Chinese exploitation and multi-national corporate profits

The extent to which multi-national corporations are profiting from super-low Chinese wages is often obscured in the rush to point nationalist fingers at China’s economic policies. In the corporate media the subject generally remains a taboo.

One way of shining some light on that profiteering is this: During the mid-2000s, Wal-Mart was China’s fifth-largest export market. In other words, there were only four countries that imported more goods than Wal-Mart, the world’s biggest retailer, did by itself.

By now, Wal-Mart has slipped a bit down the charts because the volume of Chinese exports continues to grow; but the company would remain among the top ten destinations were it a country by itself. Wal-Mart is hardly unique among multi-national corporations, but, true to its general business practices, is perhaps the most ruthless in not simply exploiting Chinese workers but in accelerating the trend of moving manufacturing to the location with the lowest wages.

Shanghai (photo by dawvon)

Other major United States retailers began procuring clothing items from Asian subcontractors before Wal-Mart, but the relentless drive to have the lowest costs forced an acceleration in the shift of production to countries with the most exploitable populations. If a manufacturer wants to continue to have contracts to supply Wal-Mart, then it has no choice but to ship its operations overseas because it has no other way to meet Wal-Mart’s demands for ever lower prices.

Eighty percent of Wal-Mart’s suppliers are located in China. And because the company is so much bigger than any other retailer, it can dictate its terms. Gary Gereffi, a professor at Duke University, said in an interview broadcast on the PBS show Frontline that “No company has had the kind of economic power that Wal-Mart does, to be able to source products from around the world. … Wal-Mart is able to transfer whole U.S. industries to overseas economies.”

Because of its size and its innovation in computerizing its inventory and tightly managing its suppliers, coupled with its willingness to squeeze its suppliers to the exclusion of all other factors, Wal-Mart holds life or death power over manufacturers, Professor Gereffi said:

“Wal-Mart is telling its American suppliers that they have to meet lower price standards that Wal-Mart wants to impose. The implication of that in many cases is if you’re going to be able to supply Wal-Mart at the prices Wal-Mart wants, you have to go to China or other offshore locations that would permit you to produce at lower cost. … Wal-Mart’s giving them the clear signal that you can’t be a Wal-Mart supplier if you can’t produce at substantially lower prices. … You can go to China, or, in many cases, many U.S. suppliers can’t make that move, and they just go out of business, because Wal-Mart is the dominant company for many U.S. suppliers. If they can’t go offshore, those suppliers end up going out of business.”

The race to the bottom

Wal-Mart leverages this power further by contracting to make products with its own name (“private-label products” in retailing lingo) and undercutting makers of traditional branded products, who can’t survive unless they, too, drive down their costs. This only accelerates the race to the bottom.

Nonetheless, let us not lay all the blame for corporate globalization at the doorstep of Wal-Mart headquarters. The internal logic of capitalist development is driving the manic drive to move production to the locations with the most exploitable labor, not any single company, industry or country. One company will inevitably become the most ruthless in implementing what companies in a variety of industries are forced to do under the rigor of capitalist competition. Wal-Mart so happens to be it.

Fully two-thirds of China’s exports are shipped from factories wholly or partially owned by non-Chinese companies. The world’s multi-national corporations profit immensely from China’s low wages and like the current Chinese system just as it is.

As I noted recently in my Feb. 9 post, extraordinarily low wages and harsh working conditions endured by Chinese workers are fueled by a steady flow of peasants from the countryside (where wages are even lower) to the cities. Most of these workers, often young women, intend to return to the countryside.

Working conditions are too harsh to endure, and wages are so low that it can literally be impossible to survive on them, report John Bellamy Foster and Robert W. McChesney in an excellent article in the February 2012 edition of Monthly Review:

“The eighty hour plus work weeks, the extreme pace of production, poor food and living conditions, etc., constitute working conditions and a level of compensation that cannot keep labor alive if continued for many years—it is therefore carried out by young workers who fall back on the land where they have use rights, the most important remaining legacy of the Chinese Revolution for the majority of the population. Yet, the sharp divergences between urban and rural incomes, the inability of most families to prosper simply by working the land, and the lack of sufficient commercial employment possibilities in the countryside all contribute to the constancy of the floating population, with the continual outflow of new migrants.”

Starvation wages and inhuman working conditions

The world’s attention on those harsh conditions have lately centered on the Foxconn electronics factory, manufacturer of Apple computer and phone products, after a rash of suicides by employees who could no longer endure their prison-like conditions. Foxconn executives showed their humanity and compassion when their response was to install nets to catch future suicide attempts. But as with Wal-Mart, Apple is far from alone in exploiting low-wage workers; in fact, these companies are the norm and not the exception.

Here are but three examples, each a separate investigation conducted by the Institute for Global Labour and Human Rights:

  • Workers at the Meitai factory are prohibited from talking, raising their heads or putting their hands in their pockets. They are fined for being one minute late, for not trimming their fingernails or for stepping on the grass, and are searched on the way in and out of the factory. Workers sit on hard wooden stools twelve hours a day, seven days a week, for a base pay of 64 cents an hour. The Meitai factory produces computer equipment for companies including Dell, Microsoft, IBM and Hewlett-Packard.
  • Workers at the Jabil Circuit factory work twelve-hour shifts, seven days a week — they are at the factory 84 hours a week. They are prohibited from sitting down and are paid 93 cents an hour. Workers who make a mistake are forced to write a “letter of repentance” begging forgiveness, which they must read aloud in front of all their co-workers. This factory produces circuit boards for Whirlpool, General Electric, Hewlett-Packard and Nokia.
  • Base wages at the Yuwei Plastics and Hardware Product Company are 80 cents an hour for 14-hour shifts performed seven days a week. During the peak season, workers toil 30 days a month, often drenched in their own sweat. Safety equipment is turned off to speed up production. The punishment for missing one day of work is to be docked three days’ wages. Yuwei produces auto parts for Ford, General Motors, Chrysler, Honda and Volkswagen.

These are the prices that millions of people are forced to pay so that more money can be distributed upward. The profits from these reductions on labor costs are distributed to high-ranking corporate executives and to shareholders. It pays to be cheap: Wal-Mart reported net income of US$16.4 billion on revenue of US$419 billion for its fiscal year ending on Jan. 31, 2011. Four members of the Walton family, descendants of the company founder, are each among the 22 richest people in the world, according to Forbes magazine — they are collectively worth 73 billion dollars.

One final thought related to Apple. The New York Times columnist Paul Krugman recently wrote that, although Apple is the largest U.S. corporation by market value, it employs only 43,000 people in the U.S., but indirectly 700,000 overseas through its subcontractors. By contrast, 50 years ago, General Motors was the largest U.S. corporation but employed ten times as many U.S. workers as does Apple. Those were union jobs, not sweatshop jobs.

Chinese workers make about five percent of what workers in the United States earn. I strongly suspect that Apple products are not sold at five percent of what they would be had they been produced domestically. Good for corporate profits, but not good for working people.

As wages are driven down further, who will be able to afford the products that are made? If wages fall below a level at which employees can remain alive, what does that portend for the future? That such a question can even be asked illustrates the insanity of our economic system.


