marglin (1988) - lessons of the golden age of capitalism

8/13/2019 Marglin (1988) - Lessons of the Golden Age of Capitalism

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R E S E A R C HFORACTION

Lessons of the Golden Ageof Capitalism

STEPHEN A. MARGLIN

WORLD INSTITUTE FOR DEVELOPMENTECONOMICS RESEARCHUNITED NATIONS UNIVERSITY


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Copyright World Inst i tute for Development Economics Research of the UnitedNations Universi ty, Apri l , 1988The views expressed in this publication are those of the author. Publication is part of theresearch programme of the Institute, and does not imply endorsement by the Institute or theUnited Nations University of any of the views expressed.ISSN 0784-6533ISBN 951-99956-3-3Reprinted Auranen, Forssa, Finland, September 1990

W O R L D I N S T I T U T E F O R D E V E L O P M E N TE C O N O M I C S R E S E A R C HL a l J a y a w a r d e n a , DirectorThe Board o f WIDER:Saburo Oki ta , ChairmanAbdlat i f Y. Al-HamadBernard ChidzeroMahbub u l HaqAlber t O. HirschmanLal Jayawardena (ex officio)Reimut Jochimsen

Pentt i KouriCarmen MiroI. G. PatelHei tor Gurgul inode Souza (ex officio)Janez Stanovnik

WID ER was established in 1984 and started work in Helsinki in the spring of 1985.The principal purpose of the Institute is to help identify and m eet the need forpolicy-oriented socio-economic research on pressing global and development problems and their inter-relationships. The establishment and location of WIDE R inHelsinki have been made possible by a generous financial contribution from theGovernment of Finland.The work of W IDER is carried out by staff researchers and visiting scholars andthrough networks of collaborating institutions and scholars in various parts of theworld.WID ER s research projects are grouped into three main themes:I Hunger and poverty - the poorest billionII Money, finance and trade - reform for world developmentIII Developmen t and technological transformation - the managem ent of changeWID ER seeks to involve policy m akers from developing counties in its reserarchefforts an d to draw specific policy lessons from the research results. The Institutecontinues to build up its research capacity in Helsinki and to develop closer contactswith order research institutions around the world.In addition to its scholarly publications, WID ER issues short, no n-technical reportsaimed at policy m akers and their advisers in both developed and developing countries. WID ER will also publish a series of study gro up reports on the basic problemsof the global economy.


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Contents PagePreface by Lal Jayaw ardena , Director of W ID E R 3

1. Introdu ction 52. Th e Legacy of De pression and W ar 73. The Arrang em ents Sus ta ining Grow th 9

The M acroeconom ic Structure 9Th e Internat ional Ord er 10Th e System of Pro du ction 13Th e Ru les of Co ordin ation 14

4. Ev olu tion of the Institu tions 17Full Em ploy m ent Profit Squeeze 19Bret to n W oods and Pax Am er icana 21

5. The En d of the Go lden Ag e: An Assessm ent 226. Lessons of the Go lden Ag e 24

Beyon d Keynes and M arx 32Ap pen dix I : Ou tline of Project 34Appendix I I : Contr ibutors- W ID E R 's M acroeconom ic Policy Gro up 36App endix I I I : Co ntents of For thcom ing Book s 38


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PrefaceThe potential benefits that developing countries gain from participation in the world economy depend partly on the level of international trade and economic activity at any given time but also on thenature of the international monetary and trading system itself.Indeed, the two are closely linked: some systems are better atpromoting growth and employment than others . Yet i t is useful toretain the distinction: for there is often a tendency either to takethe existing system for granted or to assume that, if it is unsatisfactory, nothing can be done about i t because i t was brought intobeing through "deep-seated" histor ical forces which cannot easilybe changed. In fact , however , international economic and monetarysystems appear to have a relatively brief expected life-span: theclassic pre-1914 international gold standard lasted for only two generations and Bretton Woods only for one generation (1946-71) ,while the existing floating rate arrangements are already showingtheir age.

