What is an Institutional Crisis of Capitalism?

Lessons from the Thirties

How do corporations fit into society? And what happens when they don’t?

The answer to the second question is “an institutional crisis of capitalism” – like the one we’re currently experiencing.

An institutional crisis can be defined as a break in the continuity of social reproduction, which is never fulfilled by commercial relations alone, but always requires public intervention into the daily lives of citizens, through schooling, health care, policing, urban amenities and retirement provisions as well as multiple forms of regulation conditioning the activities of businesses. Every major crisis (of the kind that come around once every forty to fifty years) is marked by institutional breakdowns at various scales, whether local, national or international. Their severity interrupts capital accumulation itself: thus the crisis, including today's. Yet to understand the causes and outcomes of these breakdowns we also need to answer the first question, about the institutional “fit” that prevailed – for better or worse – in the decades preceding the turmoil. And that, in turn, entails gaining some understanding of the forces and social relations of production as they have evolved to maturity in each successive era of capitalist development.

In this post I’m going to look back on the development of the American corporation in the early 20th century and characterize the type of society that formed around the economic engine of mass manufacturing. Then I’ll point to some of social reproduction problems that caused the Great Depression, and to the initial solutions that were tried in the Thirties. In subsequent posts I intend to pursue this analysis through the Keynesian-Fordist and Neoliberal periods. I'm not going to get into footnotes, but the ideas on institutional crisis are based on the "Social Structures of Accumulation" school and the French "Regulation Approach." Check out David Gordon, Segmented Work, Divided Workers and Michel Aglietta, A Theory of Capitalist Regulation.

Why do all this history? Because it's impossible to understand the complex and contradictory structure of today’s society without retracing at least some of the pathways that have brought contemporary class dynamics into being. The hope is that the arguments on this blog could become sharper and more robust with reference to a more detailed historical account. An account whose broad lines and particulars you’re invited to reject, amend or improve, by the way.

The Drive System

The expansion of the US railroad industry in the period 1850-70 achieved two things: it established the distribution infrastructure of a continental market and it fixed the norms of corporate concentration, hierarchy and discipline that would later structure the monopoly sector of American business enterprise. From that point forward many other sectors such as oil, tobacco, steel, farm equipment, etc, all experimented with the practice of vertical integration, which meant taking over both supply and distribution chains for any given product line. Vertical integration allowed the corporations to manage an entire business process under a single hierarchy and thereby shrink the transaction costs that were previously incurred by multiple firms coordinating their activities through the marketplace. Significant economies of scale were achieved, unleashing price wars that contributed to the worldwide deflation of the 1870s and ‘80s. When profitability returned from 1897 on, conditions were ripe for the major banking houses (Morgan and Rockefeller) to oversee an immense merger wave which used national and international capital to assemble continental-sized firms, constituting the American monopoly sector in one financial swoop. US Steel, General Electric, International Harvester, Du Pont, Anaconda Copper, American Telephone and Telegraph, International Paper, National Biscuit Company, United Fruit, etc – all these and many others were founded almost simultaneously, in a single four-year period, from 1898-1902.

This was the backdrop against which the Detroit automobile industry emerged. As everyone remembers, assembly-line mass manufacturing was pioneered by the Ford Motor Co. from 1908 onward. Vertical integration was completed by a revolution in the technological organization of production. With its endlessly rolling conveyor belts and drop chutes moving product from upper to lower floors, the Highland Park factory that opened in 1913 realized Marx's uncanny vision of the capitalist factory as an integral function beyond human use or will: “an automatic system of machinery, set in motion by an automaton, a moving power that moves itself... so that the workers themselves are cast merely as its conscious in linkages” (Marx, Grundrisse). Both the role of the worker and the structure of command changed radically with the introduction of the assembly line. Ford’s essential contribution to American industry – portrayed so brilliantly in Chaplin's Modern Times – was known to contemporary observers as the drive system: a radically new form of labor control where the machines set the pace. Under this this new arrangement, the foreman’s heavy-handed authority over individual workers gave way to the disciplinary function of engineers maintaining the optimal (and gradually increasing) speed of highly rationalized production sequences. The rate of exploitation, and therefore of profit, rose dramatically with the drive system.

In 1914 Ford proclaimed the five-dollar day, effectively doubling wages for a shift reduced to eight hours. At the same time the corporation introduced the highly invasive Sociology Department whose attempts at educating and moralizing the workforce would catch the attention of a faraway observer, Antonio Gramsci, to whom we owe the concept of Fordism. As Gramsci wrote in the Prison Notebooks: "The enquiries conducted by the industrialists into the workers' private lives and the inspection services created by some firms to control the 'morality' of their workers are necessities of the new methods of work. People who laugh at these initiatives... thereby deny themselves any possibility of understanding... the biggest collective effort to date to create, with unprecedented speed, and with a consciousness of purpose unmatched in history, a new type of worker and of man." Yet the Sociology Department failed to achieve its aims and even the relatively high wages of Detroit industry were never enough to allow workers to buy the products they were producing. World War I gave a much more significant boost to the manufacturing economy, through the expansion of export markets and then institution of the War Industries Board for US military production in 1917. A second merger wave ensued, including the takeover of General Motors by Pierre Du Pont, who installed Alfred P. Sloan as corporate manager.

