-mail conversations, and track the precise location of drivers and couriers).
• Losing one’s job must impose a major cost on fired workers, so that the fear of being fired elicits the desired discipline and compliance. The out-of-pocket loss that a fired worker incurs is called the COST OF JOB LOSS. It depends on several variables: how long they can expect to be unemployed (before finding another job), what (if anything) they receive in unemployment insurance benefits while they are jobless, and how the wages and benefits at their new job compare to what they earned in their old job.

Whereas the rest of the world associates reproduction with love, commitment, fulfilment, and (of course) sex, economists view reproduction as a rather more dull undertaking. For them, reproduction is the economic re-creation of the human race. This includes the biological process of reproduction. But it also includes the sustenance, care, and training of people, so that they can lead fully productive economic lives. REPRODUCTION, therefore, is much more than making babies: it also means raising them, caring for them, and educating them. And it includes caring for the grown-ups, too: feeding them, providing them with rest and recreation, keeping them healthy and strong – and then sending them back to work, lunchbox packed, on Monday morning.

Most of the work that goes into reproduction occurs inside the home, away from the prying eyes of supply and demand. No money changes hands, no profits are made, and the value of output is not even counted in the GDP statistics. For this reason, most economists tend to ignore reproduction as a private, non-economic matter.

But this is a terrible mistake. The economics (and politics) of reproduction (broadly defined) have huge consequences for how the rest of the economy functions – everything from consumer spending to labour supply to education to pensions. The economics of reproduction are also essential to understanding economic inequality between men and women, and between different cultural and racialized groups.

There are only 24 hours in a day. Workers spend many of them in wage labour, trying to support themselves and their families. They spend several more caring for themselves – in essence, getting ready to go back to work the next day. And if they're lucky, they'll have a couple of hours left for relaxation and recreation.

So time is scarce and valuable. And businesses understand this. They try to reduce how much of your time they have to “pay for” – whether you are a worker, a customer, or an innocent bystander. In so doing, profit-seeking businesses “steal your time” ... and thus steal part of your life.

In the workplace, for example, employers minimize any non-productive time they must pay for. So workers are usually required to travel to, prepare for, and clean up after work on their own time, not the boss's time. While they are on the payroll, every possible paid minute is monitored and dedicated to production. Outside of the workplace, businesses regularly waste the unpaid time of customers or potential customers: putting customers on hold for long periods of time, forcing customers to wait in line, selling products that require many hours to assemble, interrupting homelife with unsolicited phone calls. All this wasted time may be “free” from the perspective of a company, but it’s invaluable to busy families. What would happen to capitalism if companies actually had to pay people for all the time they currently “steal” without payment?

The economic activities of the household are fundamentally tied up with different economic roles played by women and men. For starters, the division of unpaid labour within the home is very unequal: women do more of this work than men, they perform different types of unpaid work (more caring, cleaning, and cooking), and the work they do generally has lower “status” and recognition. This division of labour reflects outdated, sexist attitudes that women are “naturally” better-suited to caring work (based, in part, on the fact that they give birth to babies), and that men shouldn’t have to do so much around the home since they work outside of the home. This sexism is reinforced by a complex mixture of tradition, religion, economic pressure – and all too often by violence.

The inequality of men’s and women’s labour market experience reinforces, and is reinforced by, the inequality of their economic position within the home. Women usually earn less than men, and so some families make a supposedly “rational” choice that the woman should stay home to care for children (since her foregone wages are less than the man’s). The lack of affordable and quality child care services in most countries plays a negative role in these decisions, too. Then, because men work hard in their paid jobs, many refuse to do their share of work at home. (This argument doesn't seem to work for women: women with paid jobs still have to work their “double shift.”) The fact that women’s career paths are often interrupted by childbirth, child rearing, or other domestic duties (like caring for sick or elderly family members) further undermines their ability to advance their careers and earn higher wages, reinforcing all of the above trends.

There has been incremental progress toward greater economic equality for women in most developed economies, but it hasn’t come easily. Most women now participate in paid work, and PARTICIPATION RATES (which measure the proportion of working-age persons in the paid labour market) for men and women are converging. …this is partly because men's labour market participation declined somewhat under neoliberalism (due to deteriorating job conditions).

Recall that we identified two broad kinds of consumption: workers’ mass consumption and capitalists’ luxury consumption…. Mass consumption tends to equal workers’ wages…. Unlike workers, however, capitalists have a meaningful choice regarding how to spend their income: on luxury consumption, or reinvesting in their businesses. How much they consume, and how much they invest, will influence how strong the economy is today, and how fast it grows in the future. In earlier times, frugal capitalists tended to reinvest most of their profits, and hence capitalism developed quickly.

Today, however, capitalists consume much of their profit (or find other unproductive uses for some of it, like financial speculation), and this has been associated with a visible slowing of business investment during the years of neoliberalism. Indeed, if the goal of neoliberalism was to strengthen investment and growth, then it has clearly failed: despite new powers and freedoms, the world’s capitalists invest less of their profit than in previous epochs.

Apple Inc. is the world's largest supplier of personal electronic devices – and the most valuable corporation on the planet (its stock market value surpassed US$700 billion in 2014). Every year Apple releases new versions of all of its popular phones, tablets, and pods. Certainly, each incarnation contains some novel technical features – but last year’s edition still works. So how does Apple convince consumers to dispose of almost-new products, and shell out several hundred dollars for a “hot” new one?

Of course, perceived social status, cultivated through clever advertising plays a key role (that strategy is common with all “trendy” products, from jeans to watches to cars). But Apple has also perfected a more nefarious corporate strategy, called “planned obsolescence,” to boost sales even as its market becomes saturated. Planned obsolescence uses minor and artificial modifications to products, so that older vintages (with years of useful life ahead of them) become less desirable or even un-usable, and consumers are pressured to buy new ones. Updates to previously-purchased operating systems (which Apple automatically downloads to your device over internet and wireless connections) can cause older equipment to slow down dramatically. Batteries in Apple phones wear out after a few hundred charging cycles, but cannot be easily replaced. (In fact, the company uses unique proprietary screws and closures which prevent average consumers from even attempting simple repairs like changing the battery.) Repeated and inexplicable changes in peripheral devices and connectors (like power sockets and docking ports) further compel consumers to buy new equipment- but special programming chips prevent consumers from using cheaper peripherals made by other companies. Meanwhile, the careful integration and synchronization of proprietary programs and services (like calendars and contact lists, data storage, and music) discourages consumers from ever switching to alternative hardware. All this makes it all the more likely that consumers, confronting a dead battery or a slow application, resign themselves yet again to just buying a new one.

Capitalism has a “throw-away” mentality that pervades many industries, driven by the profit motive of private production. Globalization reinforces this wastefulness: manufacturers utilize ultra-cheap labour in poor countries to reduce prices for new products, making it economically unattractive to perform even simple repairs on existing equipment. Consumer frustration is not the only consequence of planned obsolescence; overflowing landfills is another.

The seemingly impersonal logic of competition has been “internalized” by many working people. Many will grudgingly accept painful changes – even the loss of their jobs – if they seem to be the result of competitive, impersonal “market forces.” If a politician decided their factory should close, workers would immediately protest; but when so-called “markets” decide a factory should close, this is somehow accepted as legitimate. Individual workers rarely have any meaningful influence over the fate of the company they work for, so they shouldn't take its failures (or its successes, for that matter) personally. Nevertheless, the anonymous and seemingly neutral pressure of competition is an effective “screen” to justify incredible social pain and dislocation. If a company folds and all its workers lose their jobs, it's often accepted as fair because “they just couldn't compete.” However, we should never forget that “market forces” are not anonymous or impersonal. This is just another name for the efforts of different companies (and their owners) to boost their profits at the expense of others. Competition is not a natural or inevitable force, it does not (in and of itself) justify anything, and people whose lives are damaged because of it should feel fully justified to complain and resist.

In general, because of all these positive “spin-offs” from investment spending, the broader economy has more at stake in strong business investment than business itself does. In economic language, the social benefits of investment spending are greater than the private benefits (that is, the profits that private companies expect when they make an investment).

This is why governments regularly implement measures aimed at stimulating more business investment. Some of these measures have been more effective than others. Policies which reward savings and the financial industry in hopes of boosting real investment are generally very ineffective. On the other hand, policies which directly stimulate real capital spending by businesses (such as investment tax credits and targeted investment incentives) can be more effective. Simply fattening profit margins (for example, by cutting corporate income taxes - as most countries have done under neoliberalism) seldom works, either. Eventually, if efforts to entice more business spending are unsuccessful, governments and communities must learn to supplement or replace profit-driven business investment with other forms of investment (including through public and non-profit models for investing in infrastructure, service delivery, and even goods production…

The dependence of investment on broader socio-political factors has caused longer-run fluctuations in investment – like the 25-year postwar boom in private investment that drove the Golden Age expansion, and the subsequent downturn in investment spending that accompanied the turmoil and retrenchment of the 1970s and 1980s. It also poses a major hurdle for progressive efforts to challenge the dominance of private business over our economy and society. If it appears that a radical social change movement might be successful in a particular country, private investment spending will likely decline quickly. The economy then deteriorates before the challengers have even implemented their own policies. This is why many left-wing political leaders go out of their way to “reassure” investors of their non-threatening intentions long before ever getting elected. (Unfortunately, catering to business in this way creates its own political problems, by undermining the movement's subsequent ability to implement any change at all.)

Whatever the reason, it is clear that the link between current profits and future investment has been seriously weakened. This badly undermines the logic of “trickle-down” economics: namely, that enhancing the profits of companies and their owners will stimulate more investment, more jobs, and higher incomes throughout the economy. In fact, further increases in business profits will likely have little impact on investment at all, given the mountains of idle cash which corporations are already accumulating.

It may even be that many capitalists have lost the primal hunger to expand their wealth at all costs – and are instead content to sit back consuming a larger share of it (in luxurious style), or simply hoarding it away. Once upon a time, this hunger (which Keynes famously referred to as the “animal spirits” of capitalists) was the driving force that made capitalism a dynamic and creative system. If that hunger has indeed abated, then capitalism’s fundamental legitimacy as an energetic and progressive force may be threatened. And an important opening will be created for alternative economic visions – offering more convincing ideas for how to mobilize investment to meet our many economic, social, and environmental needs.