If such systems change more frequently than is often supposed,and if , while they last, they have a large influence on economicgrowth and cyclical fluctuations, then it is necessary to find out asmuch as possible not only about what dist inguishes "good" systemsfrom "bad" ones but also about the forces that br ing them intobeing, and sustain or al ternatively weaken them. Certainly therecord of economic instability in the fifteen years since the collapseof the Bretton Woods system lends l i t t le support to those whobelieve that the world is better off without any system. Indeed, therepeated calls from both official spokesmen and economists forgreater exchange rate s tabil i ty and "a new Bretton Woods" clear lyindicate a nostalgia for that post-World War II construction and thebeginnings of a search for a successor to it.Partly with a view to preparing the ground for a new system,which must surely come before the turn of the century, WIDER'sresearch has deliberately turned back to the histor ical antecedentsand especially, in the project reported in this booklet , to the "golden age" of the 1950s and 1960s: we look back in order to learnwhat we can from the terrain already crossed and equip ourselvesfor traversing the uncharted terr i tory ahead. While i t would befoolish to imagine that we can somehow reproduce in the 1990s theconditions that gave rise to the rapid growth of the 1960s, it wouldbe even more foolish to ignore the experience of those years. Atleast we have one advantage over the policy-makers and economistswho struggled to un derstan d the post W orld W ar II system at the 3


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t ime, which is that we know what happened: we know the systembroke down. But why did i t collapse? That remains a highly controversial yet highly relevant question.Was the fundamental cause of the breakdown the structure of theinternational economic order itself? Did it collapse through its"internal contradictions", as come economists predicted at thetime? Or was the international system itself made possible only by aunique set of conditions at the national level, the weakening ofwhich undermined its foundations? Was the collapse of the 1970sthe results of accidental nominal and real "shocks" (a concept thatonly entered the economic vocabulary during that decade) , or wasit rather the inevitable working-out of long-term, systemic, forces?The answer suggested by the research reported here is that bothdomestic and international condit ions were required to sustain the"golden age", and i t weakened when these forces s topped reinforcing one another and began instead to undermine each other .As the author , Prof. Stephen Marglin of Harvard University,states, "Major policy conclusions follow from this way of looking atthings" . Some of the remedies proposed for contemporary problems, such as greater international policy coordination, are unlikelyto succeed, since they do not address the root causes of presentdifficulties. Similarly, economic liberalization and austerity programmes, as implemented by most developing countr ies during the1980s, are predicted not to succeed in restoring these countries tosustained levels of economic growth. The continuing uncertainties

of the international economic order are predicted to have far toounsettling effects on world-wide business confidence and investment to permit such an optimistic prognosis . More basic remedieshave to be sought, more adequate substi tutes for the insti tutionsthat sustained the golden age.A full description of WIDER's research on this subject, whichfalls within i ts theme area "Money, Trade and Finance - Reformfor Wor ld Development" is given in Appendix I . The contr ibutors ,whose work is used extensively in this summary booklet, are shownin Appendix II and the contents of the books embodying the fullresearch results , to be published by Oxford University Press underits Clarendon Press imprint , are shown in Appendix III .Lai JayawardenaApril 1988

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Lessons of the GoldenAgeintroductionThis paper is the distillation of the results from a research project atWIDER. Helsinki, aimed at understanding the causes of the persistent cr ises and problems in the global economy, which star tedaround 1970 and continue to this day.1 It draws upon the work ofseveral par t icipants of the WIDER project , par t icular ly on "TheRise and Fall of the Golden Age," by Glyn, Hughes, Lipietz andSingh.2The purpose of the present paper is not to provide a comprehensive summary of all the research which this project has undertaken.I t is rather to whet the reader 's appeti te, and to convey the f lavourand purpose of the larger body of work.

The premise of the first phase of research in this project has beenthat any a t tempt to res tore economic per formance in the OECDcountries to the levels achieved in the 1950s and 1960s must bebased on an understanding of the key economic arrangements ofthose years: How did these arrangements mutually interact to produce consistently high rates of growth - averaging over four percent annually in the 1950s and nearly five per cent in the 1960s?Equally important is an understanding of how these arrangementsdisintegrated: were the problems essential ly domestic ones, internalto the functioning of each national economy, or were the problemsrather in the international sphere, in the poli t ical and economicrelationships that l inked national economies with one another?Only after answering such basic questions can one proceed to thinkconstructively about economic reform and restructur ing.None of this is to be read as a suggestion that policy should bedirected to reproducing the economic arrangements of the 1960s inthe 1990s. Such an attempt runs counter to another premise of thisresearch, namely, that economic arrangements are changed overtime by their very functioning, by the conscious and unconsciousactions of economic agents who modify the framework within whichthey operate, with the result that this f ramework continually evolves and to that extent is beyond the control of policy makers. Policymakers ' f reedom, to paraphrase Hegel, presupposes insight into thenecessities which constrain their choices. To apply the lessons ofthe golden age, we must understand not only what al lowed capitalism to deliver the goods for a reasonably long period of time, and

1 For a description of the project and a list of participants and papers, seethe Appendix.2 Andrew Glyn, Alan Hughes, Alain Lipietz and Ajit Singh, The Rise andFall of the Golden Age , Helsinki: W IDE R Working Paper, 1988. 5