European monetary fables tell a story, but for whom?

Fables have long been used to tell stories and impart “moral” lessons. Not limited to bedtime stories, fables are a common device to propagate “lessons” that powerful interests wish to suffuse through a society. A favorite fable nowadays is that of the virtuous Germans and the lazy Greeks. Punishment – excuse me, “structural adjustment” — is the natural denouement of this oft-told fable.

In reality, this mythology has about as much to do with reality as the big bad wolf blowing down grandmother’s house.

Greek workers actually work many more hours than do Germans, and earn less. The “secret” to Germany’s economic dominance within the European Union is cuts to German wages. Germany has undercut other countries that use the euro as their currency by suppressing wages, a process that took form under a Social Democratic government.

View of Vikos Gorge, Greece (photo by Skamnelis)

According to the Organisation for Economic Co-operation and Development (an intergovernmental club of the world’s advanced capitalist countries), Greeks worked, on average, 42.3 hours per week on their main job and 2,109 hours for the year 2010. Germans worked, on average, 35.7 hours per week on their main job and 1,419 hours for the year 2010.

To put those figures in further perspective, Greeks worked more hours than any other people in the European Union; only South Koreans worked more among the world’s advanced capitalist countries.

So much for “lazy” Greeks. Moreover, the average annual wage of a Greek worker is 73 percent that of the German average, despite the cliché of the pampered, overpaid Greek trotted out at every opportunity.

German industrialists profit on backs of German workers

Nonetheless, it was written above that it was suppression of German wages that is a major underlying cause of European economic imbalance, although the already low and falling-further wages in Greece are leading to a collapse of domestic demand there. European Central Bank policy is to target inflation at two percent per year. But, according to the International Labour Office, German wage increases since 2001 have averaged half of one percent per year, consistently below the German inflation rate. To put it another way, the ILO has calculated that German productivity has remained virtually unchanged in relation to the productivity of all countries that use the euro, while German wages have declined by more than ten percent relative to the composite wages of all other euro-zone countries.

In other words, the prosperity of German manufacturers has come at the price of a decade of wage cuts (adjusted for inflation) suffered by German workers. Sound familiar? Reduced income leads to reduced consumption, so exports account for a steadily rising portion of German gross domestic product. In relative terms, it becomes more difficult for other European Union countries to compete with German products, particularly in other countries using the euro, because German manufacturers increasingly can undercut them. Manufacturing capacity elsewhere is shuttered, reinforcing German dominance and increasing unemployment in the countries on the receiving end of the exports.

A British economist, Engelbert Stockhammer, in a paper published last year, described this phenomenon bluntly:

“Germany has pursued a policy of aggressive wage restraint resulting in large current account surpluses. German gains in competitiveness (since the introduction of the Euro) have not been founded on superior technological performance, but on more effective wage suppression. … Simply put, German wage suppression rather than fiscal profligacy is at root of the crisis of the Euro system. … Europe needs a set of economic institutions and policy rules that addresses such imbalances and their underlying mechanisms.”

The imbalances within the European Union, the economic crisis caused by financial bubbles and reckless financial speculation, the ever increasing ability of capitalist elites to impose their preferred policies on governments, the increasing ability of financial speculators to maintain a stranglehold on capitalist economies and the pervasive ideology of neoliberalism to the near total exclusion of alternatives has led to the precipice. The punishing austerity being imposed on Greece had previously been reserved for countries in the developing world or outside the capitalist core; now these immense social forces are attempting to crush an advanced capitalist country.

It’s no accident the European Union is undemocratic

The particular constellation of forces that have led Greece to its present position originate in Brussels as well as in Berlin. At the European level, there is a conscious project at work. The European Union is, at bottom, an attempt by European capitalists to remold their societies to be more like the United States, with its extreme disparities in wealth and privilege. An impediment to such a goal is that people across Europe have the habit of asserting themselves, not only to defend their social gains but sometimes to push forward. There was a general strike in Denmark in 1998, as an example, in which one of the key demands was for a sixth week of paid vacation. (We in the United States ought to let that one sink in.)

European capitalists also desire the ability to challenge the United States for economic supremacy, but cannot do so without the combined clout of a united continent. This wish underlies the anti-democratic push to steadily tighten the European Union, including mandatory national budget benchmarks that require cutting social safety nets and policies that are designed to break down solidarity among wage earners and different regions by imposing harsher competition through imposed austerity. These rules are designed by central bankers to benefit European big business. Europe’s capitalists and central bankers are no less shy about adopting neoliberal ideology than their counterparts elsewhere, but are reliant on a supranational project to override national governments that must contend with popular resistance.

The Friedrichstrasse in Berlin (photo by De-okin)

Thus, economic downturns and stagnation are always portrayed as the fault of working people refusing to be more “flexible” or earning too much money or “selfishly” expecting to retain hard-won benefits.

The European Union, in its current capitalist form, is a logical step for business leaders who desire greater commercial power on a global basis: It creates a “free trade” zone without social accountability while giving muscle to a currency that has the potential of challenging the U.S. dollar as the world’s pre-eminent currency. The weakness of the supranational form is that it collides head-on with nationalism, which acts as a disorganizing force within the E.U., whereas in countries like the U.S. and China nationalism is a potent unifying force.

An irony here is that it is precisely nationalism that German capitalists and their corporate media outlets wield to maintain the policies that have worked out so well for them. The German newspaper Bild — the equivalent of a Murdoch tabloid — is fond of screaming headlines such as “Now they want more!” in response to further loans to Greece. Never mind that the Greek government is merely a pass-through; the loans are going straight to the banks, bond traders and hedge funds that hold Greek debt, and it is Greek workers, not German workers, who will be paying the price. A terrible price it is: During 2011, Greek public- and private-sector salaries were cut by one-third and pensions reduced, while many employees and pensioners have ceased being paid at all. This month (February 2012), the Greek parliament, literally on the orders of the European Central Bank and International Monetary Fund, voted to cut the minimum wage a further 20 percent, unilaterally end job security and begin to lay off 150,000 government workers.

Recall late last year, when former Prime Minister Georgios Papandreou dared to suggest a popular referendum on the then latest round of austerity. The Guardian reported that French President Nicolas Sarkozy and German Chancellor Angela Merkel “summoned” the Greek prime minster to a meeting to inform him there would no referendum. A remarkable word. “Summoned” is what a government does when it calls in an ambassador to issue a complaint. Heads of sovereign states are not “summoned.” One imagines that French and German bankers and bond traders were proud that day.

Austerity no matter who is in office

By no means, however, are German capitalists dependent on Merkel’s Christian Democrats remaining in power. It was none other than the Social Democratic Party — a party that righteously proclaims itself the party of working people — that codified austerity on those same working people. Back in 2003, Gerhard Schröder, then the Social Democratic chancellor, pushed through his “Agenda 2010” legislation.

Schröder said, “We must not get trapped in defending our past achievements, but instead must work to our future.” Since those “past achievements” included old-fashioned concepts such as good wages and pensions, Schröder said, “The core challenges before us are accepting the reality of globalization, the ‘digitalization’ of our economy and an aging society.” Classic Right-wing code words. “Accepting” this “reality,” Agenda 2010 cut business taxes while reducing unemployment pay and pensions.