Conventional economists have given a name to this ongoing unemployment. Monetarists like Milton Friedman misleadingly termed it the NATURAL RATE OF UNEMPLOYMENT: a term that deliberately reflects their bias that governments shouldn’t do anything about it, since unemployment is only “natural”. Somewhat less ideologically, other economists call it the NON-ACCELERATING INFLATION RATE OF UNEMPLOYMENT (or NAIRU, for short). The theory suggests that if unemployment falls below this threshold, wage pressures will be passed on by companies in the form of inflation. (In fact, while inflation is one possible outcome of the tension between workers and employers in a low-unemployment environment, it is not the only possible outcome. And while wages that grow faster than productivity can be one source of inflation, they are not the only source of inflation, nor even the most important source.)

Many neoclassical economists have tried to identify the precise level of the NAIRU, using sophisticated statistical techniques. These efforts have failed, and it is now widely accepted that the NAIRU is neither constant nor measurable; it's credibility as a guide for interest rate policy has evaporated. Today, modern central banks tend not to target a specific NAIRU in their efforts to regulate labour markets. But they still explicitly believe the system needs a certain degree of unemployment to restrain wages, and they act forcefully when needed (with higher interest rates) to maintain that cushion.

NAIRU [Non-Accelerating Inflation Rate of Unemployment] advocates interpret all of these factors as sources of “inflexibility” in labour markets. They argue that weaker unions, workplace protections, and social benefits will allow labour markets to function more “efficiently” (that is, profitably) with a lower long-run level of unemployment. They have thus pushed strongly for policies to enhance what they call labour market “flexibility.” This term is another deliberate, highly ideological misnomer. In fact, there are many ways in which a highly disciplined labour market is quite inflexible: for example, insecure workers are less likely to quit jobs they aren't well-suited for. The real issue is not flexibility (in the common-sense meaning of being able to adapt to change); the real issues are power and discipline.

Perhaps the most important economic link between lower wages and higher employment is the indirect, policy-driven relationship between wage trends and central bank behaviour [“raising interest rates to re-establish enough unemployment to restrain wages and reinforce labour discipline”]. Central banks tightly control the pace of job-creation to keep a lid on wages and protect profit margins. If wage demands are weak, for whatever reason, then bankers may allow the economy to expand a bit further. This whole relationship is rooted in the belief of central bankers that wage pressures are the dominant source of inflation, as well as their assumption that there are no other possible ways of attaining low inflation and low unemployment at the same time.

Buy My Cars

“The commonest laborer who sweeps the floor shall receive his $5 per day. We believe in making 20,000 men prosperous and contented rather than follow the plan of making a few slave drivers in our establishment millionaires.”

Henry Ford, US industrialist (1914).

Henry Ford’s decision to pay assembly-line workers a relatively high wage is often interpreted as a symbol of “enlightened capitalism.” But his strategy was really motivated more by sophisticated self-interest than by generosity: to attract and motivate high-quality workers, he paid what economists now call an “efficiency wage” – far higher than the “going rate” in the labour market. But wouldn’t paying higher wages also help Ford sell more cars? Not directly: after all, only a tiny share of the total output from his fantastic new factories was purchased by people who actually worked there. Sadly, Ford’s approach to labour relations has gone out of vogue as the US economy becomes steadily more desperate and unequal. Indeed, starting in 2007 the Ford company won agreement from its hard-pressed union to pay newly-hired autoworkers as little as US$14 per hour (or $112 for an eight-hour day). Incredibly, adjusted for 100 years of inflation, Ford’s original $5 per day back in 1914 was a higher rate of real daily pay (now worth about $120 per day at today's prices). So despite incredible advances in technology and automation, today's newly-hired autoworkers make less than their counterparts did a century ago. And not many of them can afford to buy a new car.

A modern economy includes a huge variety of different jobs, offering different wages and working conditions. Neoclassical economists claim that all workers are paid according to their productivity; also, wage differentials should “compensate” workers for especially challenging or unpleasant work. In reality, however, workers who perform the most unpleasant, difficult, and challenging jobs also tend to be paid relatively low wages. The same power imbalances that push them into accepting the least desirable jobs, also constrain their ability to earn higher wages. Meanwhile, those with comfortable, rewarding jobs also tend to earn higher incomes – and none are higher than the salaries and bonuses received by top executives of companies. Think of a worker who performs a job that is dirty, difficult, or dangerous. Is their income higher, to compensate them for their challenging working conditions? How would you explain the difference between their income, and the income of chief executives? Is it due to productivity or difficulty? Or something else?

Economics is the study of work: what we produce. But it is also the study of who gets what, and what we do with it. Production and distribution are closely linked, since what we produce, how much of it, and how we produce it all depend on the distribution and final use of that output. Some reformers concede that capitalism is efficient and productive, and limit their ambitions to redistributing some output in order to attain a decent society at the end of the day. But for both economic and political reasons, production and distribution cannot be separated so easily. Pure redistribution is unlikely to permanently succeed, so long as the prior, fundamental inequality in economic power at the point of production (between those who own most wealth, and those who are employed by them do the work) is unquestioned. (member's italics)

Of course, investment income is concentrated among the wealthy households who own most financial wealth. Working households, on the other hand, receive most of their lifetime income from employment (supplemented, to varying degrees, by government income security programs). Thus there is a clear overlap between the distribution of income across factors, and the distribution of income across households – for the obvious reason that particular households rely on particular types of factor income. After all, economic classes exist precisely because identifiable groups of people play structurally different economic roles. Even among workers, however, inequality exists, and can rise or fall over time. Inequality between workers reflects differences in the degree of bargaining power which they wield in their respective efforts to attain work and negotiate decent wages, as well as the role of taxes and social programs in offsetting differences in household income between workers.

As the overall returns to capital have grown under neoliberalism, so too has the share of personal income captured by the very richest segment of society (namely, the ones who own most capital). This partly reflects direct capital incomes (like dividends, capital gains, and profits from privately-held businesses). But the super-sized compensation received by CEOs and other top executives is also, directly or indirectly, a payment to “capital” (even though it is usually counted as “labour income” in official economic statistics). After all, the most lucrative payments to executives are now stock options, equity grants, and other capital-related arrangements. And even when they are paid direct salary, multi-million-dollar CEO compensation is clearly driven by the overall profitability of the enterprise, not their personal “work”. So for both the major owners of capital, and the hired top guns who manage their companies, the growth of capital income has been the key source of their rising personal income in recent decades. Moreover, thanks to the preferential tax treatment of capital income that prevails in most capitalist countries (whereby dividends and capital gains are taxed at lower rates, if at all), the growth of capital income has had an even larger impact on the distribution of after-tax income.

“When the rate of return on capital significantly exceeds the growth rate of the economy, ... then it logically follows that inherited wealth grows faster than output and income ... Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labour by a wide margin, and the concentration of capital will attain remarkably high levels.”

Thomas Piketty, French economist (2014).

All this translated into a dramatic rebound in the share of total income taken home by the richest part of society. This rebound was particularly dramatic in the US, where the richest 1 percent of society once again now receive as large a share of total income as in the 1920s. The huge stock market losses incurred by the wealthy during the 2008-09 financial crisis was only a temporary setback for this concentration of income. After 2010 (as stock markets bounced back, but labour markets remained mired in underemployment and austerity), the rich once again captured far more than their share of whatever new income was generated by an anaemic recovery. In fact, by some measures the richest 1 percent of Americans pocketed all of the personal income gains generated in the US economy in the first several years of recovery after the meltdown.

Poverty can be measured in different ways. The extent of poverty varies greatly across the advanced economies. The US experiences the worst poverty among major developed economies…. It has the weakest unions and labour market protections, and relies more on low-wage jobs. Not coincidentally, it also has the weakest social programs (to supplement low-wage incomes, and support those who are not employed). Anglo-Saxon economies (like Australia and Canada), Asian economies (Japan and Korea), and Mediterranean countries (like Spain and Greece) also have relatively high poverty rates.

In contrast, the Nordic and some continental European economies demonstrate much lower levels of poverty. Denmark has the lowest rate of poverty of any developed capitalist country, barely one-third the US rate. This indicates that there is nothing inevitable about poverty, despite the seeming universality of neoliberalism. Countries which invest in social programs, labour market supports, income security programs, and other proactive measures can continue to generate good jobs, protect those without work, and achieve very low rates of poverty.

…new medical research has documented numerous consequences of relative poverty for human health. Feeling that one is somehow inferior or short-changed relative to the rest of society produces significant stress (experienced physically as well as emotionally). This stress can be measured empirically (through tests for stress hormones, glucose, or white blood cells – all of which are released by the body in response to perceived threats). While these short-term stress responses (rooted in our evolutionary “fight or flight” instinct) help humans deal with immediate danger, long-run and chronic stress is damaging in many ways. It has been shown to cause heart disease, obesity, diabetes, mental illness, and many other health problems.

Health statisticians have known for years that these conditions are all strongly correlated with low income. But now we know this correlation is not primarily the result of the personal lifestyle choices or “bad habits” of poor people. A long-term self-conception as disadvantaged, inadequate, or underachieving compared to others (especially when experienced from an early age) can cause measurable health damage – no matter how self-disciplined and nutrition-conscious an individual may be. The true culprit is an economic and social system which re-creates and glorifies wealth and conspicuous consumption, while simultaneously handicapping the self-worth of so many.

Different poverty measures produce very different estimates of poverty. The US government uses an absolute threshold for its official poverty statistics – one that has not been updated (other than for simple inflation) since 1964. By this measure, poverty in the US has been fairly steady over the past half-century, fluctuating between 12 percent and 15 percent (it increased to 15 percent after the 2008-09 recession). This implies that the absolute living standard of the poorest Americans has not changed at all in the 50 years since that benchmark was determined (a shocking result considering all the technological and productivity improvements experienced in that time). Using a relative poverty measure (such as the proportion of population receiving less than 50 percent of the median income – a common international standard), US poverty is even higher (17.4 percent in 2012). In 2012 an estimated 28 percent of employed Americans earned wages below the absolute poverty threshold for a family of four, so even among employed people poverty is a serious problem.

