20 March 2011

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.


  1. How do we account for the fact that workers were willing to continue consumption on credit to the point of indebtedness? To what extent do we want to claim that a willingness to be indebted is produced by neoliberalism? Given that these levels of consumer debt that we see in this era coincided with the extension of easy credit, many claim that buying on credit is somehow natural, or produced by character flaws, etc. While this type of analysis is largely irrelevant from the standpoint of history, it still seems important for us to account for the consumer's outlook on debt and credit.

    One thing that strikes me is how few examples I can think of in which workers and activists actively questioned the premise of buying on credit. There are, of course, many consumer advocates, trying to make sure that there isn't anything funny in the fine print of credit card agreements, but this stops far short of criticizing the system itself. And we also saw significant campaigns for the extension of _more_ credit (e.g. anti-red lining campaigns.) So what about neo-liberalism produces this kind of consciousness?

  2. That's a difficult question that I don't have a fully satisfying answer for. One way of looking at it would be to interpret the subjectivity of the '00s as a case of speculative investment psychology - unprecedented in its breadth within the population, but involving a similar process among wage laborers as it always has among investors. Capitalism's seemingly automatic self-expansion (except for periods of crisis) is fundamentally what makes this kind of thinking plausible, and as more of wage workers' (nominal) wealth was converted to financial instruments, presumably they would become more vulnerable to this mystification.

    But it may also be that as the productive capacity of society grows and the fetish of hard work as the source of wealth becomes less and less plausible, there is a kind of social intuition that access to increased consumption *ought* to become easier and easier. Predatory banks then took advantage of this feeling and, packaging their loans in forms too complicated to trigger alarm bells on the part of their victims, fueled the debt binge.

    These are just stabs in the dark since I haven't given it much thought. But you're right that a complete explanation of the crisis would need an adequate explanation for the transparently irresponsible run-up of debt.

  3. There also needs to be some attention to the "demand side" of the equation. Even if the above could adequately explain why people thought it possible to run up credit forever, we also need to understand why they actually wanted to.

    There are many different directions such an inquiry could go: did advertising become more effective? Are people pursuing consumerism as part of a competition with acquaintances who are also consuming more? (If so, why was this competition less intense under Fordism?) Are people consuming as a kind of compensation for other kinds of fulfillment that are chronically frustrated under neoliberalism? Is intensifying consumerism related to the shift in the basis of personal identity from work to lifestyle that seems associated with neoliberalism?

    These factors might be distributed unevenly by class, age, race, or gender, so a good handle on who exactly is doing what kinds of consumption and assuming what levels of debt would be helpful. So would some good comparative examples (for a start, this graph shows that under neoliberalism high levels of household debt are by no means limited to the US). The fact that until recently Japan actually had a higher level of household debt than the US, despite much less inequality, indicates that "keeping up with the Joneses" might not be the main factor.

  4. I'm not sure the use of credit is the most crucial part of this crisis. To say that credit was the basis for accumulation under neoliberalism basically says that neoliberalism was a forty year long ponzi scheme. I don't really buy that.

    As far as I understand the explosion of debt is part of the process of a dying regime of accumulation attempting to keep itself afloat after its ceased to become viable. The end of its viablity though is not because of the ultimate collapse of debt cycles, but because of falling rates of profit due to over production. Basically it's due to a failure of the system of *production* not consumption.

    The system of production that defined the last forty years I think is best explained not as lowering labor costs, but making production more flexible. This includes lowering labor costs, but a lot of other stuff like just-in-time production and geographic mobility. This is the kernel of Harvey's concept of "flexible accumulation." The failure of that system probably started around the early 00's, when debt began to rise precipitously.

    I'm not really sure how to figure out what happened there, but if we want to explain what changes would count as an actual *solution* to this crisis then we need to understand that. We need to explain how production will be revived, not consumption.

  5. Earl,

    I'm not quite sure how to evaluate your claim that production has failed. Isn't a crisis of overproduction also a crisis of underconsumption? It seems like the crisis occurs because production is mismatched to the level of consumption. How would you envision a revival of production?

  6. Earl is right to point to the production of value as the big gap in the explanation I laid out here. I obliquely referred to this issue when I noted that productivity rose more slowly under neoliberalism than under Fordism, and that this is why increasing exploitation was necessary.

    If we use productivity as a measure of the expansion rate of value (which is problematic, but it's as close as we're likely to get with existing statistics), then some key questions about neoliberalism come up. Neoliberalism has *consistently* underperformed Fordism, and compensation has been stagnant across the period, which is why deepening consumer (and government) indebtedness is a long-term feature of neoliberalism, not just of its senescence. So I would be reluctant to see the crisis of debt as a new development ca 2000.

    I agree that computerization, containerization, and just-in-time were important in expanding value by permitting its more efficient circulation. The other key development under neoliberalism that requires analysis is the incorporation of new pools of labor, especially in China. But for whatever reason (and hopefully we'll talk more about that), neoliberalism seems less adept than Fordism, at least within the US economy.

    The ultimate point is that, in developing a theory of crisis under capitalism, I think it would be a mistake to reduce things to production. Value must be produced, but it must also be realized, which means the organization of consumption is an essential issue and a potential source of crisis. Tentatively, I would argue that once in place, neoliberalism would have developed this dysfunctional system of credit-based consumption regardless of the rate of productivity, so it makes sense to foreground the issue of debt. But I admit that we'll need to fill in a lot of gaps before we can make a considered judgment on that point.

  7. The graph that shows hourly compensation rising much more slowly than productivity is faulty. Hourly compensation is compensation/hrs and productivity is output/hrs. Since the numerators--compensation and output —- have increased at almost exactly the same rate since 1970 in the U.S. and the denominators are identical, it follows necessarily that hourly compensation and productivity have also increased at almost exactly the same rate since 1970. And this is what you find, if you look at nominal compensation and output, and when you adjust them for inflation *appropriately*.

    The people who find a discrepancy between the growth of hourly compensation and the growth of productivity make an apple-to-oranges comparison: when they adjust for inflation, they "deflate" compensation by one price index and output by a different one. See papers by Bosworth and Perry:


    and Feldstein:


    In this context, it’s definitely wrong to use different indexes to deflate. The point of comparing trends in hourly compensation and hourly productivity is to see if they’re equal or not, in order to see if workers’ *share of output* is constant. If they’re equal, then workers’ share of output is constant. But if growth of hourly compensation is less (more) than growth of productivity, then workers’ share of output is falling (rising). Now, since what’s at issue is shares of output--how the output is distributed--and everyone draws conclusions about that from the comparison, the *whole* output must be deflated in the same way. This means that one needs to use the same deflator for compensation and for output.

    Andrew Kliman