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where things went wrong, but also the ways in which the verysuccess of the system in the 1950s and 1960s undermined it andeventually led to the drift of the 1970s and the stagnation of the1980s. We must understand in what ways the givens of today'sarrangements are different f rom those of yesterday's .It is not necessarily for the worse that policy makers do not haveas free a hand as is sometimes imagined - especially given thepresent political mood and climate. It is all too easy to lose sight ofthe positive side of the changes which were instrumental in undoingthe golden age. For instance, it will be argued that increasinglabour mili tancy contr ibuted importantly to the profi t squeezewhich in the late 1960s altered the economic climate to the detriment of capital accumulation and growth. But the other s ide of thecoin to the profit squeeze was a real and substantial gain withrespect to the condit ions of work and i ts remuneration. The growthof the welfare state and the persistence of low unemployment mayhave made workers less responsive to pressures from their employers to increase productivity and maintain profits, but these featuresof the golden age also gave a new security and confidence to peoplewhose lives had previously been characterized by all too little ofboth.On the international side, it will be argued that the decline ofAmerican hegemony not only contr ibuted to the profi t squeeze bymaking imported raw materials - chiefly oil - more expensive, but,more important, ultimately crippled the use of fiscal and monetarypolicies to manage aggregate demand by the major players. But theend of American hegemony also ref lected both the economic andpolitical recovery of those belligerents - winners as well as losers -which had emerged from World War II with severely damagedeconomies and polities, and the emergence of new forces out of thewreck of the colonial empires that fell in the aftermath of war.Prosperity at the price of the dignity of individuals or nations wouldnot be much of a bargain even if it were on the policy menu.This WIDER research project , then, seeks to unders tand themaking and the unmaking of capital ism's golden age (roughly. thequarter century that followed World War II) in terms of thearrangements which fostered sustained growth and high unemployment af ter World War II and the forces which undermined theeffectiveness of these arrangements in the 1960s and, increasingly,in the 1970s. These arrangements can be divided into four parts.First are the arrangements which shaped the macroeconomic climate internally, what we term the "macroeconomic structure." Second are the arrangements which framed the international economy,the "international order ." Third are the insti tutions within whichcapital- labour relations evolved, here termed the "system of production." And finally the mechanisms for eliciting the requisitebehaviour on the par t of individual agents , the "rules of coordina-6 tio n." This four par t schem a is in the first instanc e simply a


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classificatory device, a beginning of theory, and these four components appear one way or another in many descriptions of capitalistdevelopment. But more than mere classification is at issue: ouranalysis focusses on the interactions between the macroeconomicstructure, the international order , the system of production, andthe rules of coordination.2.The LegacyofDepression and warAs background to how these insti tutions functioned during the golden age, the histor ical background of Depression and War is essential. The first legacy of the Depression was the commitment to thewelfare s tate. The trauma of unemployment on a scale too wide tobe plausibly blamed on the shortcomings and failures of the individual worker permanently changed the way people throughoutEurope and North America would think about the role of the government. What conservatives - except for the fringe of the NewRight - and liberals argue about today are the margins of the welfare state, not its principles.Another legacy of the Depression, par t icular ly in the UnitedStates, were changes in both law and customs that enhanced thepower of organized labour . In other countr ies , the posit ion of thetrade unions improved in the af termath of World War II ratherthan during the Great Depression. However , except in the UK andthe Scandinavian countr ies , organised labour did not achieve thepower it won in the United States. An initial eruption of grass-rootsradicalism, which for a t ime threatened to convulse Europe andJapan, was repulsed soon af ter the war ended; by and large, tradeunion leaders worked to contain more radical workers. 3 Nowheredid the trade unions mount a coherent and sustained challenge tocapital is ts ' prerogative to organize work, control production ordetermine investment. Trade-union leaders, for the most par t ,accepted a bargain in which managing was left to the bosses.Insofar as union demands went beyond the division of the pie, thefocus was one or another issue of employment security, such asrespect for seniority in deciding who would be promoted or laid off.