Another dimension of recent inequality research has shown that inequality tends to become self-reinforcing over time, in the absence of countervailing efforts to reduce income gaps. The bigger are the differences between income groups, the more effort do higher-income people put into protecting their own privilege, and ensuring that their advantages are inherited by their children. These efforts (like building gated communities, or paying for private schools, or even voting against income support programs for poor people) may seem rational for well-off families. But they are unproductive (not to mention unethical) from the perspective of the whole economy. One immediate consequence of this perverse, self-reinforcing tendency is that poverty tends to become geographically concentrated (in very poor neighbourhoods) whenever inequality is worse. That makes it even worse for poor people, because now they must confront not only their own poverty – they must also grapple with the consequences of their neighbours’ poverty (experienced through crime, dysfunction, and social exclusion).

Precisely because of these barriers to social mobility (erected to protect privilege and keep the poor at a safe social and physical distance), the more unequal is a society, the less mobility there is between classes. For example, the income ratio between the richest and poorest segments of society in the US is more than three times larger than in Denmark. Correspondingly, the correlation between a parent’s income and the income their child takes home later in life is also more than three times stronger in America than in Denmark (where a parent's income has only a minor impact on the income eventually earned by their children). Data from other countries confirms that very unequal societies experience much weaker social mobility. This evidence completely refutes the “Horatio Alger” myth propagated in US culture, which pretends that any poor person with a good idea and strong work ethic can climb to the highest rungs of society. To the contrary, poor people (and their children) tend to stay poor, while rich people wastefully expend real economic resources to ensure that they (and their children) stay rich. This confirms that once inequality gets going, it will get worse over time – unless we consciously and deliberately stop it.

Reversing that unacceptable and economically damaging trend [of inequality], therefore, requires confronting the major pillars of neoliberal policy – and the political assumptions and arguments that support it. Since most people depend on wage labour for their income, creating a lot more jobs would immediately and powerfully reduce inequality; that’s why inequality fell so dramatically during World War II. Instead of suppressing wages, disempowering unions, and facilitating PRECARIOUS WORK, higher wages should become the goal of economic policy, attained through institutional measures like higher minimum wages, restored collective bargaining, and other tools. Targeted efforts must aim to overcome the barriers associated with LABOUR MARKET SEGMENTATION (described in the next chapter), so all workers can share in the benefits of a broad employment- and wage-led expansion. Fiscal and tax policies need to reemphasize redistributive goals, while raising the necessary funds for the ambitious expansion of public investment and public programs that will be part of the overall job-creation effort.

As a result, clear patterns and divisions within the labour market emerge over time. This outcome is known as LABOUR MARKET SEGMENTATION. There's not one unified labour market where employers and workers all meet to strike a fair deal (as assumed in neoclassical theories). Instead, workers are divided into different groups, and informally but effectively assigned to different categories of jobs. And arbitrary distinctions between groups of workers (such as gender, race, ethnicity, and language) come to be associated with those labour market divisions – even though they have no bearing on the ability of those workers to actually perform their assigned jobs. Racist and sexist attitudes about the supposed “suitability” of different types of people for different jobs emerge to reinforce and “justify” those divisions in jobs and incomes.

Neoclassical economists argue that anonymous competition between employers should automatically eliminate any unfair distinctions and prejudices in the labour market. Employers should be anxious to hire from any group of workers that is systematically underpaid, since employing them is super-profitable (they’re as productive as other workers, but paid less); that drives up demand for the underpaid group until the wage gap disappears. But this theoretical faith in equality is not verified by real-world experience. In fact, far from equalizing outcomes and eliminating arbitrary divisions, employers actually appreciate these systematic fissures in the labour market, and work to preserve them. Economically, the existence of more desperate and hence cheaper pools of labour allows employers to exploit them more intensively: offering lower pay, demanding more discipline and work effort, and offering less security and stability. These vulnerable labour market segments also tend to experience the most precarious employment; last hired in an upswing, first fired in a downturn, denied the stability and predictability that comes from a permanent, regular job.

The impact of race on peoples’ day-to-day experiences reinforces the importance of racial and ethnic factors in their self-identities. In the US, for example, where racial identities (and racial divisions) are strong, researchers have noted that even “white” workers are more likely to define themselves according to their race, rather than their class – and hence are very susceptible to conservative messages disguised with racial cues and sub-texts. How convenient this is for an economic system which is organized, first and foremost, to sustain a deep structural inequality that is measured in dollar signs, not skin pigment.

Because racial and ethnic identities are so powerfully linked to economic inequality (indeed, that's largely why racial categories were invented in the first place), they hamper efforts by working people to win better jobs, security, and democracy. And racist ideas may be deliberately reinforced by employers who benefit from the resulting divisions among working people. Non-racialized (or “white”) workers clearly enjoy some benefits as a result of racial and ethnic segmentation in the labour market; after all, they have a better chance at attaining whatever few decent jobs are actually generated in the economy. Hence some may accept arguments that racialized workers should be kept “in their place.” When times are tough (such as during a long recession), right-wing forces deliberately foment racist responses, trying to divert workers' anger away from blaming capitalism, to blame racialized workers or immigrants instead.

Many economists argue that environmental problems reflect a “failure” or “imperfection” in the operation of free markets. The consumption of “free” natural resources, and the dumping of pollution (again for “free”) back into the natural environment, both impose real costs on those who experience its negative effects. But those costs are not paid by the offending company. They can consume natural assets, or dump pollution into the environment, without charge – due to the absence of regulations and the inability of affected people to collect compensation for the real costs they experience. In economics, this is called a market EXTERNALITY. Producers are able to avoid, or “externalize,” a real cost of their production, by treating the environment as a free source of materials and a free dumping ground.

Some environmentalists conclude, therefore, that the problem can be solved by correcting the market, and forcing companies to absorb (or “internalize”) the costs of pollution and natural capital. One method for correcting the market might be to impose special fees (such as a CARBON TAX on greenhouse gas pollution) on environmentally damaging activities. Another approach, called EMISSIONS TRADING, would cap overall pollution and then rely on supply-and-demand forces to determine the “price” of pollution. Many economists believe this market-friendly approach is more effective than simply mandating resource conservation or lower pollution through direct government standards or regulations.

However, we should be careful not to place too much faith in the efficiency of markets and competition. In reality, price signals (even “corrected” ones, incorporating externalities) are not always effective in changing behaviour in desired ways, Think of alcohol consumption: even in countries with high alcohol taxes, people still drink a lot, and alcoholism is still a problem. Relying on the price mechanism to reduce pollution also has negative distributional effects: the burden falls disproportionately on lower-income households, whereas well-off people or profitable companies can keep “buying” as much pollution as they want. Stringent pollution fees could undermine profit rates in some industries, with consequent implications for business investment spending (although they would also stimulate new investment in some other industries, like green energy production). This doesn’t worry free-market economists, who believe that market forces always automatically re-establish full employment and maximum prosperity; in the real world, however, demand-side problems like investment and unemployment are a constant concern.

Some environmentalists also hope that market forces will facilitate environmental progress through “green” choices by consumers. They urge consumers to purchase environmentally-friendly products – and assume that companies will respond to consumer opinion by improving their environmental performance. Some believe that consumers can also help by altering or “down-shifting” their lifestyles, spending and consuming less. All of these individual, personal decisions, presumably, will translate into a more sustainable economy.

Here, too, we must be cautious about crediting market mechanisms with more integrity and effectiveness than they deserve. Businesses shape consumer sentiment as much as they cater to it; they often respond to “green” consumerism with symbolic measures; many spend more money advertising the often-phony environmental virtues of their existing products, than investing in cleaner technologies. Sometimes consumers are presented with a genuine environmental choice: for example, buying an energy-efficient but more expensive home appliance. But most consumers will be attracted by a low up-front purchase price (often because of their limited income), rather than longer-term operating cost savings. Hence they will purchase the cheaper (but more polluting) product. This is why direct government energy efficiency regulations, which force industry to make less polluting products, are ultimately more effective.

EMISSIONS TRADING (or “cap-and-trade”) systems are favoured by neoclassical economists as a way to efficiently reduce pollution. The theory is elegant. First the government issues a limited number of pollution permits. The total permits issued equals the maximum amount of pollution that society is willing to tolerate. Permits may be given away or auctioned off to polluting companies. The total outstanding stock of permits might be reduced over time (to achieve gradual reductions in total pollution). Companies can then buy and sell the permits among themselves. The resulting market price for the permits supposedly represents the efficient “price” of pollution; in theory this should guide polluters in seeking the least expensive ways of reducing emissions.

The theory holds some promise, but there are many problems in practice – including that it allows companies to continue polluting so long as they’re willing and able to “pay” for it. And like any other market in capitalism, there is no guarantee that the resulting price is either efficient or fair. The experience of the European Union's carbon dioxide emissions trading system (the world’s largest) has not been encouraging. The “price” of EU permits has swung wildly: peaking at €30 per tonne in 2006, but then collapsing to near-zero in 2007, soaring back to €20 by 2011, and then plunging precipitously again (to under €3 by 2013). This hardly constitutes an “efficient guide” for long-run business decisions in capital investment and technology. And with the price so low, companies have almost no incentive to reduce emissions at all. Ironically, polluters in some other countries are now allowed to buy EU permits (at depressed prices) to validate their own excess emissions. Worst of all, wild price swings have spurred a whole new form of financial SPECULATION … A new market in “carbon derivatives” has sprung up to allow speculators to place bets on future swings in carbon prices. Europe’s environment would have been far better served by direct regulation of emissions in the most polluting industries (like coal-fired electricity plants), instead of undertaking this complicated, unsuccessful experiment in free-market engineering.

Many environmental activists blame economic growth for environmental problems, and it is certainly true that the dramatic expansion of global output (and more specifically the consumption of fossil fuels used to produce that output) over the last 200 years is the ultimate cause of climate change. An implication of this view (and sometimes its explicit conclusion) is that “growth” must be reduced or stopped to protect the environment. This suggests a conflict between economic activity and environmental protection, and leads many people to conclude (wrongly, in my view) that environmental sustainability can only be attained at the price of a reduced material standard of living.