German unions represent workers across industries, and contracts are negotiated industrywide so that one company can’t play off its employees against those working for a competitor. Despite this advantage, unions allowed wages to decline in exchange for job security as German industry became stronger. Unemployment has been dropping — at least Germans received the promised job security — but their purchasing power is slowly declining, reinforcing the trend toward Germany becoming overly dependent on exports. More than half of Germany’s exports go to European Union countries.

Meanwhile, in Greece, the main Right-wing party, New Democracy, went on an arms buying spree when last in power a few years ago, unneeded military hardware paid for with loans. And the rich in Greece don’t pay taxes, in a country with one of Europe’s biggest economic disparities. Government workers are being demonized as the biggest problem in Greece, but it is precisely government workers who can’t evade paying taxes — their employer makes sure of that.

Local problems can’t be solved locally

How does Greece get out of its vicious circle? Ultimately, there is no Greek solution, only a European or global solution. International solidarity and working people in all countries acting in concert to defend themselves and working toward a better world than the unsustainable scramble of all against all we currently live in are the routes out of economic crisis.

In terms of immediate steps, Greece is not without a defense against the downward spiral of austerity. Comparisons are being made with Argentina, which defaulted on its debt that was too big to pay and allowed the foreign-exchange market to drastically devalue its currency. There is much talk of Greece defaulting, but that is only one half of the “Argentina” option — Greece simultaneously would have to drop the euro and re-adopt its old currency, the drachma.

Argentine’s fascistic military dictatorship of 1976 to 1983 laid waste to the country’s economy, and a civilian president, Carlos Menem, imposed an austerity program in the early 1990s in conjunction with selling off state enterprises at below-market prices. As a result, Argentina’s foreign debt grew to unmanageable proportions. When neoliberalism had reached its logical conclusion there — economic collapse — working people set up barter clubs and in some cases took over factories that had been shut down, restarting production and converting them into cooperatives. A new president, Néstor Kirchner, suspended debt payments after taking office, eventually paying only 30 percent of the odious debt after negotiations.

One of the reasons why the Argentine economy collapsed was because the country’s rulers had insisted on maintaining the value of the Argentine peso even with the U.S. dollar, and wouldn’t allow its currency to decline in value. Greece uses the euro and therefore can’t devalue. Without a currency devaluation, internal cuts are the remaining option to meet market demands. When Argentina defaulted and allowed its peso to float freely, the peso’s value fell drastically. As a result, Argentina’s exports became attractively cheap and because imports became expensive, a stimulus to internal production was created. Within a year, Argentina’s unemployment rate fell by two-thirds and it had achieved budget and trade surpluses.

If Greece did return to the drachma, the currency’s value would be pummeled by foreign-exchange markets, making Greek products and tourism a value. Because imports would become very expensive, there would be no choice but to increase domestic production. There would also be uncertainty: Greece doesn’t have the same material resources as Argentina does nor does it have export industries as strong, so it is impossible to say that Greece would rebound as fast as Argentina did a decade ago. Taking the “Argentina option” would be a gamble and would have to be accompanied by capital controls and the nationalization of banks.

Dropping the euro would not be free of additional pain in the short term (especially because the cost of imports would rise) and a Greece with its own currency would not have the same measure of independence that Argentina possessed. Moreover, such moves would not touch the underlying instabilities of the global capitalist system nor would it in any way lessen the requirement of international solidarity to find a global solution to a global crisis. But could anything be as bad as the steady diet of austerity, punishment and humiliation Greeks are now enduring?

The trojan horse of Ron Paul-style libertarianism

The Occupy movement has brought together people from a variety of places along the political spectrum, generally somewhere on the Left. The main exception are Ron Paul followers — or perhaps it might be more accurate to say Ron Paul fanatics, as “follower” falls well short of capturing the zeal of those whom the Texas libertarian attracts.

But what is it that attracts Ron Paul followers who, in whatever disjointed fashion, align themselves with the Occupy movement and articulate what is perhaps the most basic Occupy critique: Corporations have far too much power.

Let’s start with the basic libertarian philosophy, which boils down to “government is always bad.” (Ron Paul followers thus would seem to be more at home among tea partiers or the business wing of the Republican Party, where indeed many gravitate.) To put a bit of flesh on the bones, libertarianism can be described as a belief in complete freedom of commerce, of minimal government involvement in the economy or social affairs, and of allowing the “market” to determine economic and social outcomes. An intellectually honest libertarian, then, would be against government laws interfering in adults’ personal lives.

“The Bosses of the Senate” by Joseph Keppler

The typical conservative opposes government regulations, but only when it comes to commerce; such beliefs suddenly vanish when it comes to social issues, and thus we have the towering hypocrisy of Republicans thundering against government simultaneous with demands that government control women’s bodies, regulate what happens in the bedroom and decide who can or can’t have a full legal partnership with the person they love.

Representative Paul is not consistent, either — he, too, believes that women are not capable of making decisions about their own bodies and thus opposes abortion. The again, if one sees women as simply carriers of fetuses, and thus lesser beings or commodities rather than full-fledged human beings, maybe it isn’t necessarily inconsistent. (One clue as to why his followers skew heavily toward men. Actually, straight White men, as will see presently.) And his belief in ending military adventures overseas is based on old-fashioned isolationism, not on any notion of solidarity or of a common humanity.

It pays to check under the hood. Having spent many days at the Occupy Wall Street encampment in New York City’s financial district, I did have the chance to talk to a few Ron Paul followers; there always seemed to be one among the sign-holders that daily lined the Broadway side of the encampment. Reluctant as I am to generalize, they were consistently the most fixed in their beliefs. What none of those to whom I talked would consider is what the result would be should their libertarian utopia actually be implemented.

The system is called capitalism for a reason

A brief sojourn on the nature of power in a capitalist country. A short-hand way of describing power relations might be that the possessors of capital rule. The system is called “capitalism” and those who succeed in it accumulate a massive amount of capital.

Any one person, no matter how industrious, can only do so much work, so businesses are formed and employees hired. When the business gets big enough, it is incorporated as a corporation. (There are many suffixes, but let’s stick to one word.) The founder, the founder’s immediate top executives, and eventually their successors, run the corporation to make money. The corporation has to produce a product or service that customers are willing to buy, yes, but to do so in a manner that enables the executives at the top to earn big money and, if the company is big enough to be listed on a stock exchange, the shareholders are expecting a share of the profits, too.

This pot of money is created because the executives pay the employees much less than the value of what they produce. The difference between the value produced and the wage paid is the source of corporate profit, the extraordinary salaries and bonuses paid to those at the top and the dividends paid out to shareholders.

Graphic by Bryan Helfrich

Those few who benefit from the work others perform — the one percent, to use the Occupy Wall Street formulation — quite naturally like the arrangement. And since we have the most greedy lusting for ever bigger pots of money, and competition between the executives of the corporation and the shareholders of the corporation as to which gets the bigger portion of the pot, ways must be found to extract more money (i.e, “capital”).

