First steps in explaining the crisis of neoliberalism

This is an initial specification of my current understanding of the basic dynamic underlying the crisis of neoliberalism. It is schematic and lacks detail, it largely excludes the crucial dimension of subjectivity and culture, it restricts to one country what is inherently a global process, and it doesn't even begin to confront the difficult question of value. Hopefully we can begin to address these deficiencies going forward.

Like all other forms of capitalism, neoliberalism is fundamentally animated by the ongoing accumulation of capital. What marks neoliberalism as economically different from other regimes of accumulation is its particular solution to the problem of maintaining profits as capital cycles thru the realms of production and consumption.

Every producer needs to find a consumer willing to buy his or her product. This is a common-sense observation, but it runs into some tricky problems under capitalism. The issue is that, since the 1950s and the advent of a mass-consumer society, most of consumers' buying-power has been represented by wage earners rather than the wealthy, other businesses, or the state. That means businesses have to pay their workers enough money so they can afford to buy those businesses' products.

In the 1950s and 1960s, businesses did just that. As workers became more productive, their wages increased in tandem. The economy produced more goods, but with higher wages workers could afford to buy them. Productivity was increasing so fast in this period that businesses could continuously increase wages even after taking a hefty share for themselves in profits. This was a key pillar of the system known as Fordism, which produced still-unmatched rates of growth, plummeting poverty rates, and prosperity around the globe.

But by the late 1960s this system was starting to break down, and had entered full-blown crisis by 1973. A declining rate in the increase of productivity was a key underlying cause of the crisis, and together with growing macroeconomic disorder doomed the practice of steadily raising wages while maintaining profitability. One of the two had to give, and under capitalism the only sine qua non is profits.

Figure 1: Source

A new organization of the economy emerged by the early 1980s: neoliberalism. With lower overall rates of productivity growth (see figure 1), profits now had to be bolstered at the expense of wages, rather than increased alongside them. This was achieved thru a brutal attack on organized labor carried out jointly by business and the state, and the dismantling of the system of secure jobs, good benefits, rising wages, and robust social insurance. The results are reflected in the striking divergence between productivity and compensation seen in figure 2: after the 1970s, workers were still becoming more productive, but their income stagnated.

Figure 2: Source

This kept profits at an acceptable level, but it produced a new problem. Workers were producing ever more goods and services, but with their wages stagnant who would buy the product of their labor? The solution was brilliant in its simplicity: the growing gap between what workers made and what they could afford to buy was filled by credit.

Increasing levels of government debt also played a key role in keeping the economy going, but that will have to be left for another post. And there is much more to be said about how Americans were convinced to take on ever higher levels of debt, but for now let the brute fact suffice:

Figure 3: Source

It is important to note here that, contra some popular explanations of the crisis, this is not a matter of people being overindulgent. Yes, people were purchasing beyond their means, and yes, they were often buying things they didn't really need and yes, banks often used extremely poor judgment in extending credit to risky borrowers. But that's not the point. If our society had not convinced people, in one way or another, to spend beyond their means, the crisis would have happened much sooner. The problem is not with self-control — it's not even with predatory banks tricking people into ill-advised real estate refinancing. The problem is the fundamental contradiction within the neoliberal system of accumulation between suppressing wages to maintain profits and successfully selling goods and services.

Of course, ever-increasing levels of personal indebtedness is an unsustainable sales strategy. As the burden of debt grew heavier and heavier, the only question was what sector would set off the crisis. Since the speculation on mortgage debt was pursued with the most abandon (figure 4), it's hardly surprising that housing was where the crisis hit first.

Figure 4: Source

But it is essential to understand that the housing finance collapse was the precipitating event for the crisis, not the fundamental cause. Nor was financial deregulation the fundamental cause of the crisis (tho it did play a central role in coordinating and propelling neoliberalism too complicated to detail here). The reason these events unleashed a general crisis in the US (and global) economy, rather than remaining isolated in the housing industry, was the underlying brittleness of the system. The contradictions within neoliberalism had been building for at least a decade; the housing collapse merely unleashed that pressure in a devastating explosion.