This difficult discussion is complicated by a lack of clarity in terminology. … economists define “growth” simply as an increase in the real value of GDP (adjusted for inflation), which in turn represents the value of everything produced for money in the economy. This includes both goods and services, for consumption and investment, produced in the public sector as well as the private sector. So it is impossible to come to any general conclusions about the environmental consequences of growth, since “growth” consists of so many disparate activities. (Indeed, the only common ingredient in all the output included in GDP is work: productive human activity, in all its wondrous forms.) Growth for growth’s sake is never our economic goal; there is never any guarantee that more output translates into a better life for the masses of humanity: it all depends on what is produced, who gets it, and how it is used. And under neoliberalism, growth has clearly not been the central economic goal. To the contrary, neoliberal policies have deliberately sacrificed growth in the interests of restoring business dominance and profits.

As human beings, it is clear we need to do more work, not less, to meet our many needs and solve the many problems we face: alleviating poverty, rebuilding troubled communities, providing necessary human services...and caring for the environment. The value of our work (other than what we do on a voluntary basis) shows up in GDP statistics, and hence it all contributes to “growth.” But the environmental implications of our work depend completely on what we are doing, and why. Are we strip mining coal to generate highly-polluting electricity, or are we caring for children and elders in a neighbourhood community centre? Both are “work,” and both are counted in GDP. So assuming that “growth” is bad for the environment is no more credible than assuming that “growth” enhances human well-being…

Scientists agree that global emissions of greenhouse gases must be reduced quickly and dramatically – cut 40 percent by 2030, according to the Intergovernmental Panel on Climate Change, to avoid the most catastrophic effects of climate change and eventually stabilize global temperatures. But this dramatic, essential shift need not imply a negative shock to employment and living standards. To the contrary, steady investments in energy efficiency and renewable energy generation would constitute a hugely beneficial economic engine. Robert Pollin, a US economist, has simulated a detailed plan to reach the 40 percent reduction for the American economy, based on publicly-supported investments of US$200 billion per year for 20 years (equal to just 1.2 percent of US GDP). The investments would be split between measures to reduce energy use, and stimulate clean renewable energy sources (including solar, wind, and geothermal). Thanks to the relatively labour-Intensive nature of both energy efficiency and renewable energy initiatives, and their higher ratio of domestic content (as opposed to import-intensive fossil fuel industries), the program would generate a net increase of 2.7 million jobs per year in the US (even after considering the decline of employment in fossil fuel industries). It's a plan that's good for the labour market – not just the climate.

If banks can create money out of thin air (every time they issue a new loan), then why not dot.com entrepreneurs? That logic, combined with the technological wonders of the internet era, has sparked a flurry of VIRTUAL CURRENCIES that aim to challenge the dominance of state-backed currencies in economic affairs.

The largest of these currencies is Bitcoin, which began operations in 2009. But hundreds of others have also sprung up; most don't last long. Some on-line currencies have a central sponsor (who organizes trading and takes responsibility for managing accounts and guaranteeing payments). But many (including Bitcoin) are decentralized: there is no one “in charge” of creating the money, handling transactions, or guaranteeing security. For this reason, virtual currencies appeal to anti-government libertarians, who want to circumvent what they see as the illegitimate authority of government institutions (like central banks). They also appeal to criminals of various kinds, who appreciate any opportunity to anonymously accumulate and transfer money, away from the prying eyes of police and regulators.

The creation of new Bitcoin money is controlled through an odd system (called “mining”) in which computer operators receive payment (in Bitcoins) for helping to create and manage the computer algorithms needed to keep Bitcoin accounts secure and confidential. (That's the theory, anyway: in practice, hackers have robbed many Bitcoin accounts.) Bitcoins can be exchanged for conventional currencies on open exchanges, but their value in those trades fluctuates wildly. That's mostly because speculators have seized on the Bitcoin market (like any other financial asset whose price fluctuates) as a new arena for making short-term trading profits. The inflexible supply of Bitcoins makes matters worse.

Do virtual currencies even count as "money," as conventionally understood? Not really. Their use as a means of exchange or unit of account is limited: few retailers accept Bitcoins, and those that do normally convert them into standard currencies (usually the US dollar) immediately, which means the Bitcoin has no stable value of its own. As a store of value, Bitcoins are also unreliable due to enormous, speculator-driven fluctuations in their exchange rate. For example, the US-dollar value of Bitcoins quintupled within a month late in 2013, but then crashed by more than half in the next four. Bitcoin prices are far more volatile than other speculative assets or commodities, largely due to uncertainty regarding the system's long-term viability (especially as financial regulators around the world start to crack down on illegal uses of virtual currencies).

The FIAT MONEY system ultimately depends on the active backing of state power. Government's ability to require its use (including to pay taxes!) is essential to its widespread and continuing acceptance. Virtual currencies have no such backing, which is why they are unlikely to ever amount to more than passing fad among computer nerds, libertarians, and speculators.

...private banking has shown a tendency to produce repeating (and damaging) cycles of over-expansion followed by contraction and retrenchment. Banks make their profit from new lending, and this self-interest drives new credit expansion. But they always measure the opportunity for profits against the risk that loans might not be repaid. Losses on bad loans can gobble up a bank’s profits, and even its base of equity capital, very quickly. Private banking thus demonstrates a perpetual clash of personalities, as “greed” (for profits on loans) battles “fear” (that loans won't be paid back). When economic times are good, few borrowers go bankrupt, and banks become less sensitive to the risks of loan default. Their greed overwhelms their fear, and they push new loans aggressively – creating purchasing power and stimulating economic activity (or, less desirably, bubbles in stock markets and real estate prices). The reverse occurs when times turn bad, and their fear trumps their greed. Then banks become hyper-sensitive to loan defaults, and pull back their lending (even from reliable customers), causing a CREDIT SQUEEZE which reduces overall purchasing power and growth even further. Ironically, in tough times banks' fear of defaults can actually cause defaults - since lending restrictions produce economic stagnation and thus more bankruptcies (among both businesses and households). This cyclical, profit-driven roller coaster is called the BANKING CYCLE, and it is a major factor behind the boom-and-bust cycle of capitalism.... The American economist Hyman Minsky was one of the first to explore the dynamics and importance of these repeating swings.

In contrast, a system of publicly-owned banks, ultimately reinforced by the money-creating authority of the state, would not face the same inherent risk of evaporating confidence and sudden collapse. To be sure, even in a well-managed public banking system some borrowers will occasionally default, and some loan losses will occur. But these losses need not threaten the survival of any particular bank, since all are protected by the stabilizing effect of public ownership and the state’s ultimate power to create new purchasing power (offsetting loan losses) as needed. There would be no reason for depositors or other banks to suddenly withdraw their funds. More importantly, a public banking system would be mandated to provide the economy with a steady, healthy supply of new credit; its goal is no longer to maximize private profit, but instead to reliably facilitate productive economic activity. Loans could even be channeled deliberately to the most important and productive uses of new credit (including new capital investments, public infrastructure, community development, and others), rather than flowing willy nilly into whatever activity (productive or not) offers the highest short-term returns for private banks. Publicly owned banks, in other words, would function like a true public utility: meeting the broader economy's need for steady, productive credit. I believe that proposals for public and non-profit banking must be an important element of any vision for progressive economic change;...

These macroeconomic spin-offs explain why central bankers and financial regulators have been reluctant to interfere with this long-term rise in personal indebtedness, despite rising concerns about the resulting financial instability of households (and potentially the whole banking system). If businesses are not borrowing to stimulate new demand, then perhaps households can fill the void – for a while. Moreover, growing household borrowing serves a political function, as well: it seemingly allows working people (again, for a while) to attain the promised good life, despite wage stagnation and unemployment. Debt-financed consumer spending can thus delay the economic slowdown that would otherwise result from weak business investment, the accumulation of cash by non-financial businesses, and weak labour incomes. But household debt burdens cannot grow forever. Sooner or later, if higher household debt is not matched by higher output and incomes (thus allowing households to service and eventually repay their debts), the long-run escalation in personal debt must eventually reach a ceiling. At that point economic crisis (featuring defaults and foreclosures among households, and spillover problems for the banks which lent to them) is likely to occur. This is exactly what occurred in the US beginning in 2008, when an enormous decades-long increase in household borrowing suddenly stopped…. American households then began to deleverage (that is, reduce their debts), and the resulting contraction in money and purchasing power led to several years of very weak macroeconomic conditions.

Interest rates, too, can be measured in real terms, as the difference between the nominal interest rate (in percent) and the rate of inflation. If a bank charges 2 percent annual interest for a loan when overall prices are also growing at 2 percent, the bank's wealth doesn't change – because the loaned money, once repaid with interest, has no more purchasing power than it did when it was loaned out. If interest rates are lower than inflation, then the REAL INTEREST RATE is actually negative: the borrower, not the lender, is better off at the end of the loan because the money they pay back is worth less than the money they borrowed. The higher is inflation, therefore, the lower is the real interest rate. That’s why financial institutions hate inflation with a passion. (member’s italics)

But there’s no reliable evidence that single-digit inflation (under 10 percent per year) harms real economic progress. If anything, there seems to be a positive connection between modest inflation and growth: not because inflation causes higher growth, but simply because faster-growing economies tend to experience somewhat faster inflation. Considerable economic evidence suggests that modest inflation (perhaps 5 percent per year) is actually beneficial. It allows sellers of various commodities (including workers, who sell their labour) to reduce real prices when necessary (simply by lagging behind the pace of overall inflation), without actually cutting nominal prices (in dollars). Modest inflation thus lubricates the ongoing relative price adjustments that are necessary in any evolving economy. It is also useful in gradually reducing real debt burdens over time, thus enhancing purchasing power of households, governments, and other indebted sectors.