Competition plays an indispensable role; if a corporation doesn’t increase its profits, the financiers who constitute most of the shareholders will dump its stock and buy the competitors’ stock. The competitor will be better positioned, and might put the first corporation out of business. There are various paths to boosting profits, but ultimately the corporation has to cut costs. At first, cost-cutting can be done through buying machinery or developing more efficient production techniques. But competitors will do the same. Given enough time, the path to boosting profits must rest on reducing the cost of labor — cutting wages, cutting benefits and moving production to countries with much lower labor costs. We are paying the collective price for all this right now.

As more money concentrates into fewer hands, an elite develops that accumulates more money than it can possibly spend on yachts, mansions and other luxuries. Some of their money will spent on buying political influence — “market forces” work in their favor, but they want to be sure that “political forces” do so as well. There may be vastly more working people than elites, but those elites have the money to give to political office holders, to buy and control mass media outlets, to create “think tanks” and other institutions to disseminate their preferred message, and (because of their ability to make big donations) to control non-economic institutions such as schools. We working people sure can’t do any of that.

The only check against that process — which accelerates as more flows to the top, leaving still less for everybody else — is political and social activism. But as the power of the one percent grows, and the struggle of working people to survive becomes more acute, the ability of the elites to further bend the rules in their favor and the difficulty of working people to influence public policy increases, the power of corporations steadily grows. A corporation is not an abstract entity — it is an organization that is run in a dictatorial fashion from the top, and the structure that enables the concentration of wealth. The corporation is simply the legal entity to accomplish that, as would be the case with or without the added benefit of “corporate personhood.”

Removing checks on the most powerful

Now, back to libertarianism. If corporate power (really the concentrated power of a minuscule elite) has become so strong despite the checks and balances built into the modern political system, and that power continues to strengthen, what would happen if the checks and balances were removed? What would happen if we allowed “markets” to determine all outcomes?

The answer should be obvious. A “free market paradise” such as that advocated by Rep. Paul and other libertarians, would mean the end of what is left of our social safety net. No more minimum wage, no more Social Security, no more laws against discrimination in the workplace, no more safety rules, no more consumer-protection laws, no more environmental protection. Indeed, Rep. Paul again said the Civil Rights Act of 1964 was wrong because it “destroyed the principle of private property,” according to a Jan. 1, 2012, report in The Huffington Post.

One Ron Paul supporter I talked to was certain that “property rights” would safeguard us in lieu of laws enforced by government. We’re a few blocks from the Hudson River, I said to him, then asked what would stop a chemical company from building a plant on the river, dumping its waste into the river and belching toxic substances from smokestacks. “Property rights” would come to the rescue, he replied, because the “owner” wouldn’t allow that. The owner of the property would be the company operating the hypothetical chemical plant, and it is precisely “property rights” that would enable the company to build the plant and the lack of government oversight that would enable it to pollute in a dangerous manner. To this answer, he replied that “the owner of the river wouldn’t allow that to happen.”

Photo by Alex Proimos

The river does not have an “owner,” I pointed out, and I should have added that, without any government, there would not be an official entity to defend the integrity of the river. He didn’t have a response, and allowed the discussion to lapse. His belief that there should not be a federal government rested on a conviction that state government would be better because it is more local. He might have wished that a state government might be the “owner” of the river (although his actual belief system would require that the river should have a private owner), but that would be no good here, either, because the Hudson is, after all, half in New York and half in New Jersey as it nears its outlet. Pollution is not likely to observe state boundaries. And rivers should not be privatized.

This conversation had begun when I asked him what he thought of the racism in Ron Paul’s newsletters of the past; they were full of vicious White-supremacist and homophobic comments. His answer was a near perfect neologism: “I could write anything under your name and send it out without your knowing.” I replied that wouldn’t be possible as I would swiftly take legal and other action against someone doing that and put a fast end to it. Rep. Paul’s claims that he had no knowledge of what went out under his name for a period of several years is quite simply as lame an excuse as could be put forth — and his followers blindly repeat it.

What we have here is the “true believer” syndrome: I want to believe it, therefore it is. Such a thing is hardly unknown elsewhere, it must be admitted, but rarely does it achieve such perfection. Incidentally, the above conversation was by no means the most fruitless; other Ron Paul followers were still more relentless. (A discussion of “End the Fed” in this post.)

Governments reflect balance of strengths within society

Part of the confusion arises from the demonization of that concept known as “government.” The “government” is not a disembodied entity somehow detached from society, but rather is a reflection of the social forces within society. In a society in which “free markets” are the basis on which most outcomes are decided, those people and institutions that accumulate the most money — and therefore control employment, bend the political process to their preferred outcome and wield their wealth to influence or control other institutions — will be the decisive agents. Their decisions will be to benefit themselves, inevitably at the expense of everybody else.

Such dominance does not mean absolute control. Popular pressure can, on occasion, assert itself as last month’s online campaign to halt the Stop Online Piracy Act demonstrated. But sweeping away government — or reducing government to two functions (enforcing contracts and maintaining a military force) as Chicago School ideologues demand — means that the “market” will determine all outcomes. The “market” would mean concentrated corporate power would decide all outcomes, especially economic outcomes. Life would be much harder than it is now, with no recourse.

That industrialists and financiers would love such an outcome is quite understandable. What isn’t is why any working person would want it. And the scenario just sketched it precisely what libertarians, Ron Paul included, would deliver if they actually were handed power.

The magic elixir that makes so many working people believe that government is source of all problems (although it was a corporation that laid you off or moved your job to the Global South) is that mystical word “freedom.”

“Freedom” is equated with individualism — but as a specific form of individualism that is shorn of responsibility. Industrialists and financiers are presented as individuals to be emulated, and their special interests are presented as the interest of all of society. More wealth for the rich (regardless of the specific ideologies used to promote that goal, including demands for ever lower taxes) is advertised as good for everybody despite the shredding of social safety nets that accompanies the concentration of wealth. Those who have the most — obtained on the backs of those with far less — have no responsibility to the society that enabled them to amass such wealth.

Imposing harsher working conditions is another aspect of this individualistic “freedom,” but freedom for who? “Freedom” for industrialists and financiers is freedom to rule over, control and exploit others; “justice” is the unfettered ability to enjoy this freedom, a justice reflected in legal structures. Working people are “free” to compete in a race to the bottom set up by capitalists — this is the freedom loftily extolled across the corporate media.

Utopias have a way of becoming dystopias, and the corporate utopia on offer by libertarians — be they in the Cato Institute, in corporate boardrooms, in the tea parties or in the Ron Paul campaign — is a most dystopian trojan horse.

Not so fast: The contradictions in China’s capitalist rise

Hand-wringing over China increasingly seems to be a preoccupation of mainstream journalism, popular culture and the world of politics. In the past two years, China has passed Japan to become the world’s second-largest economy and passed Germany to become the world’s biggest exporter. Speculation abounds on when China will be crowned the world’s largest economy.

