Saving capitalists from themselves

The biggest threat to capitalism is not Marxists but capitalists themselves. That’s the thought which struck me from reading Ann Pettifor’s claim that a Corbyn government could be good for business.

I’m thinking here of two analytically separate mechanisms.

The first arises from a simple identity, that the aggregate profit rate can be increased in one of two ways – either by increasing the share of profits in output, or by raising the output-capital ratio. Thatcherism tried the former – for example by weakening workers’ bargaining power. Post-war social democratic Keynesianism tried the latter: it hoped that full employment would keep the capital-output ratio high and hence maintain profit rates and therefore incentives to invest,

Ann’s point is that a Corbyn government would also try the latter; looser fiscal policy would raise the output-capital ratio and hence profit rates. “Falling incomes and spare capacity have not been good for business” she says.

The second mechanism lies in the fact that the success of capitalism rests upon two things: accumulation and legitimation. On the one hand, capitalists need high profits and incentives to invest such as a favourable tax regime. On the other hand, though, the system must possess a minimum of legitimacy so that people support it.

These two conditions can sometimes conflict. Take, for example, high house prices. On the one hand, these help sustain capitalism. High rents and mortgages force people to work long hours thereby giving capital a quiescent workforce. As David Harvey writes, “barriers of private property in land…[are] needed to ensure an adequate supply of exploitable wage labour for capital.” On the other hand, though, if people feel they have no chance of acquiring property, they’ll see no hope of getting a stake in the system and this will undermine its legitimacy. As Thatcher recognised, a property-owning democracy shores up support for capitalism.

High inequality can also undermine legitimacy. If people feel the rich are ripping them off – for example by not paying their “fair share” of tax – there’ll be a backlash against capitalism.

Intelligent Tories – yes, there are some if you look hard enough – recognise this problem. Sebastian Payne in the FT quotes Nick Boles:

Roosevelt’s key insight was that capitalism in the 1890s in the US was becoming its own worst enemy,” he says. “It had been captured by robber barons and monopolistic groups. It was destroying the interests of the small businessman, the small farmer and the consumer. He worked out that if those who believed in capitalism didn’t reform it, then the populists would sweep it away.” 

Again, Labour might be the saviour of capitalism here. Its plans to reduce house prices, raise the living wage and increase corporate taxes might increase the legitimacy of the system.

From this perspective, we can regard the function of the state in capitalist society as being to solve a collective action problem – the fact that what is in the short-term interests of individual capitalists might not be the longer-term interests of capitalists as a class.

For example, each individual capitalist wants wages to be as low as possible, compatible with sufficient recruitment and motivation. But if wages are low, the market for consumer goods will be weak*. Or each individual capitalist might want tax breaks and rigged markets in his favour but these undermine the legitimacy of the system.  (This might be the eventual effect of Trump’s tax plan.)

It’s possible that a Corbyn government would solve these collective action problems.

But only possible. It’s not clear that there is as much spare capacity as Ann thinks: the OBR and Bank of England think there isn’t. If there’s not, then looser fiscal policy might lead to higher interest rates rather than a higher output-capital ratio. Maybe higher corporate taxes would lead to more tax-dodging or less investment. Or perhaps a higher wage floor would, at some point, cost jobs. And wage-led growth might not work.

The difference between Marxists such as me and social democrats such as Ann is, I suspect, that we are more sceptical than she is of governments’ ability to fix capitalism.

This, though, is a comradely debate for another day. My point here is that it’s possible that Labour will save capitalists from themselves. The narcissistic over-entitlement of the stupider capitalists, however, means they cannot see this.

* This dilemma can be overcome by allowing workers greater access to credit, as Thatcher did. But this might not be a permanent fix.

Comments

[TickyW]

Ironically, it was Keynesian that saved 1930s' capitalism from itself.

[Simon Arthur]

My fundamental issue with the Labour Party is that while they want a fairer distribution of income, they still want in within the capitalist system. This is fine, but they are still dependent on capitalism to provide those funds and ignore all the socio-economic and especially ecological debates that come with it. Can you be both ecologically friendly and keep the mines open? Can you support jobs and vote to shut trident down? It seems to demand too many contradictory views to hold (which Corbyn seems to being forced to realise now) which Labour just aren't examining. They may jump start capitalism but i, personally, cant see it being in anything other than terminal decline. But im a pessismist....

[Malcolm]

I agree with your analysis of the problem with democracy. We are so close to the Times when the world’s problem have to be solved that it is unrealistic to think that our current form of democracy will give us the answer.
It is essential that we find a way to put the world on a war footing to resolve the multiple,icity of issues facing us. I recognise that this will take time but 5 years is about as much as we have got left to persuade by example and by argument the key nations in the world to join a New United Nations to implement a sustainable economy. There are adequate resources for the planet to provide a good life if we manage its resources sustainably.
Such a policy can only succeed if it is introduced slowly and extended as fast as its acceptance permits,but it is the direction that Labour is uniqu;year placed to embrace.

[Ahmed]

"weakening workers’ bargaining power."

Bargaining power can raise nominal wages but it can not raise real wages because when nominal wages rise, businesses pass along the costs as price increases, which leaves real wages unaffected.

Similarly, if nominal wages fall due to a lack of bargaining power, competition sees to it the excess profits of businesses are competed away. Prices fall with nominal wages. Real wages, in this case also, are unaffected.

No, the only way to get real wage increases is by increasing productivity.

Incidentally, during the Great Depression, while nominal wages fell, prices fell faster than wages, which meant that real wages were actually rising.

So much for businesses taking advantage of unemployed workers. (I think I just killed Marxism).

[Luis Enrique]

you sometimes ask what centrism is for, I think reading "saving capitalism from the capitalists" (pretty much the first economics book I ever read, on your recommendation, back in what 2003 or something) and building a policy platform partially based on that wouldn't be a bad answer.

[Ralph Musgrave]

"High rents and mortgages force people to work long hours...". The decline in interest over the last 30 years or so has mean that mortgage payments as a percent of income has remained unchanged, far as I can see.

[Blissex]

«reading "saving capitalism from the capitalists" [ ... ] and building a policy platform partially based on that wouldn't be a bad answer.»

As usual our blogger and this comment, and they author of that book, confuse very, very different things by handwaving terminology: what socialdemocrats want to save is not "capitalism from capitalists" but "the industrial mode of production while avoiding being wiped out by capitalists".
The valuable bit is the industrial mode of production; what socialdemocrats think is that political dominance by late-capitalism can be moderated but not avoided, so what matters is minimizing the tendency of the capitalist political system to asset strip or over-exploit the industrial mode of production.

[MrRohrer]

@TickyW there is zero irony in Keynes saving capitalism from
Itself in the 1930s - that was exactly Keynes’ intention.

[Arthur Murray]

The Tories have a problem. Up to the 12017 general electionLabour borrowing could always be criticised as being a Bad Thing because "there is no magic money tree".
And yet when the Tories needed £1 billion to give to the DUP to get their support for a minority government the magic money tree coughed up. Even the British public understood what was going on. So that approach to Labour borrowing is no longer possible; a new one is needed, something that economically-naive people can understand.
So the Tories settle on: "what about the interest that Labor would have to pay on their borrowing?" Although it's a rather more complicated concept than a "magic money tree" a lot of people understand that you have to pay interest on a loan. The good news for the Tories is that those same people do not understand Zero Lower Bound.