Nevertheless, interest rates are usually an important (if imperfect) tool for influencing the overall path of the economy. And the criteria on which central banks make their decisions are not “neutral” or “technical.” They reflect central bankers' views of the economy, their ranking of the importance of different economic goals (holding inflation as more important than unemployment, poverty, and other problems), and their susceptibility to the influence of different sectors within society. In particular, central bankers are highly influenced by the attitudes and actions of the private financial industry: they meet regularly with financial executives, and constantly monitor feedback from financial markets. Central bankers like to pretend they are neutral technocrats, merely helping to guide the economy to some mythical point of maximum efficiency. This underpins the neoclassical claim that central bankers should be “independent” of elected government – that is, unfettered by any democratic pressure or oversight. Yet in reality central banks are not independent at all. They are highly political institutions – and like other political institutions, their actions ultimately reflect the power differentials between various groups in society with competing interests and concerns regarding monetary policy.

Initially, neoliberal monetary policy was heavily influenced by the MONETARIST ideas of Milton Friedman and other ultra-conservative economists. They weren’t concerned with unemployment, arguing that it reflected laziness or the perverse impact of labour market “rigidities” (like unions, unemployment insurance, and minimum wages). In their extreme interpretation of neoclassical theory, the real forces of supply and demand automatically ensure an efficient full-employment equilibrium, and hence the only impact of money is to determine the absolute price level. Therefore, to control inflation, central banks simply had to strictly control the growth of the money supply. If they allowed an annual 5 percent increase in the total supply of money, and if they stuck to that rule for a long time, then inflation would eventually settle at 5 percent. Thus began an experiment in MONETARY TARGETING (trying to directly control the expansion of money) that was a colossal failure.

The severe global recession of 1981-82 was caused directly by monetarist policies. Their effort to link inflation to money supply growth failed for an obvious reason: in a credit banking system (with ENDOGENOUS MONEY) central banks cannot control money supply. Rather, money expansion is determined...by the credit-creation activity of private banks, and by the willingness of borrowers to take on new loans.

However, that deliberate recession was successful in other important ways. It signaled a new era in global capitalism. It disposed of the notion that full employment was the top economic priority. And it began the long, painful process of ratcheting down popular expectations regarding what average people can (and can’t) expect from the economy.

Another important feature of neoliberal monetary policy has been the emphasis on entrenching the so-called “independence” of central banks. In most developed countries, central banks have been granted day-to-day freedom to pursue their goals without oversight or interference from government. To varying degrees, national governments still participate in determining the banks’ broader objectives – most importantly, formally establishing the inflation targets (where they exist). But in theory they are prohibited from influencing the banks’ regular interest rate adjustments or other actions.

The deliberate goal of this supposed independence is to insulate the powerful, often painful interventions of central banks from popular opposition. But of course, central banks are not really “independent” at all: the elevation of inflation control to the top of the economic agenda, regardless of what else is sacrificed in the process, is a non-neutral and highly political choice that imposes uneven costs and benefits on different segments of society. The financial industry and owners of financial wealth have benefited most from neoliberal monetary policy. And they continue to have huge influence over the day-to-day actions of central banks. By erecting central banks as an independent, supposedly apolitical authority, elected governments pretend that choices regarding the fight against inflation are out of their hands.

Central bank “independence” is explicitly and deliberately anti-democratic. And it’s utterly phony. It removes a crucial element of public economic policy from the realm of public deliberation and control. By pretending that monetary policy is a neutral, technical, and hence apolitical activity, governments hope that public debate over monetary policy will evaporate.

New issues of equities have become especially rare. Business investment has been sluggish, and hence cash-rich companies don’t need much additional finance. Moreover, through SHARE BUY-BACKS, flush companies can repurchase some of their shares from investors (further boosting share prices, and further enriching the company’s executives). In many countries, the total amount of outstanding corporate equity has actually declined in recent years, with the ongoing destruction of equity (through buy-backs and corporate mergers) outweighing the issue of new shares…. This confirms that the main purpose of stock markets is not “raising money for growing businesses,” as is pompously claimed by the mission statements of stock exchanges. They have become, primarily, tax-subsidized casinos, whereby financial gamblers place bets on which way share prices will move in the next few hours or minutes.

This frenzied paper chase which occurs every day on the financial markets is largely divorced from the real day-to-day productive work of non-financial companies. Instead, financial traders are trying to make money through SPECULATION. Productive profit is generated when a company purchases inputs (including labour), produces a good or service, and sells it for more than it cost to produce. The pursuit of productive profit has many unfortunate side-effects that we have explored throughout this book – but at least it stimulates production and employment. Speculative profit, on the other hand, involves no production at all. It is guided by the age-old adage: “Buy low, and sell high.” No jobs are created (except for the brokers who handle the trading, pocketing a lucrative commission on each sale). Investors simply buy an asset, and then hope that its price rises, allowing them to sell it for more than they paid. Speculation is the act of buying something purely in hopes of selling it later (for more than it cost).

Get Out While You Can

“In a paradoxical way, the function of equity markets today is not to enable savers to put money into companies. It’s to enable them to get it out.”

John Kay, head of UK government commission on stock markets (2013).

To make matters worse, clever financial experts are constantly developing new kinds of financial assets, and new ways of trading them for profit. Massive amounts of trading now occur in a broad class of securities called DERIVATIVES. These are securities whose price at any point in time depends, often in very complex ways, on the performance of other financial assets. Examples of derivatives include futures, options, and swaps. Through the clever use of derivatives, financial traders can place a bet on any expected change in the price of one or more other assets. A special derivative strategy called “shorting” actually allows speculators to profit from a fall in the price of another asset – thus reversing the traditional adage “buy low, sell high.” (In contrast, short traders “buy high and sell low” to generate their speculative profit!) This is an especially dangerous activity, because it gives speculators a vested interest in the failure of the company they are shorting, and hence they may try to hasten its downfall (by spreading unfounded rumours, for example, or even engaging in financial sabotage). There are specialized derivative markets to bet on changes in the weather. Even money itself can be traded for speculative reasons, especially on foreign exchange markets (where one country’s money is converted into another's). And whether it’s stocks, bonds, or derivatives, every trade generates a juicy commission (typically 2 percent or 3 percent) for the brokers who conduct it - giving them a massive interest in frenetic trading for its own sake. The only thing speculators can't tolerate is stability: whether markets are rising or falling, they hunger for volatility and the trading opportunities that come with it.

Misplaced Creativity

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

John Maynard Keynes, British Economist (1936).

Until the late 1970s, financial valuations rose broadly in tandem with the expansion of real output, real investment, and real trade. One could have some confidence that each financial asset was ultimately backed by something tangible and lasting, and each financial trade was connected somehow to a real economic transaction underneath. …however, that the relationship between financial and real economic activity has become precariously unbalanced. This reflects both the deliberate slowdown in real growth and capital accumulation that was engineered by neoliberal policy, and the explosion of financial activity and Innovation that was permitted by deregulation and financialization. Clearly the financial tail has come to wag the economic dog. And we should all worry, quite rightly, about what, if anything, actually holds up the immense financial valuations that are now the Holy Grail of capitalism.

Financialization has added a new dimension of fragility to modern capitalism. One of the most dangerous manifestations of this hyperactive paper chase is the tendency of securities markets to produce repeating SPECULATIVE BUBBLES, in which the price of one or more assets rises spectacularly, sparking widespread frenzy among traders – but followed inevitably by downturn, panic, and collapse. A typical speculative bubble begins with the “discovery” of some new asset: perhaps a new product, a new technology, or even just some amazing new kind of financial derivative. In the 1600s, in one of capitalism’s first speculative episodes, the initial spark was the discovery of tulip breeding. Dutch investors drove the price of stunning new breeds of tulips to astronomical highs – not because they wanted to plant them, but because they thought they could profit from re-selling them. Prices peaked in 1635 at several thousand Dutch florins for a single bulb (equivalent to as much as US$75,000 today). Initial investor interest, concentrated among insiders, gives the price of a speculative asset its initial upward momentum. But that’s just the first step. Other investors see rising prices (and associated speculative profits), and rush in for a piece of the action. This drives prices even higher.

Recall that industrial capitalism emerged in Britain in the eighteenth century. Britain’s relatively centralized and powerful state, willing and able to support private-sector investment and production, was a key reason capitalism began there – rather than in continental Europe, China, or India (which had comparable living standards at the time).

Britain’s government created a unified market at home: breaking down barriers between feudal enclaves, standardizing weights and measures, and providing passable and safe transportation routes. It did the same thing globally: using military might and colonialism to forcibly access raw materials and markets. It provided early capitalists with tariff and patent protection. It helped to establish private ownership rights over agricultural land (through the ENCLOSURES process), thus creating a new class of landless, desperate workers to work in the new factories. And it facilitated that new form of work called wage labour, keeping workers in line and suppressing early efforts to form unions.

In short, far from reflecting the spontaneous energy of unplanned private enterprise, the early success of British capitalism couldn't have occurred without the state’s active support. Measured as a share of GDP, the state’s various and far-flung activities consumed about as much of Britain’s total output then (around a third) as it does today.

So the real question is not whether government should be big or small (although clearly, proposals for improved social programs and other progressive reforms would require more public funding and hence a “bigger” government). And there’s no real debate over whether governments should “intervene” in the economy: they always have, and always will. The real questions are rather different. How does government intervene in the economy? And in whose interests?

In this regard, the state in modern developed capitalist economies demonstrates a kind of “split personality”. Its natural tendency is to focus on the core function of protecting and promoting private wealth and business. And businesses (and the wealthy people who own them) have many sophisticated ways to ensure that governments continue to cater to their interests, despite the formal structures of democracy, including:

• Ownership and control over most of the mass media (and other cultural industries). This ensures that a broadly pro-business message is delivered constantly throughout society.
• Direct influence over the electoral process through candidate and campaign financing. Political candidates cannot succeed without massive financial resources; obviously this gives wealthy people (and their favoured candidates) a substantial headstart. For example, a right-wing political network founded by the billionaire Koch brothers in the US planned to raise and spend $900 million in the 2016 presidential elections – more than either of the major political parties.
• Structures and practices which discourage political participation by working and poor people – the ones who have the most to gain from political change.
• In the US, for example, less than half of people with income under $20,000 per year voted in the 2012 presidential election. But 80 percent of those with income over $150,000 voted. Pro-business ideas are further strengthened through corporate and donor funding of think tanks, academic research, private schools, and other educational and ideological institutions.