Among other forms, the decline of the United States can take comical or satirical forms in novels, Rick Moody’s Four Fingers of Death and Gary Shteyngart’s Super Sad True Love Story being two recent, outstanding examples. The plot of both unfold against a backdrop of a rapidly decaying United States at the brink of bankruptcy as the Chinese contemplate cutting off all credit, the former novel contemplating the human costs of economic free-fall layered over an absurd military gambit to salvage imperial prerogatives and the latter deftly using satiric exaggeration to lampoon the consumer fetishism that passes for U.S. popular culture. Laughing at the precipice is, arguably, better than crying.

Contemplation of the end of U.S. dominance can of course take much deadlier forms, such as the Bush II/Cheney administration’s invasion of Iraq — a desperate ploy to re-assert U.S. military supremacy, impose a neoliberal paradise for its corporations, provide an economic and military base for the U.S. to assert itself over the Middle East and secure energy resources. Administrations from Nixon to Clinton had, in some form, carried out policies designed to slow down the incremental but steady relative decline of U.S. power in relation to the rest of the world, but such policies were tossed aside last decade in a mad gamble to restore undisputed supremacy. That the Bush II gamble backfired spectacularly cannot be in reasonable dispute; plunging the country into debt, wasting resources on military adventure, inflicting an appalling scale of casualties and engendering increased international willingness to oppose U.S. initiatives has instead accelerated imperial decline.

Beijing Opera House (photo by Petr Kraumann)

I think this is one critical reason for why U.S. corporate elites and their allied thinkers and policymakers split between Bush epigone John McCain and Barack Obama instead of their usual pattern of heavily tilting toward the Republican Party — the election of Obama promised a return to working with the allies of the advanced capitalist world instead of go-it-alone bull-in-the-china-shop adventures.

That does not necessarily mean a less aggressive foreign policy as bombing campaigns in Libya, Yemen and Pakistan attest, but it does mean a more targeted use of the military, more consultation and more spreading of the costs and responsibilities, and therefore leading to a reduced burden and less instability, which are good for business. Wall Street in particular prizes stability. Therefore, the business elites who back Obama more or less got what they expected — a cool, steady hand at the helm of empire in which broader considerations are taken into account rather than a cowboy mentality that benefitted only a small, politically favored segment of Corporate America.

Level of post-war hegemony impossible to maintain

The general pattern of a relative decline in U.S. hegemony remains outside the ability of any strategy to alter. No country could possibly maintain the dominant position enjoyed by the United States in the years following World War II. Europe and Japan were in ruins, most of the rest of the world undeveloped and the U.S. possessed an intact manufacturing base and the ability to export its products around the globe. Europe and Japan rebounded, many other countries developed — sometimes in spectacular fashion — and there was much more competition.

But until the rise of China, there was no perceived direct threat to U.S. centrality. No single European country, nor Japan, was big enough to push the U.S. off its position at the apex of the global economy, and the centrality of the dollar in the Bretton Woods system and in the current era of free-floating currencies has cemented that status. An economically integrated European Union is not up to the task, despite the wishes of its industrial and banker architects, because there are too many centrifugal forces tearing at its foundation.

But now there is a country that seemingly has the potential to unseat the United States. But can China actually do so? Is Shanghai going to replace New York as the world’s financial center?

Let’s not hold our breaths just yet — China is not nearly capable today of becoming the new capitalist center.

Size matters. In earlier times, the seat of a small republic such as Venice could be the leading financial center based on the strength of its trading networks. Once capitalism supplanted feudalism, however, the financial center was successively located within a larger federation that possessed both a strong navy and a significant fleet of merchant ships (Amsterdam); then within a sizeable and unified country with a large enough population to maintain a powerful navy and a physical presence throughout an empire (London); and finally within a continent-sized country that can project its economic and multi-dimensional military power around the world (New York). China does have a population four times larger than the U.S., but its military and economy are much too small.

As the capitalist sphere grows larger and the problems of increasing complexity become more difficult, the capabilities of the center must become greater. Moreover, a center must be able to apply the force that maintains capitalism. There is no conceivable defensive reason for the U.S. to maintain military bases in more than 120 countries or to spend about as much on its military as all other countries combined. Such an overseas presence is a function of the force that has always underlaid capitalism: forcing open countries to trade, invasions and coups d’etat to ensure compliant governments, violent repressions against restive foreign populations and armed strike-breaking at home. There is no country or bloc that can meaningfully challenge U.S. military might in the near future.

Amsterdam’s reign as the financial center was doomed once the United Provinces (a precursor to the Netherlands) was soundly defeated in naval battles by the British, although Amsterdam did remain a significant financial entrepôt for some time. By the start of the 20th century, the U.S. had become the world’s biggest economy, and when it emerged stronger from the world wars while Britain emerged weaker, the U.S. became the global hegemon, although London remains one of the world’s most important financial entrepôts. History, however, does not repeat itself in neat patterns.

The rise of Britain and then the United States rested on exporting manufactured products and protecting their domestic industries. But unlike China, both also relied on internal consumer demand and had large areas of the world into which their corporations could expand; rising employee wages could be tolerated because of the ability of profits to grow in an era of expansion. In an era of mature capitalism, China is dependent on taking market share from others.

Success in doing that, so far, has enabled extraordinary trade surpluses, but the fact that much of that surplus is parked in U.S. Treasury bonds illustrates that China is nowhere near displacing the United States. On the surface, it appears as an irony that borrowing costs for the U.S. government are stable, or even falling, during a protracted economic crisis that originated within U.S. borders. But the centrality of the dollar, and the sheer size of the U.S. economy, makes U.S. government debt as reliable a safe haven as exists. If the U.S. government goes down, pretty much the entire global capitalist system goes down.

Seeking currency advantages is a common objective

Only a currency that is fully convertible and represents the most rock-solid government guarantee could replace the dollar, and neither is the case with the renminbi. China in 2012 is a developing country and believes it must protect its young industries, just as other countries did during their rise. The advantage that China has over other countries is that, because of its vast trade surplus, it can afford to spend huge sums of money intervening in foreign-exchange markets to keep the value of its currency low, giving its exports a continuing advantage.

Doing so is really not so sinister; many countries, among them Japan, Switzerland and the United States, intervene in the markets to reduce the value of their currencies. (Despite the continual insinuations in the corporate media that the Chinese Communist Party issues decrees and, voila!, the renminbi is cheap, it requires continual heavy spending in foreign-exchange markets. You would think more corporate-media business reporters would be familiar with the fact that the Bretton Woods system of fixed exchange rates ended nearly 40 years ago even if Republican Party congressional members aren’t.)

Both the Bush II/Cheney and Obama administrations maintained policies aimed at a cheap dollar; Obama’s goal of doubling U.S. exports in five years would be impossible without a dollar valued low against other currencies, thereby making U.S. products more affordable overseas. Nonetheless, China does this at a larger scale than other countries and is too dependent on exporting cheap products to stop doing so.

Factory on Yangtze River

The production of cheap products is dependent on ultra-low wages, and that brings us to the contradictions within China’s capitalist rise. China’s low wages are based on ruthless exploitation of its rural population, and even China does not have a limitless supply of peasants able to move to cities to work in sweatshops. And even China has limits to how much manufacturing capacity it can rationally use.

