Capitalism as a fetter

I was a little disappointed to see Tony Yates’ reaction to Aaron Bastani:

Can we ditch 6th form debates and have someone arguing for evidenced based improvements to our policy portfolio please?

My disappointment is the failure to see that there is, if you like, a third way between utopian communism on the one hand and technocratic tweaks on the other.

It begins from the idea that ten years of stagnant productivity might mean we are now at the phase of capitalism that Marx foresaw:

At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. 

If this is the case, then Tony’s reply to Aaron is half right. He’s right to decry utopianism and demand improvements to our policy portfolio. Where he might err, though, is in not seeing that capitalism itself is the problem. If so, we need quite radical solutions.

So, how might capitalism now be a fetter on the productive forces? Here are a few ways:

First, low investment and innovation might be due in part to the fact that these have external benefits which firms cannot internalize. William Nordhaus famously showed that capitalists capture only a “minuscule fraction” of the benefits of innovation. It might well be that one reason why techno-optimism co-exists with low investment is that firms are loath to invest for fear that their profits will be competed away by future innovations.

Secondly, it’s possible that tough intellectual property laws stifle innovation whilst protecting monopolies.

Thirdly, the failure to align managerial and shareholder incentives has led to a lack of productive investment. As Stutz and Kahle have shown, quoted firms today tend to be older and to invest less than their counterparts did years ago. In a similar vein, entrenched management acts as what Joel Mokyr calls a “force of conservatism.” Eric Brynjolfsson and Andrew McAfee say that "significant organizational innovation is required to capture the full benefit of…technologies." But bosses lack the incentives or the skills to undertake such innovations.

Fourthly, inequality – not just of income but of workplace power – might itself be a fetter on production. I’m thinking of (at least) three mechanisms here:

 - It breeds distrust (pdf). The reduces growth in several ways. It might reduce the many transactions which depend upon trust. The fear of future expropriation or tax increases might deter investment and innovation. It might encourage capitalists to invest in guard labour or in political lobbying to entrench their privilege rather than in productive activity. It can lead to worse policy-making as populism increases because people no longer trust “elites”: Brexit might be a consequence of high inequality.

 - The high-powered incentives that lead to big CEO salaries can backfire. They encourage dishonesty, reduce creativity and divert management effort from hard-to-monitor tasks such as long-term innovation and towards easier-to-monitor ones such as short-term earnings management.

 - Inequalities of wages within the workplace cause dissatisfaction (pdf), which demotivates employees and reduces productivity. Inequalities of power can have the same effect. They demotivate more junior staff, who expect to be told what to do rather than use their initiative. They can also suppress productivity by failing to fully exploit the dispersed fragmentary knowledge of “ground truth” which workers possess.

You might wonder: if all this is the case, how did capitalism ever grow? One answer comes from Schumpeter; growth was powered by an entrepreneurial spirit which has been supplanted by bureaucratic management. Another answer is that capitalism has changed. What worked when workers were unskilled drones operating physical machines does not work when skilled immaterial labour works with intangible assets. And thirdly, we must remember that capitalism grew fastest between 1945 and 1973, when it contained a big dollop of social democracy.

If this diagnosis is right, what’s the answer? For me, it would comprise a mixture of conventional supply-side policies, state support for innovation and worker coops, and measures to improve workers’ bargaining power such as a citizens income and full employment to incentivize labour-saving productivity. You might object that these aren’t very socialist. But they should be a stepping stone to socialism, a form of accelerationism. We can’t get to a communist utopia overnight.

Comments

[Peter K.]

Fully support increased workers' bargaining power and full employment to incentivize labour-saving productivity.

In the U.S. there has been a push among progressive economists to focus on monopoly as a source of many ills, putting workers at a bargaining disadvantage and squashing competition and entrepreneurship.

They argue that during the soc dem golden era there was tougher anti-trust enforcement. It went away with the neoliberal era and they look approvingly on the EU's massive fine of Google for example. ($5 billion which is only 2 weeks of income for Google)

As a socialist I'm not sure what to make of it. "Competition" seems overrated to me.

[Blissex]

«ten years of stagnant productivity might mean we are now at the phase of capitalism that Marx foresaw:»

It could be that rather than 10 years it has been over 50 years, barely compensated by massive debt expansion.
My impression is that since Marx's time what has happened has been not a huge increase in productivity, but a huge increase in land rent extracted from fossil fuels.

That is, we haven't escape the malthusian trap, we have simply moved to one with a much higher ceiling, because we have discovered that some land that looked like desert (for example Ghawar) actually is much, much more fertile than the best land of Kansas or the Ukraine, as long as it does not lose that fertility.

Malthus or Marx may have been right in the longer term, their expectations may yet come to pass, delayed by this fantastic gusher of land rent.

«William Nordhaus famously showed that capitalists capture only a “minuscule fraction” of the benefits of innovation.»

But those benefits are in the vast majority the consequence of having discovered that amazingly fertile land producing extremely cheap calories, rather than "innovation" as such.

[Blissex]

«ten years of stagnant productivity might mean we are now at the phase of capitalism that Marx foresaw:»

The overall point I am trying to make is that the "political economy" is both a machine-system, that can be studied with an engineering approach, and a social-system, that can be studied with a political-economics approach.
Of course the two interact, and a better social-system can result in a more productive machine-system, but also viceversa.
In particular the vast majority of the increase in living standards in the past 200 years may not be due to improvements in the social-system, as in improvement in technology or organization of production as such resulting in a greater efficiency of the machine-system, but to an extraordinary increase in the *inputs* of the machine-system, that is the extraordinary increase in the input of calories into the production process thanks to the diffusion of extremely cheap "food"/"fuel", first coal and then oil to power the machine-system.
That is the machine-system has only in small part improved to produce more with the same or fewer inputs, but it is rather producing a lot more with a much, much, much bigger amount of inputs; overall its material efficiency may even have substantially fallen.

[Tony of CA]

Capitalism is toast.

[Kaleberg]

Capitalism never worked all that well. It worked best under extreme socialism pressures, from the mid-1940s into the 1970s. Socialism and unionism made sure workers got some benefit from rising productivity. Once that collapsed, that stopped. That meant the market stopped growing. Less demand, less need for innovation. More seriously, we have two generations of workers who KNOW that no matter what and how well they produce, they won't see much for it. It's the old Soviet Union. They pretend to pay us, and we pretend to work.

[Heim]

Responding to Kaleberg. The hilarious thing is that our Sunday morning conversation was exactly the old Soviet Union paradigm. Keep up the good work!

[Scratch]

"Capitalism is toast."

Either capitalism or democracy is eventually toast. You can only con some of the people all of the time if they're not cold and hungry and can't remember something better.

[marku52]

Blissex, Yes, Yes, and Yes.

It astonishes me that "learned economists" stare uncomprehendingly at the lack of growth during the middle ages. Suddenly growth appears miraculously. "We don't know how that happened"

Coincidentally, at the same time we discover how to use fossil fuels.

Why is growth now stagnant? At least one cause (of many) is that all the "good stuff" is now used up or polluted.

[Diyarbakır çiçekçi]

capitalism has good and bad sides.

[Al]

Growth from 1945-1973 was the result of reconstruction in Europe and the Pacific Rim after WWII, plus economic development in the developing world, Social Democracy had little to do with it.