How to Get Rid of a Prime Minister

Never mind the niceties of elections and formal democracy: every now and then the real decision-making process of capitalism is revealed through the decisive ability of corporations and the wealthy to shape government actions and policy. A startling example of this power was provided in Australia in 2010, when then-Prime Minister Kevin Rudd (leader of the Labor party) tried to impose a new corporate income tax on the highly profitable Australian mining industry. The tax was motivated in part to address budget deficits resulting from the government's successful effort to stimulate the economy and avoid being caught in the 2008-09 global recession. But mining executives reacted swiftly and effectively: they threatened disinvestment from Australia, warned of major layoffs and unemployment, and spent A$22 million in just two months on aggressive advertisements attacking the government. The industry also boosted funding for conservative opposition parties. Public opinion swung against the government, and within weeks Rudd was removed from office by his own party – and the tax was abandoned.

Consider the massive foreign investments that flowed into China (over US$1.8 trillion worth from 2000 through 2013, including Hong Kong), undeterred by that country’s democratic shortcomings. Low-cost, productive, regimented labour; powerful government support for technology and infrastructure; low business taxes; access to what will soon be the world's largest market – these advantages easily outweigh any concerns business executives might have over democratic rights. And corporate promises that foreign investments in China will leverage democratic reforms have proven hollow indeed. Instead, multinational companies have actually helped to maintain the current, immensely profitable state of affairs: for example, by opposing modest labour law reforms adopted in China in the late 2000s, and discouraging the democracy protests that erupted in Hong Kong in 2014.

So, contrary to the claims of philosophical libertarians like Milton Friedman (who equate “freedom” with the right to accumulate private wealth), there is no inherent link whatsoever between capitalism and democracy. Quite the reverse: capitalism demonstrates a natural anti-democratic streak by virtue of the inherent tendency for private wealth, and hence political influence, to be continually concentrated in the hands of a very small proportion of society. Therefore, fighting to protect and expand democratic rights, and rolling back the undue political influence of private wealth, must be an essential part of workers’ broader struggles for a more just economic order.

Fiscal debates in many countries in recent years have been dominated by concern – much of it exaggerated, but some of it legitimate – over big government deficits and rising government debt. Conservative politicians have seized on these concerns to justify painful cutbacks in public programs. Yet ironically, conservative governments often racked up the largest deficits of all. Indeed, the broad fiscal decline experienced in most developed economies during the 1980s and 1990s was clearly caused by neoliberal economic policies – especially by higher interest rates (which produced higher unemployment, slower growth, and higher debt-servicing charges). Those neoliberal policies were far more damaging to governments’ bottom line than public spending on social programs.

More recently, an even bigger blow to government finances was caused by the GLOBAL FINANCIAL CRISIS that erupted in 2008, sparking a worldwide recession from which the developed capitalist economies have still not fully recovered. That downturn hammered government budgets through multiple channels: tax revenues fell steeply (due to weak employment and consumer spending), the cost of income supports (like unemployment insurance) rose automatically, and the enormous cost of bailing out failed banks and other private companies added to the red ink. In some cases (especially peripheral European countries like Greece, Portugal, and Ireland) private bond markets began charging very high rates of Interest for new lending – but soaring borrowing costs make the deficit even worse. This post-2008 eruption of public debt is also a legacy of neoliberalism (and the inherent financial instability it ingrained in the global economy). So the claim that modern right-wing governments are somehow more “fiscally prudent,” compared to supposedly free-spending regimes of earlier years, is painfully false.

Private Debt Good, Public Debt Bad

Conservative finance ministers regularly invoke a phony “kitchen-table” analogy, to justify the deep cuts in public programs they claim are essential for balancing the budget. “Mom and pop know they can’t spend more than they take in,” the minister gravely asserts. “And my government understands this, too. We have to run our government like mom and pop run their household. That’s why we’re eliminating your public programs.”

First of all, the suggestion that moms and pops, planning household finances at the kitchen table, never spend more than they take in is factually ludicrous. Household borrowing…is an essential precondition for major household purchases (like homes and cars). Without it, the economy would be stuck in endless recession.

Businesses, too, borrow funds whenever required in order to finance essential investments. Any chief executive officer who proclaimed (as right-wing finance ministers regularly do) that their top priority is to eliminate debt, would be fired immediately as a superstitious incompetent. Financial analysts understand well that vast profits can be generated when businesses borrow to finance profitable investments (a strategy called LEVERAGING).

The same fundamental principle applies to public investments, too. If a public investment generates more incremental value (in jobs, incomes, or productivity) than the interest paid on the money borrowed to pay for it, then it is economically rational and legitimate to undertake the investment. Only a superstitious belief that “public debt is always bad” stands in the way of these opportunities to increase output and income through debt-financed public investment.

In sum, it is clear that conservative anti-deficit and anti-debt campaigns are motivated more by politics than economics. Neoliberals use fear of public debt to politically justify the elimination of public programs (like income security programs) which they want to get rid of anyway. They have used similar arguments to justify the stealthy privatization of public investment through PUBLIC-PRIVATE PARTNERSHIPS. These initiatives nominally transfer the responsibility for major public projects from government to private investors – yet governments (and taxpayers) are still left holding the bill for future, long-run interest costs (paying interest rates higher than the government would have paid to build the infrastructure itself). These so-called “partnerships” are in reality a taxpayer funded giveaway to private investors, justified by a phony phobia of public debt that is itself the legacy of neoliberalism.

On the whole, it’s usually best (barring national emergency) for governments to avoid increasing debt too rapidly. But government budgets do not need to be balanced every year (or even on average over periods of expansion and recession). Debts incurred to fund productive public investment, or to employ workers who would otherwise sit idle, can be economically efficient. And it is fundamentally wrong to assume that government debt is inherently “bad” and must be eliminated.

Class Warfare

“Through the tax code, there has been class warfare waged, and my class has won. It’s been a rout.”

Warren Buffett, US Billionaire (2011).

Legendary financial manager Warren Buffett is one of the richest people in the world, with an estimated fortune of US$73 billion in 2014. But most of his income is generated by investments that are taxed at preferential rates. He disclosed that in 2006 he paid a lower average rate of personal income tax (17.7 percent) than his secretary (who paid 30 percent on a salary of about US$60,000). To his credit, he called for changes in the tax code that would impose minimum taxes on rich investors.

In NAFTA’s first two decades, 75 Chapter 11 claims were launched, challenging everything from limits on polluting additives in gasoline, to changes in pharmaceutical patent laws, to the operation of Canada’s public post office. Total damages claimed in these suits exceeded US$40 billion – and companies have won enough judgements to force governments to take the process very seriously. Consequently, the ISDS [Inter-state Dispute Settlement] system has had a chilling effect on all government policy-making: politicians fear that any policy that might harm corporate profits could spark yet another NAFTA lawsuit.

The spread of this practice to other trade agreements has sparked a worldwide surge in ISDS claims. From 2000 through 2013, a total of 530 ISDS claims were launched against governments around the world, and the rate of new claims has been accelerating (averaging over 50 per year since 2011). Complaining investors have been winning full or partial judgments in most of the cases they launch.

The widespread adoption of ISDS practices proves that modern globalization is not really about “promoting trade.” The true goal is to construct and globally enforce a pro-business bias in all areas of government policy.

Cross-border human flows, motivated by both economic and non-economic factors, have been important throughout human history. Workers move from one country to another in search of better employment or income prospects. Capitalists may encourage those migrations when they face uncomfortably tight labour market conditions in particular countries (in which case inward immigration helps to keep a lid on wages). But migrant workers usually face difficult economic and social challenges in their new lives. Prejudice, racism, and LABOUR MARKET SEGMENTATION undermine their earning opportunities, and often prevent them from fully utilizing their skills and education. Migrants are treated as temporary, second-class citizens, often forced to return to their country of origin when their jobs are finished, and subjected to social and legal abuses in the interim. More often than other workers they are channeled into PRECARIOUS WORK. Their migration can also harm the countries they leave – especially since it is usually the best-educated, most capable people who get permission to immigrate to other, richer countries. Many migrants send regular remittance payments home to support their families; these payments are economically important to many developing countries.

Trade and the Environment

Free trade can be bad for the environment, too. In some polluting industries, companies may be lured to locate in countries with relatively weak environmental rules. This undermines global efforts to reduce pollution. Also, the long-distance transportation associated with globalization consumes vast quantities of fossil fuels. Many products now consume more energy being transported to far-off markets, than in their actual production. Indeed, intercontinental ocean shipping, which relies on heavily-polluting bunker oil, is one of the most polluting industries on the planet. Ocean shipping produces about 3 percent of all global carbon dioxide emissions more than all but five entire countries (China, the US, India, Russia, and Japan). And because ocean shipping operates beyond the reach of national governments, it largely avoids environmental regulations. (For the same reason, labour standards in the shipping industry also tend to be horrendous.)

85 vs 3.5 Billion

The 85 richest billionaires in the world own combined wealth of almost $2 trillion. But most people in the global South own virtually no financial wealth. In fact, the global development organization Oxfam has estimated that the wealth of those 85 billionaires now exceeds the combined financial wealth of the poorest half of the world's population.

The problem is not scarcity; the problem is power. Who has the power (both economic and political) to demand that productive resources be devoted to their favoured uses? And who lacks this power? How else can we explain a world economy that allocates more resources to high fashion instead of basic children’s clothing, video games instead of laptops for poor schoolkids, and medicines for erectile dysfunction instead of tuberculosis? The fact that this inequality is experienced via the supposedly “neutral” forces of supply and demand should not obscure the fact that it is still rooted in power: the power of some people to demand, and receive, so much more than others.

Wrong Turn

“The application of mistaken economic theories would not be such a problem if the end of first colonialism and then communism had not given the IMF and the World Bank the opportunity to greatly expand their respective original mandates, to vastly extend their reach. Today these institutions have become dominant players in the world economy. Not only countries seeking their help but also those seeking their ‘seal of approval’ so that they can better access international financial markets must follow their economic prescriptions, which reflect their free-market ideologies and theories. The result for many people has been poverty and for many countries social and political chaos. The IMF has made mistakes in all areas it has been involved in.” (member’s italics)

Joseph Stiglitz, former Chief Economist of the World Bank (2003).