 

Sloan perfected the flow-chart of the multidivisional corporation. A central office under a single president took care of strategy, coordination, advertising and basic research, while separate divisions were established for vertically integrated product lines as well as regional distribution networks, all of which enjoyed a degree of relative autonomy. During the same period GM proposed two major innovations that would be adopted by all consumer-oriented mass-manufacturing corporations. The first was an expanded range of styling options and accessories changing year by year and inciting consumers to buy new models for status reasons, long before the previous purchase had exhausted its use value (this was the beginning of planned obsolescence). The second was a financing arm, GMAC (General Motors Acceptance Corporation) which provided the credit that made mass consumption a reality. The Twenties roared with the twin engines of assembly-line manufacturing and corporate-funded credit: Detroit and other US manufacturing centers exported their products around the world and the stock market entered what seemed to be an endless boom.

The growth of mass production and particularly of the automobile industry transformed American life, installing the vertically integrated multidivisional corporation at the center of the national economy, establishing a new middle class of college-educated engineers and managers, inaugurating mass consumption, introducing credit into the household economy, kicking off the beginnings of the suburban migration, and last but not least, elevating New York to the position of global financial center. Looking back on the period, the economist Joseph Schumpeter took it as the very example of a “long wave” of capital expansion. Long waves are not simple ten-year business cycles, but instead, forty- to fifty-year periods of development. At the outset of these periods, key technological inventions are transformed by innovative entrepreneurs into business organizations that become the leading sources of economic growth, restructuring an entire society in their image. As Schumpeter wrote in his book Business Cycles (1939):

The motorcar would never have acquired its present importance and become so potent a reformer of life if it had remained what it was thirty years ago and if it had failed to shape the environmental conditions – roads, among them – for its own further development. In such cases, innovation is carried out in steps each of which constitutes a cycle. But these cycles may display a family likeness and a relation to one another which tends to weld them into a higher unit that will stand out as a historical individual.

Schumpeter’s point is clear: the automobile industry lay at the center of US economic development in the early twentieth century. The question is, what happened in the Thirties to provoke the crisis of the mass-manufacturing era that began in the Tens and Twenties? And why do we call the following period “Fordism,” when the expansion of the industrial drive system and the accompanying forms of social reproduction had clearly occurred, in the US at least, in the period from 1898 to 1929?

Institutional Calamity

The answers to those questions cannot be simple. On the national level, the social structures of agricultural towns, urban immigrant neighborhoods, craft unions and single-proprietor businesses were all radically undermined by the scale, productivity and standardizing rationality of the vertically integrated multidivisional corporation and the drive system, whose relentless pace exhausted workers and whose tremendous efficiency soon led to problems of both overproduction and technological unemployment. On the international level, patterns of trade, finance, war-making and diplomacy were disrupted and transformed by the decline of the British empire after 1914 and the shift of hegemony toward the US as both world banker and global entrepôt of raw materials, machine tools and manufactured goods. The inability of New York fully to take over from London and provide credit to the rest of the world after 1929 led to the definitive collapse of the British gold standard, the failure of the export markets on which Detroit and other manufacturing centers depended for their superabundant production, and the ensuing employment crisis in all sectors of the US economy. The timid beginnings of employee welfare programs advanced by the monopoly sectors in the Twenties proved totally inadequate in the face of this widespread distress. And needless to say, the US banking sector was in no position to provide any further consumer credit, nor were households in any position to expand their already threatening burden of debt. The engineer and businessman Herbert Hoover, who was in office from 1929 to 1933, could do nothing more than exhort Americans to greater levels of motivation and self-organization. The last weeks of his presidency saw an uncontrollable run on the banks in which hundreds of thousands of individuals lost their savings, setting the stage for the social-democratic policies of the Roosevelt administration.

We think of Roosevelt as a miracle-maker who transformed the United States single-handed, through the generosity of the New Deal. In fact his administration used the bank run (which followed on the collapse of Kreditanstalt bank in Austria and the beginnings of the full-fledged European depression) as the pretext for quite draconian emergency measures, principally the Glass-Steagall Act that broke the power of the Wall Street investment banks and Executive Order 6102 that forced citizens to surrender their gold in exchange for paper dollars at the rate of $20.67 per troy ounce. Thus the New Deal began with powerful acts of repression and outright expropriation affecting the owners of money capital. Once that had been done, the government unilaterally raised the price of gold to $35 an ounce, generating an expansion of the money supply that could be used to vastly extend federal operations – at the price of withdrawing from the gold standard, abandoning the world market and thereby contributing to the rise of fascist war machines in both Europe and Asia.