Democracy is a historical accident of capitalism, not a prerequisite or something somehow built in. The spaces and contradictions contained within the political systems created to stabilize the functioning of capitalism (including institutions to adjudicate conflicts among capitalists and mechanisms for selecting political leadership in the absence of an absolute monarchy or the continued ascendency of a static landed aristocracy) enabled working people to wrest some of that democracy for themselves.

Authoritarian capitalism is a model that has built industrial or trading powerhouses on small scales: Singapore and South Korea come most readily to mind. China is unique in that it is using this model on a vastly larger scale, and to become a global superpower, not simply a regional player as the others. South Koreans eventually forced a democratic opening from below through organizing; it is an open question as to whether a similar pattern will emerge in China.

Rising wages contradicts investment needs

Regardless of any possible democratic opening, if Chinese can’t buy the products that are produced with new capacity, what good is this extra production? For China to re-orient itself to producing for internal consumption would mean having to allow dramatic growth in workers’ income. But doing so would mean ending foreign capital’s reason to move production to China. China could try to switch to high-end manufacturing — to some degree, it is trying to extend its mix of production to do just that — but it doesn’t have the capabilities of non-Chinese companies that are already making such products and it would have to compete by muscling out foreign competitors.

As their own populations become more restless, foreign governments would not be able to stand by and allow themselves to be swamped by cheap Chinese imports. Moreover, the internal demand for such high-end products is limited within China, so it would be right back to having to rely on exports; much of China’s demand for high-technology products comes from government infrastructure projects and there comes a time when such a high level of investment ceases to be prudent and becomes wasteful spending, as has happened to Japan.

Another way out for China is what it seems to be intent on doing — buying foreign companies and buying interests in foreign operations. Yet it seems to be doing this not for investment purposes but to guarantee supplies for its internal markets as it is increasingly unable to meet its own needs, especially in energy. The Chinese certainly have the capital reserves to pursue this strategy, thanks to their massive trade surpluses and the large profits of their state-owned enterprises, but at some point will appear to be throwing their weight around, engendering resistance. Right now, Western capitalists see a market of 1.3 billion people and dollar (and euro and pound) signs dancing in their heads if they can gain access to it. But we come back to the fact that the production that has been moved to China from the West and other East Asian countries is based on extremely low wages.

The Chinese Communist Party can continue to apply repression to keep wages low, but such policies directly contradict its historic Mao-based ideology, which rested on the now-shredded social safety net known as the “Iron Rice Bowl” — an achievement not lost to collective memory. If the endless drip of scattered local rebellions organizes enough to force competitive wages, Western capitalists would still want to sell their products in China, but would produce at least some of them elsewhere. At that point, could China continue to grow its economy eight to ten percent a year? It does not appear it could. Chinese industry could step in and build new capacity, or acquire the capacity that Western capitalists abandon, but the upward pressure on wages would undercut China’s ability to export cheaply, and without much increased internal demand China would have a glut of capacity that would face shuttering.

China has limits, as all countries do, and if social explosions happen on a massive scale, none of us knows what the outcome might be. The party continues to apply repression to keep a lid on dissent. How long can it do so? None of us knows the answer to that, either, although it is interesting that U.S. capitalists who have moved production to China have an interest in continued Chinese “communist” repression at the same time that Chinese “communists” are now the most fearsome capitalist competition. Rivals who cannot let go of each other: The U.S. needs China to buy its debt and China needs the U.S. as an export destination.

The earlier paths of Taiwan and South Korea

Paul Gilman, an activist-historian who has spent many years studying China, has said to me during our correspondence on this topic that Taiwan and South Korea’s right-wing dictatorships had to invest in the countryside to keep peasants even with the urban proletariat in terms of living standards to prevent revolutionary outbreaks, and that partially explains why Taiwanese and Korean workers were able to force large rises in wages, to the point where neither country can be used as low-wage havens for multinational corporations. (The militancy of those working people also helped.)

Two numbers will illustrate these points: The percentage of China’s gross domestic product that is household consumption (that is, all the things that people buy for personal use from toothbrushes to automobiles) is an extraordinarily low 35 percent and wages for Chinese workers held steady for a quarter-century at approximately five percent of U.S. wages.*

Let’s put those two numbers into some context. Household consumption accounted for 51 percent of the Chinese economy in 1985. To put that in further perspective, household consumption in the United States today is 71 percent and in the largest economies of East Asia and Western Europe it is around 60 percent. At the same time, the wages of Chinese workers have drastically declined as a percentage of gross domestic product during the past fifteen years, while the composite profits of Chinese corporations, private and state-owned, have nearly doubled. And one final comparison: Wages in Japan, South Korea and Taiwan started at less than ten percent of U.S. wages but rose quickly in comparison to world standards.

And that in a nutshell explains why so many manufacturers have shifted so much production to China. And why all those corporations headquartered in the U.S. and elsewhere who manufacture in China do not want change to come to China any more than do China’s coastal corporate elites, who decisively influence policy within the Communist Party. (Maybe we can just call it the “Chinese Capitalist Party” and end the pretense.)

One manifestation of that party policy is heavily concentrating investment in coastal industry while neglecting the countryside. Hung Ho-fung, a sociology professor who writes frequently about China, in a New Left Review article pungently titled “America’s Head Servant?: The PRC’s dilemma in the Global Crisis,” reports that rural per capita income has never exceeded 40 percent of the urban level during the past two decades. China’s countryside is arguably overpopulated, but government-party policy induces the exodus that has maintained downward pressure on wages.

How long can Chinese wages remain low?

Following a wave of strikes in China last year, some factories were forced to raise wages by as much as 50 percent. The U.S. corporate press simultaneously marveled that Chinese workers had “suddenly” organized themselves and were “no longer docile” while also wringing their hands on behalf of capitalists that China might no longer be a reliable low-wage haven. No need to worry just yet — 50 percent added on to five percent means seven and a half percent of world standards. That seems to remain a good deal for capitalists. It would seem that the Chinese political leadership decided it was prudent to let restless workers vent some steam, win a real concession (in relative terms) and thereby boil off (for now) the possibility of an organized challenge coalescing.

Eventually, the surplus army of labor will dry up, and Chinese manufacturers will face the same situation that Taiwanese and South Korean manufacturers began facing in the 1990s. Wages will have to rise, sharply, to at a minimum be competitive with East Asian living standards, thereby reducing the level of exploitation to a point intolerable to Chinese capitalists, and even more intolerable to multinational corporations operating in China. The Chinese export model, however, may have trouble before the countryside empties out because of its dependence on suppressing internal living standards, continually growing external demand and maintaining its currency valued low. The specter of inflation also looms, and China is interminably showing signs of tapping the brakes.

Meanwhile, the world probably cannot absorb much more Chinese production — the deep economic malaise in Europe and North America shows no signs of relenting, and may get worse. China has no choice but to create internal demand. But Chinese capitalists/Communist Party functionaries are getting rich on the current export model, and in a one-party system there is a built-in resistance to change and a security apparatus that can be used to stifle internal dissent.