By far the most important examples of successful development in recent years have been the East Asian economies. Japan’s spectacular rise after World War II blazed the trail. Other regional economies followed suit (including Korea, Taiwan, Hong Kong, and Malaysia), each putting their own stamp on the recipe that Japan pioneered.

All of these countries relied on strong state intervention to guide the development process. … Very rapid investment was supported by government tax policy, capital subsidies, and financial regulations, Exports played a crucial role, but not in the manner imagined by neoclassical free-trade theory. Like the eighteenth century Mercantilists, the Asian countries generated large trade surpluses through aggressive exports (reinforced by powerful constraints on imports). They welcomed foreign investment and foreign technology, but required that know-how be quickly transferred to domestic firms. Soon the imitators became the imitated, as Asian firms set global benchmarks for productivity, quality, and innovation. Incomes grew rapidly (for workers, too), thanks in part to a cautious, paternalistic form of CORPORATISM: a system in which income distribution is managed jointly by government, businesses, and unions.

…conservative commentators often argue that “deficits are always bad, and surpluses are always good.” …trying to reduce the government's deficit (or any other sector’s deficit, for that matter) is likely to produce an offsetting reaction among other sectors, with very little impact on the overall economy. For example, consumers or businesses may end up taking on additional debt as an indirect, unintended consequence of tighter government fiscal policy.

It is impossible for all sectors in the economy to simultaneously reduce their deficits. If they tried to do so (perhaps following mistaken conservative advice), the end result would be a terrible recession (resulting from a broad decline in spending). Overall balance between income and expenditure would eventually be restored, but at a much lower level of income and employment. This self-defeating outcome is called the PARADOX OF THRIFT: economic players (whether consumers, businesses, or governments) who try to increase savings by cutting back spending can actually end up with lower savings – thanks to the economic slowdown which their spending cutbacks perversely caused.

There is still another way of understanding the relationships symbolized in our more complete map. Every economy needs some kind of initial spending push, just to get things going. ...that boost came from investment. It is the initial injection of spending power, which in turn generates additional income and spending (from suppliers, the company's workers, and consumer industries). The final amount of income and spending is much bigger than the initial injection of investment. This MULTIPLIER effect exists because workers can’t spend anything until they get a job; new investment which creates new jobs thereby stimulates an ongoing chain of new spending (and matching production) that's several times larger than the initial investment. This is why investment is so important – and why governments, communities, and workers all have an interest in stimulating more of it.

Recessions and subsequent recoveries have diverse causes and features; each one is unique. But this rollercoaster pattern is more than just a series of occasional, random events. There is clearly a systemic nature to economic cycles. Even a cursory review of economic history indicates that recessions and recoveries don't just “happen” because of random and seemingly unrelated “shocks.” Instead, there are inherent forces within capitalism which create and re-create this cyclical pattern. The boom-and-bust cycle of capitalism poses a special challenge to neoclassical free-market economists. Remember, neoclassical theory predicts that the operation of competitive markets will automatically ensure that all willing workers are employed, and that all available resources are fully utilized in production – so that the economy is ultimately SUPPLY-CONSTRAINED. This faith in the efficiency of self-adjusting markets is misplaced at the best of times. But the credibility of the whole theory is shaken to its core during deep recessions – when millions of workers sit idly by, capital is destroyed, and investment goes nowhere.

Its interdependent yet decentralized nature, together with its structural reliance on profit-seeking business investment, explains why capitalism is inherently prone to boom-and-bust cycles. Other economic systems (including pre-capitalist systems and planned socialist economies) also experienced periods of good times and periods of bad times – depending on the state of agriculture, technological progress, political stability, and other factors. But these systems never demonstrated the same repeating, rollercoaster pattern as capitalism.

Merely having a larger public sector in the first place can itself dampen economic cycles. Government programs such as education, health care, and other public services are not subject to the same profit motive, and hence the same boom-and-bust pattern, as private business production. The public sector thus tends to be an oasis of stability during recessions. It is much less vulnerable to contagious contraction than the private sector.

Unfortunately, some conservative politicians argue for measures that undermine the stabilizing power of government programs, and would in fact make government a destabilizing economic force. Neoliberal cutbacks to social programs (especially income security programs), and reductions in the taxes that once paid for those programs, have undermined the power of automatic stabilizers, leaving the economy more vulnerable to a chain-reaction recession. Even worse are BALANCED BUDGET LAWS, which require governments to keep their budgets in balance (with no deficit) – even during a recession. Under these laws, government must either increase taxes or cut spending during recession – either of which only makes the recession worse. Motivated by an ideological hatred of deficits, therefore, these policies have the perverse effect of exaggerating the economic swings that arise in the private sector.

Where is capitalism positioned today with respect to this historical pattern of long waves? Clearly, the dynamism of the Golden Age had petered out by the 1970s; since then business and political elites have been trying to reconstitute the global economy on a harsher, neoliberal foundation. Has that effort succeeded, setting the stage for a new extended period of capitalist stability and expansion? Not likely. On one hand, breakthroughs in electronic technology (like the personal computer and the internet) have stimulated investment and productivity growth across a wide range of industries. And neoliberal policies clearly dominate the political arena, shifting the balance of economic power in favour of business and boosting profits accordingly. The geographical focus of expansion may have shifted somewhat – away from the industrialized countries, and toward China and other rapidly industrializing regions.

But on the other hand, there is plenty of evidence that neoliberalism has not truly achieved all the conditions needed for a new long upswing. Real investment spending by business is amazingly sluggish, considering strong profits and a solidly pro-business political and economic climate. International affairs continue to be disrupted by regional wars and massive trade imbalances. Environmental problems disrupt investment and undermine living standards. Perhaps most damagingly of all, hyperactive financial markets introduce regular episodes of panic and chaos into the global economy, and this is clearly inconsistent with long-run stability.

At any rate, even if neoliberalism is working profitably for capitalists, it has had negative impacts on the living standards of most people – and sooner or later, this will throw into question the long-run political stability of this new, “tough-love” regime. The jury is still out, therefore, on whether this modern incarnation of capitalism has really established the conditions for a longer-run winning streak.

The 2008-09 crisis was unprecedented in its global scale. Most countries were dragged down by the spillover effects of financial chaos and collapse – but not all. A few countries managed to tiptoe through the economic destruction, and avoid recession altogether. It is insightful to study how they did it.

• China (GDP growth in 2009: 9 percent): State management and planning still plays a leading role in China…, despite the growing importance of private business. Strict regulation over international capital flows, interest rates, and exchange rates prevented contagion from the GFC from fully infecting China's economy. Realizing that Chinese exports to the US and other countries would be hammered by recession (exports did fall 25 percent in 2009), in late 2008 state planners quickly launched an enormous program to build infrastructure, financed mostly through loans from publicly-owned banks. This program was worth 12.5 percent of GDP, injected over two years; it was the biggest fiscal stimulus in the world. Huge investments were made in roads, railways, power grids, sewage, earthquake reconstruction, public facilities, and social housing. The fact that most banks in China are still publicly-owned helped greatly. First, they were in no danger of collapse from private speculation. Second, they continued to expand credit through the downturn (since their lending decisions are guided by ambitious state-determined lending targets, not by their own profit). Third, by keeping the flow of lending and repayment within the broad public sector the impact of this massive spending on the deficit was muted (China’s central budget deficit in 2009 was only 3 percent of GDP). However, after the GFC, China began to experience its own real estate bubble (concentrated largely in expensive properties purchased by China's wealthy new elite) that now poses a different danger to that country’s future stability.
• Australia (GDP growth in 2009: 1.5 percent); Australia was the only major developed capitalist country to escape recession in 2009. Part of it was luck: China’s continuing growth helped prop up Australia's economy (since Australia exports many minerals and agricultural products to China). But part of it was design. Australia’s Labor Party held government when the recession hit, and it immediately organized major injections of spending to reinforce consumer confidence and employment. Measures included school construction, expanded social housing, energy efficiency, and accelerated infrastructure. The government also made special one-time cash payments of up to $950 per person to support consumer spending at the worst moment of the crisis. Australia’s fiscal injection was more aggressive than those of many other industrial countries that faced much worse economic conditions; without it, Australia would have experienced a recession like other industrial countries.
• Uruguay (GDP growth in 2009: 2 percent): Uruguay is a small country, but its economic and social achievements are attracting world attention. In 2005 a broad left coalition (called the Frente Amplio) took office, and began an ambitious program of massive investments in education, health care, and low-cost housing – including innovative measures like government-provided laptops for all school children. This stimulated strong job-creation which, combined with modest new taxes on the wealthy, kept the deficit in check. Strong social spending boosted employment and the economy right through the GFC, and the left-wing government was re-elected in 2010 and again in 2014. The poverty rate in Uruguay declined from over 30 percent in 2004 to 12 percent by 2012. Even the generally conservative Economist magazine named Uruguay its first-ever “country of the year” in 2013.

These three countries are very different, with very different economic and political features. But each of them, in their own way, made sure that real resources continued to be allocated to meeting social needs – even as the global financial system melted down around them. And in so doing, they avoided recession altogether. If they can do it, so can the rest of the world.

In short, the GFC [Global Financial Crisis] was a uniquely dramatic and dangerous moment in the history of capitalism. Its consequences will continue to shape the economies and politics of many countries for years to come. On the other hand, despite these unique features, in many respects the GFC was entirely predictable – and its root causes readily visible in fundamental features of modern neoliberalism. Unregulated, profit-driven financial innovation led to financial products and practices that were unethical, unstable, and unsustainable. Government regulators failed to curb these practices, largely because of the concentrated political influence of the financial sector. The economy’s vulnerability to financial excess was heightened by several other dangerous trends in the real economy under neoliberalism. Chief among these were the weak state of real business capital investment (and the corresponding accumulation of excess savings by non-financial firms), the rapid growth of household debt (reflecting, in part, the long stagnation of labour incomes), and the emergence of large and chronic international trade imbalances (including an enormous and persistent US trade deficit). As described in previous chapters, these outcomes were directly attributable to decades of neoliberal policies that emphasized profit over job-creation, and promoted the flexibility and freedom of business (both financial and non-financial) over broader goals like job-creation and stability. It was obvious that these and other underlying imbalances would someday erupt in breakdown – and a few progressive economists actually predicted this one. From this perspective, then, the crisis of 2008-09, despite its unique and destructive dimensions, really represents “more of the same” from financialized, globalized capitalism.