FDR signs Social Security Act, 1935
Frances Perkins and Robert LaFollette directly behind, Robert Wagner to his right

The centerpiece of the Hundred Days, the National Recovery Act, was an ambitious central-planning effort that aimed to curb industrial and agricultural overproduction by the imposition of detailed regulatory “codes,” backed in some cases by subsidies. The goal was to eliminate the mountains of unsalable commodities and the vicious price-wars whose frequent consequences were bankruptcy and unemployment. However, the NRA was declared unconstitutional in 1935, by which point it had proven ineffective. Yet in parallel the New Dealers launched the Works Progress Administration and the Civilian Conservation Corp, which put masses of unemployed people back to work. They tried out an original form of regional industrial planning with the Tennessee Valley Administration for flood control, rural electrification and agricultural development. And in bold moves of still more lasting significance, they created the Federal Housing Administration, the Social Security Administration and finally the National Labor Relations Board, a product of the Wagner Act guaranteeing the right of workers to form unions. All of these projects allowed civil-society reformers of the Progressive Era to take up paying jobs for the public good.

Through this kind of legislation the role of the federal government expanded to include entirely new public-service sectors that complemented the process of middle-class formation initially launched by the monopoly corporations. The rise of industrial unionism, which began with the great wave of sit-down strikes in 1937, added yet another category to this process of middle-class formation, through the creation of labor bureaucracies and associated federal experts. The institutional response to the crisis laid the groundwork for a durable transformation of the US class structure. Politically, it also created the so-called “New Deal Coalition” that would dominate US politics for almost forty years, on the basis of multi-ethnic and cross-class alliances around the projects of collective bargaining, welfare provision and urban renewal.

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Yet despite all this, the underlying problems had not been solved. Another serious contraction, known as the “second depression,” struck the US economy in 1937. Many feared that progress in machine manufacturing would lead to permanent technological unemployment for broad swathes of the population, including not only craft workers but also poor sharecroppers replaced by giant new tilling and harvesting combines (as in a memorable scene from the film version of Steinbeck's Grapes of Wrath). Yet by the winter of 1937, shortly after Roosevelt was reelected with a tremendous majority of the popular vote, his administration's legislative initiatives were already paralyzed by a coalition of Republicans and Southern Democrats protecting both regional and capital interests. The difficulty of achieving a consensus on the need for radical change seems to be a characteristic of severe institutional crises. 

After a decade-long voyage to the brink of despair, the country’s definitive return to economic growth was only achieved by still greater outlays of the federal budget, legitimated by WWII and directly administrated by corporate executives acting in concert with military planners. The flip side of the careful limitation of industrial and agricultural production attempted under the National Recovery Administration was this relatively indiscriminate "Keynesian" spending, which pumped money into a runaway growth economy oriented to military rivalry, with its dramatic exaggeration of ordinary capitalist competition. The postwar social order would arise from government debt financing, corporate planning and military discipline, expanded through emergency measures to an economic space far beyond US borders. It would be based on a new wave of technological and organizational innovation precipitated directly by the conditions of multi-theater combat. And it would result, as I’ll show later on, in the formation of an unequal global trading regime that can be defined as Liberal Empire. The sobering lesson of the Great Depression is that economic growth could only be recovered through the response to an even greater calamity, namely all-out global warfare.

After all that, it's time for some conclusions. In an important post to this blog, one of our authors remarks on the “heroic” nature of the Fordist collectivity, as opposed to the cold and disjointed statistical aggregates that currently represent the social whole. Should we not understand this heroic collectivity quite literally, as the democratic expression of a military ardor that appeared as the only sure escape route from the economic disaster of the Great Depression? And yet by the very same token, should we not recognize how well-founded is the post-1968 resistance to the re-imposition of any such national unity? It seems to me that in order to draw inspiration from the social forms of the New Deal, with their undeniably positive egalitarian characteristics, one must also assess the geopolitical underpinnings of the postwar social compact. The difficulty lies in separating out the aspirations and achievements of the New Deal social democrats from the expansionary drive of Cold War capital accumulation. The fusion of these two dynamics is what is indicated – and in many ways, covered over – by the notion of a hegemonic postwar Fordism.

Ford B-24 bomber plant, Willow Run, Michigan, ca. 1944

The abject failure of the Bush-Cheney administration’s attempt to restart the military-industrial engines of economic growth shows just how important it is not to confuse the two trends – because the same formula can always be tried once again, with even worse consequences. Symmetrically, the failure of the Obama administration to propose any major policy change whatsoever to the financialized status quo reveals the fundamental need to generate a new collective project. Doing so requires overcoming deep divides. This can only be done if we understand the needs and desires that are generated by the class contradictions of American society.

In this post I’ve tried to tease out some of the bases on which the contemporary class composition was forged, in the course of a major institutional crisis of capitalism. In the next post I’ll examine the consolidated social structure of the Cold War economic order, and also look at its breakdown (roughly 1968-79) – a story that still haunts us today.