Then there is also the degradation of the Chinese environment, another looming check on Chinese expansion. And, finally, one more element to think about: Can capitalism survive hundreds of millions of Chinese dramatically raising their material standards? This question may seem counter-intuitive, as conventional capitalist wisdom assumes that more is better, implicitly assuming a bigger market means bigger profits.

Expanding markets has been a critical factor in rising Western living standards in the past. But what happens when there are no more markets to conquer, and, more directly pertinent here, are there enough raw materials and energy to support China — or China and India — reaching the material standards of the advanced capitalist countries?

One economist who believes that the size of China is resulting in irreconcilable contradictions is Minqi Li. In his book The Rise of China and the Demise of the Capitalist World Economy, Professor Li argues that future demands by Chinese workers to raise their living standards will put catastrophic pressure on the rest of the world: Either the size of China’s labor market will force living standards down in other developing countries to China’s low level, causing vast unrest in those countries, or Chinese living standards do rise but in doing so reduce what is available for the rest of the world, driving down living standards and reducing the availability of resources elsewhere to intolerable levels. Moreover, Professor Li argues, there will not be enough energy available for the projected global demand before 2035 if the demand continues to increase at current rates.

Too pessimistic? Sorry, I have no happy ending to offer. Capitalism is a system that requires continual expansion: Expand or die is its remorseless law. Capitalism has in the past escaped depressions through expansion to new places. But there is almost nowhere else in which to expand. In the present crisis, private enterprises and governments continue to reduce workforces and cut wages and benefits. The products that are made cannot be sold because there is not enough income for working people to buy them; weak demand necessitates more cuts or moving more production to a new low-wage haven.

The world is in a vicious circle and there is no easy way out. Or no way out, other than by a better economic system — and creating one will require a tremendous grassroots struggle.

* Statistics in this and the following paragraph from the World Bank; Xinhua; and Hung Ho-fung, “America’s Head Servant?: The PRC’s dilemma in the Global Crisis,” New Left Review, November-December 2009

The market is a god that has failed

The market is a god that has failed.

In earlier centuries, societies were centered on monarchs who derived their authority from divine will and today “markets” are treated in the same way — as a “natural order” ordained from above. European medieval peasants were kept in their place by church and lord, cementing the rule and wealth of the privileged. The lords made the laws and controlled the courts, and the churches provided the propaganda and justifications. God willed the arrangement, and who was a peasant to challenge it?

In fact, peasants frequently rebelled against the arrangement. Uprisings, often with explicit demands for equality, repeatedly broke out across Western and Central Europe in the fourteenth through sixteenth centuries, and strong religious movements challenging the feudal order were mercilessly drowned in blood in the early sixteenth century. The medieval era in Europe was not an era of peasants contentedly tending to the fields of their lords, contrary to common perception.

Nonetheless, those jacqueries did not bring down feudalism. They were localized, scattered and focused on immediate outrages. Crucially, there were no alignment of social forces, groups or classes with the ability to mount an effective challenge to the aristocracy that dominated feudal society. Peasants were isolated and illiterate, and artisans in the towns were highly heterogeneous.

Slow evolutionary changes eventually began to tip the balance against feudalism. Lords began pushing their peasants off the land to clear space for sheep grazing because wool had become a valuable commodity, and the capital accumulated from trade by merchants grew large enough to create surpluses capable of being converted into the capital necessary to start production on a scale larger than artisan production.

Forced off the land they had farmed and barred from the “commons” (cleared land on which they grazed cattle and forests in which they foraged), peasants could either become beggars, risking draconian punishments such as disfigurement and execution for doing so, or become laborers in the new factories at pitifully low wages and enduring inhuman conditions and working hours.

The earliest factories didn’t possess any innovative production techniques, but rather nascent capitalists rapidly accumulated capital by imposing long working hours, increasing the pace of work and drawing on more exploitable child and female labor. Although some artisans made the leap to manufacturing (as did some merchants), most artisans were forced to become wage laborers themselves, subsumed into the new system similar to peasants.

New forms of inequality require a new mythology

Further consolidation ultimately led to the rise of robber barons and giant corporations, and an entirely new mythology was created to justify the extremes of wealth. Rather than an aristocracy that inherited wealth and intermarried to maintain ties among its families, a capitalist class emerged, a class supposedly built on the sweat of hard work rather than circumstances of birth, in which individual merit rather than class status would be determinate.

The foundational work of capitalist ideology, Adam Smith’s Wealth of Nations (a book used selectively by its fans), got the ball rolling at the dawn of the Industrial Revolution. Smith disapproved of Britain’s aristocracy and celebrated capitalists, believing aristocrats unproductive and advocating that a progressive ground rent be imposed on them. Smith believed that feudal relations were demeaning to the poor and corrupting to the powerful, and argued that modern commercial activity would promote fair play and honesty.

As capitalism developed, the size of the economic enterprises of capitalists became bigger, partly because demand for manufactured products increased, but also because the pressures of capitalist competition required enterprises to become bigger. Doing so can be done through expanding a market, acquiring market share from competitors or swallowing the competition. A small number of human beings will be overly endowed with the ruthlessness to be the survivors in this dog-eat-dog world — those with a single-minded focus on amassing as much money as possible with little or no regard for all those squashed along the way. In the United States, those few who came to own vast conglomerates and previously unimaginable wealth became known as robber barons, and were so powerful thanks to their control of wealth and resources that they could routinely ask governments to use force to suppress their workers, or hire their own private armies to do so.

Today, we still have such people — in different industries of course as times change — and they are now known as “captains of industry” or “entrepreneurs” as one of the advances capitalism has brought us is the modern public relations industry. Nonetheless, a minuscule number of people own vast wealth and can use that wealth to bend public policy to their preferred outcome; that hasn’t changed. There are those who found an enterprise that generates such wealth, but more often it is inherited: a class system in a new form.

The more wealth is concentrated, the less remains for everybody else. Pay is cut, people are laid off, benefits and retirements reduced — all so that still more flows to the top. Such a state of affairs can’t continue without a powerful ideology that makes this dramatic inequality a “natural order”; that a chief executive officer earning thousands of times more than employees or a Wall Street financier earning millions of dollars by “consolidating” working people out of their jobs is a “justified” result.

The cult of the market

And so we come to the mythology of markets, extolled as the indifferent arbiter of what should be. Extreme cults of individuality form a crucial prop of this mythology; attacks on unions and minimum-wage laws are two manifestations. An early incarnation of this ideology was the “Austrian School,” an economic belief system whose best known proponent was Friedrich Hayek. Remarkably, Hayek went so far as to claim that solidarity, benevolence and a desire to work for the betterment of one’s community are “primitive instincts” and that human civilization consists of a long struggle against those ideals.

Hayek remains highly influential today among conservative economists and those who benefit from neoliberal policies, so it is worthwhile to briefly examine his writings. In the conclusion to Volume 3 of Law, Legislation and Liberty, Hayek wrote: “Man has been civilized very much against his wishes,” emphasizing the words by placing them in italics. What Hayek asserted here is that “the discipline of the market” is the provider of civilization and progress.