Despite its limitations, however, enormous quantitative easing has certainly (if inadvertently) undermined a core theme of neoliberal AUSTERITY: namely, the assumption that there is a deep shortage of resources in society, and thus everyone must tighten their belts. If money can be created out of thin air, by the government’s own bank, to buy financial securities, why can’t it be created out of thin air to do other things – like putting people back to work in real jobs? The answer is, “It can be.” But that’s a dangerous precedent. So arch-conservatives (both politicians and economists) hate quantitative easing, and have spoken passionately against it.

Will these measures be sufficient to prevent another financial crisis in the future? Certainly not. World capitalism has been wracked by periodic outbreaks of financial panic every few years for centuries. Under neoliberalism, with its overdeveloped and globalized financial industry, those crises have become more frequent, more contagious, and more dramatic. From the US Savings and Loans meltdown in the mid-1980s, to the Scandinavian crisis of the early 1990s, to the Mexican peso crisis of 1994, to the Asian financial crisis of 1997 and the Russian bond crisis a year later, to the meltdown of dot.com stocks in 2000, followed by the GFC just a few years afterward: global finance repeatedly reveals its fundamental, genetic instability. We don’t know when, where, and precisely why the next financial crisis will erupt. But we know with certainty that it will occur – because the core behaviours and relationships that make the system unstable, are as powerful and uncontrollable as ever.

After all, the core features of global neoliberalism have not been altered by the piecemeal political and regulatory response to the dramatic events of the GFC. Banking is still a private, profit-driven activity. Even under modestly stronger global regulations, banks still create far more new money through lending (perhaps 30 times as much, instead of 50 times as much) than they have available in their own vaults; they are still precariously vulnerable to crises of confidence among depositors or (more likely) other banks. Speculators still have free reign to make enormous unproductive bets, using borrowed money, buying and selling derivatives that have no rational economic function other than gambling. Profit-driven innovation by financial players will find other ways to profit from asset trading (as distinct from lending to support real economic activity). And this entire hyperactive paper chase will continue to float above a real economy marked by grim stagnation and imbalance: slow capital spending, sluggish demand, widespread unemployment and underemployment, growing inequality, chronic international imbalances, and near-zero inflation.

…The acceptance of most social-democratic parties of the underlying percepts of austerity, and their unwillingness to advocate more far-reaching policies (like the socialization of banks), left them mostly on the defensive when neoliberals regrouped and came charging. Politics in most countries (but not all) have become even more conservative than before the crisis hit; in some places (especially in hard-hit Europe), extreme right-wing parties (falsely blaming immigrants for the whole problem) have had more political success than progressive movements. It is perverse but possible that neoliberalism has actually been strengthened through a dramatic crisis of its own making.

The lessons of this irony are clear – and fully consistent with the core message of this book. Citizens and activists need to learn about economics. We must deconstruct the self-serving jargon of those in power (from the original phony arguments in favour of deregulating derivatives markets in the 1990s, to the current exaggerated phobias about government deficits), and expose who profits from speculation, globalization, and austerity. We must be able to define an alternative vision for harnessing our collective creativity, energy, and capacity to work, so that together we can build a better economy. Then we must mobilize ourselves, our workmates, and our communities into active campaigns to fight for that alternative vision.

But none yet seems to fundamentally threaten the ability of capitalism to survive and re-create itself: that is, none jeopardizes the ability of private businesses to invest, to extract labour, to produce, to sell, and to make a profit. Even financial breakdown or environmental disaster, perhaps the most dramatic of the potential risks…, will not threaten capitalism’s very existence – unless there is an informed, organized, and mobilized population to challenge the system’s legitimacy and continuation. This is evidenced by the ultimately successful response of global capitalism to the breakdown of 2008-09. Despite enormous financial losses, despite an enormous blow to the credibility of the system and the elites that run it, despite moments when it seemed like outright collapse was possible, the system was rescued. It was stabilized through focused, biased interventions from pro-business governments (ultimately paid for by average working people through their tax payments and through subsequent AUSTERITY). Most perverse of all, capitalists actually attained a stronger economic and political position, in the wake of a global conflagration that they themselves precipitated. How did they manage such a feat? Largely because of the near-universal absence of any political challenge to their continued domination.

In other words … I do not see convincing evidence of imminent systemic vulnerability. The capitalist economy is unlikely to fall of its own accord – it must be pushed, by the collective will of many millions of human beings no longer willing to tolerate its excesses and abuses, and convinced that a better alternative is possible. Those of us hoping for change, therefore, cannot wait around for capitalism to self-destruct. The only factor that poses a true challenge to the current order is our shared willingness to reject the injustice and irrationality of this economy, and stand up to demand something better…

This activism naturally extends into the arena of electoral politics, attempting to influence government policies through voting and elections. Remember, elections alone never truly determine the direction of society. The power of elected governments (even progressive ones) is always constrained by the structural power and vested interests of the small proportion of society which owns most wealth, and hence controls most investment and production. Nevertheless, social justice campaigners need to use the opportunity provided by parliamentary democracy to raise issues and demand change. Some of this happens automatically by virtue of their ongoing issue-based activism and campaigns. By fighting and hopefully winning the public debate over particular issues and problems (what might be called the “battle of ideas”), successful social movements can influence the positioning and platforms of all political parties. Even conservative, pro-business politicians, once they recognize that support for a progressive demand is widespread and strong, will adjust their platforms accordingly.

In sum, trade unionists, social change activists, and environmentalists will need to continue experimenting with new political strategies – both non-electoral and electoral – to win important reforms and concessions from capitalism. One key lesson guiding this work is the realization that winning power under capitalism is never synonymous with winning an election. Understanding the limits of electoral democracy, and the structural pressures that constrain the actions of elected officials of any stripe (due to the unelected and undemocratic power structure that governs capitalism all the time), will help these movements develop more comprehensive and ultimately more effective strategies.

Simply changing the individuals running government will not change the economy or society. But if an educated, organized, and mobilized population is ready and willing to demand concrete and progressive changes in the economy, then no politician or business executive will be able to stop them.

Link expanded public services and investments to an expansionary, full-employment macroeconomic strategy. By putting unemployed and underemployed people back to work, this strategy would automatically generate new tax revenues and validate expanded government. This is certainly the most painless way to strengthen the fiscal condition of government. … In 2012 there were almost 50 million unemployed people across the OECD (and that doesn’t count underemployed people working in part-time or marginal jobs, nor the millions who have abandoned the formal labour market due to the lack of job opportunities). Hiring those unemployed people, at prevailing productivity levels, would generate over US$4 trillion in new output and income. (In fact, this number is conservative, since average productivity tends to increase as the economy approaches full employment, since employers become compelled to conserve on labour and boost efficiency.) Even without hiking tax rates at all, therefore, this expansion would boost the flow of government revenues by an incredible US$1.5 trillion; that’s enough to offset most existing deficits in the OECD, and allow for a substantial expansion of government spending.

This proposed high-investment, sustainable, full-employment economy includes several elements reminiscent of the Nordic version of capitalism – such as intensive public spending on education, health, and labour force mobility; generous redistributive programs, financed through personal taxes; moderate business taxes; and an overarching focus on R&D and innovation. Aspects of the model also reflect the successful experience of the Asian economic model – including important roles for proactive industrial policies supporting targeted industries, and active strategies to manage foreign trade and investment flows.

This proposal, then, is not utopian or untried: all its major elements are readily visible in the real-world experience of countries which have been relatively more successful at meeting social and environmental needs – while still respecting the imperative of private businesses to make a profit on their investments. For readers in the Anglo-Saxon world, this approach should be especially useful as a well-rounded, internally consistent alternative to the more extreme, unequal incarnation of capitalism which they presently confront.

Nurturing a socialist ecology

Socialism cannot emerge out of abstract, idealistic dreaming, imposed on society by someone who thinks they’ve discovered the “true” plan. Socialism must arise in response to concrete human problems, and our concrete efforts to solve those problems. As long as humans continue to suffer needless deprivation, hardship, and exploitation, people in large numbers will continue to fight for a better deal. And as long as capitalism remains unable or unwilling to meet those demands, then socialism will exist as a potential solution.

We conclude with a lesson from Milton Friedman, one of the intellectual founders of neoliberalism. For many years during the postwar Golden Age, he was a marginal outsider, his seemingly extreme ideas shunned by those who believed that some quasi-Keynesian fine-tuning had perfected capitalism. He kept working, however, to challenge the underlying assumptions of that postwar economic establishment, and flesh out his aggressive pro-business alternative. He was motivated by faith that when a moment of crisis arrived, he would have a complete alternative program to present and implement… Tragically, the first appropriate crisis was the military coup and CIA intervention in Chile in 1973, which overthrew the elected socialist government of Salvador Allende; Chile thus became the first country in the world to experiment with full-on neoliberal economics (imposed, in this case, alongside the assassination and imprisonment of tens of thousands of socialists). Soon Friedman’s program was being adopted in countries around the world.

Progressives need our own alternative program, fleshed out and ready to go, and a similar willingness to think big. And where possible, we should start implementing it: with concrete experiments in non-profit ownership, production, and governance, supplemented by complementary macroeconomic, labour market, and environmental policies. That way, the next time a crisis hits capitalism (and that will happen, potentially sooner than later), we will have an alternative vision ready to go. We didn’t have one during the 2008-09 global financial crisis, and that permitted capitalism to emerge from that crisis politically stronger than it went in. Unlike Friedman, of course, we dream of a humane, egalitarian, and sustainable economy. But we should be at least as ambitious as he was, and we should get ready to make our dream a reality.