That questionable assertion is not necessarily easy to reconcile with what he wrote in his best-known work, The Road to Serfdom, encapsulated in this passage:

“The higher the education and intelligence of individuals become, the more their tastes and views are differentiated. If we wish to find a high degree of uniformity in outlook, we have to descend to the regions of your moral and intellectual standards where the more primitive instincts prevail.”

The “primitive instincts” Hayek referred to here are beliefs in social solidarity or that an economy not based on all-against-all struggle could be constructed.

Installing Augusto Pinochet and Milton Friedman in Chile, 1973.

In summation, Hayek argued that unregulated capitalism is “civilization” and anything else is a product of “primitive” group instincts that have survived from our prehistoric hunter/gatherer ancestors. But if people who gather in groups or parties to promote a more humane world possess little morality and/or low intelligence simply by virtue of banding together in pursuit of a program, how is that such attributes do not apply to the world’s industrialists and financiers? The pervasive neoliberal ideology that floods the world doesn’t just fall from the sky; rather it is the product of group thinking, in this case grouping thinking by a minuscule minority who profit from it and those who serve them intellectually.

So we complete the circle and arrive back at the conclusion that Hayek judged morality, intelligence and civilized behavior strictly on whether or not an individual or group agrees with his viewpoints. Although it is tempting to simply dismiss such reactionary nonsense, we should remember that, to those hungering for ever more harsher neoliberal polices, Hayek’s writings, in particular The Road to Serfdom, are the most important bibles except possibly Ayn Rand’s novels.

One economist on whom Hayek had a strong influence was Milton Friedman, who become the leading figure in the Austrian School’s direct descendent, the “Chicago School” of economics, so named because it is centered on the economics faculty of the University of Chicago. Friedman is known for such delicate work as assisting Chilean dictator Augusto Pinochet, even coining the term “shock therapy” — Friedman repeatedly used the word “shock” in advising Pinochet to apply a maximum of pressure, helpfully reprinting this letter in his book, Two Lucky People: Memoirs.

Individuality without human beings

Chicago School economics — and standard “neoclassical” economics generally — stresses individuality, yet actual human beings seem strangely absent. Chicago economics claims to be scientific, yet one of its most significant leaders, Frank Knight, wrote in an academic economics journal that professors should “inculcate” in their students that these theories are not debatable hypotheses, but rather are “sacred feature[s] of the system.” Sacred? An odd word for a field of study that claims to be scientific, but what is sacred is often in the eye of the beholder.

A belief system that requires austerity, low taxes on the wealthy, and a lack of job security for workforces, and justifies a ceaseless upward flow of wealth, while presenting the package as the natural state of the world, is sacred, depending on if you are among the one percent or the 99 percent. “Neoclassical” economics, and in particular its most vigorous school, Chicago, became the dominant economic theory simply because it provided justification for extreme economic disparities.

Neoclassical economics is an ideologically driven belief system based on mathematical formulae, divorced from the conditions of the actual, physical world, and which seeks to put human beings at the service of markets rather than using markets to provide for human needs. Economic activity is treated as a simple exchange of freely acting, mutually benefitting, equal firms and households in a market that automatically, through an “invisible hand,” self-adjusts and self-regulates to equilibrium.

Households and firms are considered only as market agents, never as part of a social system, and because the system is assumed to consistently revert to equilibrium, there is no conflict. Production is alleged to be independent of all social factors, the employees who do the work of production are in their jobs due to personal choice, and wages are based only on individual achievement independent of race, gender and other differences.

New York Stock Exchange (photo by Elisa Rolle)

Underlying these assumption is a concept known as “perfect competition,” a model that assumes that all prices automatically calibrate to optimum levels, and that there are so many buyers and sellers that none possesses sufficient power to affect the market. The prominent economist Robert Kuttner, in a 1985 Atlantic Monthly article, summarized the unreality of this concept:

“Perfect competition requires ‘perfect information.’ Consumers must know enough to compare products astutely; workers must be aware of alternative jobs; and capitalists of competing investment opportunities. … Moreover, perfect competition requires ‘perfect mobility of factors.’ Workers must be free to get the highest available wage, and capitalists to shift their capital to get the highest available return; otherwise identical factors of production would command different prices, and the result would be deviation from the model.”

Does anything in the preceding two paragraphs in any way describe the real world to you? But the above summation, along with mystical concepts such as the “magic of the market,” are the intellectual core of the idea that “markets” should decide all social and economic outcomes. It is “markets” “impersonally” imposing “discipline” on working people, on entire countries, and those on whom “discipline” is imposed should shut up and take their medicine. But “market” is simply a nice word to mask the imposition of specific interests. In reality, financiers around the world are immiserating entire countries to guarantee gigantic profits for themselves.

 The ‘market’ says it is so, but who is the market?

Far from the often-told morality play of frugal Germans refusing to subsidize freeloading Greeks, the loans the Greek government is receiving, at the cost of ever more painful austerity, is simply to reimburse big banks, primarily German and French banks, so that their questionable loans are paid back, with healthy interest. Moreover, many of those loans were sold by the banks to hedge funds — austerity is also being imposed on millions of people so that the gambling of speculators pays off. (Greek government debt is trading at 40 percent or less of face value, so the much discussed 50 percent “haircut” on debt repayments would actually give the speculating hedge funds a nice profit.)

The Greek government is merely a conduit, through which financiers can continue to collect fat profits. The “market” decided this was the only alternative because the financiers who control the market say it is the only alternative. From financiers’ point of view, that is true, because otherwise they would lose money.

The impersonal market seems to have a habit of favoring the interests of financiers (and industrialists). The “market,” so we are told, induced “technocratic” governments to be formed in Greece and Italy for the good of the two countries. But in fact bond traders and hedge funds applying pressure through the European Central Bank and International Monetary Fund — speculators — essentially hand-selected unelected central bank bureaucrats as those two nations prime ministers to ensure those governments would give their interests primacy.

The “market” also desired the massive bailout of the financial industry. In the United States, when the House of Representatives initially voted against the 2008 bailout, financiers quickly made their wrath felt; the benchmark Dow Jones Industrial Average lost 800 points that day, one of the biggest single-day losses ever. Only four days later, in the midst of widespread middle class worry over the falling value of 401(k) retirement funds tied to stock markets, the House bowed to the pressure and gave financiers what they wanted. (A splendid example of the “magic of the market” at work — by eliminating pensions, working people are yoked more firmly to the will of financiers.)

If the “market” keeps deciding more people should be unemployed, more education should be wasted, more people should not have a decent retirement, more public services should be eliminated, more wages cut while prices rise, and more money should be concentrated in fewer hands at the expense of everybody else, then why should the “market” be a holy sacrament that cannot be questioned?

What if we had a system based on human needs rather than the greed of a few? What if we had a system in which useful work is rewarded instead of financial legerdemain? A hopeless utopia? Not at all — if working people decide it will be so. We are the overwhelming majority of modern capitalist societies.

The idea that God chooses one family to provide absolute rulers for generations was overturned by our ancestors, and would be laughable if offered today. The idea that a minuscule minority should accumulate most of the wealth is the natural order of the universe thanks to a mysterious God-given force known as a “market,” is an anachronism as well.