The insti tutionalization of aggregate demand management is generally thought to date from the publication of Keynes's GeneralTheory4 in 1936. But whereas the General Theory was important in3 See Philip Armstrong, Andrew Glyn, and John Harrison,CapitalismSince World War II: The Making and Break-up of the Great Boom, London: Fontana Paperback, 1984, Chapter 2.4 John Maynard Keynes, The General Theory of Employment, Interest,and Money, London:M acmillan, 1936. 7


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providing a justif ication for aggregate dem and m ana gem en t, th ecommitment came only in the wake of war . That was no accident.The Soviet Union, along with Germany, was generally conceded tohave abolished unemployment while the capital is t democracieswere wallowing in depression. Germany's economic success waswidely attr ibuted to the mili tar ism and rearmament that culminatedin World War II . Early mili tary successes may have enhanced theprestige that Germany enjoyed in circles in the West that had earlier chosen to ignore or downplay political concomitants of Nazieconomic successes. But with the turning of the tables came a growing prestige for the Soviet Union; one aspect of this was the contrast between the dismal employment record of pre-war capital ismwith the performance of Soviet socialism. In consequence, theWestern democracies were put under considerable poli t icalpressure to prevent output and employment f rom being regulatedby swings in private confidence. This political demand took onspecial urgency as victory approached: it seemed unfair to thelarger par t of the population of the Western all ies , even to peopleotherwise l i t t le sympathetic to the Left , that young men should beasked to give up their lives for their country while their country waswilling to consign their livelihoods to the vicissitudes of the market.

Another important legacy of war was the emergence of theUnited States as the dominant power internationally, both poli t ically and economically. On the political side, the United Statesassumed the role of international policeman from the British afterthe interregnum of the inter-war years , and regular ly intervenedcovertly and occasionally overtly to prevent hostile elements fromcoming to power. I ran in 1953, Guatemala in 1954 are well knowninstances of covert intervention. In Lebanon in 1957 and in theDominican Republic in 1965, the marines actually landed.The war also made the United States the dominant powereconomically, as the only belligerent to emerge with its productivepower enhanced. For many years after the cessation of hostilities,there was a wide range of goods which only the United States couldproduce competit ively at any reasonable exchange rate, and in thecase of some goods, only the United States could produce at all.In short , as the dominant power both poli t ically and economically, the United States faced little opposition to its attempts tocarve out a new international order , one responsive to i ts interestsand its perceptions of the larger interests of the world economy -America was not the first hegemonic power in world history toconfuse the two.It was, then, in the context of the welfare state, a trade-unionmovement that was tame even where i t was powerful , the commitment to demand management and Amer ican hegemony that theregime of post-war capital ism had to operate. Let us see how these8 circum stances con dition ed th e functioning of eac h.


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5 The Arrangements SustainingGrowthThe Macroeconomic StructureA macroeconomic structure is a set of mechanisms for managingthe overall level of economic performance - output, employment,and growth. To be successful , macroeconomic management mustmeet two requirements. On the one hand, the level of aggregatedemand must be set at a level adequate to utilize fully the availableproductive resources, both capital and labour . On the other hand,the share of output devoted to capital formation must be high, andover time the demand for investment and the supply of saving mustgrow in balance with one another .A cr i t ical element of the post-war macroeconomic structure wasinvestment demand. In l ine with what we shall term neo-Keynesianviews of investment demand 5 we take the expected rate of profitrelative to the cost of capital as the crucial determinant. Theexpected rate of prof i t , in turn, can be broken down into threecomponents - the output per unit of capital at some standard rateof capacity utilization, the expected rate of capacity utilization relative to that standard rate, and the expected share of profit in valueadded. The first of these components, which we may identify withthe ratio of potential GNP to the capital s tock, need not detain usuntil much later in the story, when it begins to decline markedly.Nor was the expected profit share problematic, at least at the outsetof the golden age. As we shall see, one consequence of the war wasto temper wage demands for a long time. Profits in the early postwar period reflected the substantial decline in real wages (Continental Europe) and a substantial growth in productivity (UnitedStates). In the United States, even the intense wave of strike activity in the immediate aftermath of the war did not significantlyundermine profit margins. Japan, where war damage was mostextensive and production in total disarray, was an exception to thisgeneral pat tern.6The problem for investment demand, in short , lay in the pros-

5This perspective is developed in the writings of Michal Kalecki and JoanRobinson. See Michal Kalecki, "Class Struggle and Distribution ofNational Income," in Selected Essays on the D ynamics of the CapitalistEconomy, Cambridge: Cambridge University Press, 1971; Joan RobinsonThe Accumulation of Capital 2nd ed., London: Macmillan, 1956, andEssays in the Theory of Economic Growth, London: Macmillan, 1962.6 See Armstrong, Glyn, and Harrison, op.cit., 1984, Chart 6.4. 9


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pects for selling the additional goods that new capacity would generate. Here is where the new power of trade unions and the commitment to government intervention to maintain aggregate demandproved essential to fostering a successful macroeconomic structure.The gospel of "co-operative capitalism" was that high and growingwages and high and growing government expenditure wouldguarantee a stable expansion of demand and utilization of newlyinstalled capacity. This gospel may have initially been received withconsiderable scepticism, clashing as it did with viud memories ofthe dismal demand performance of the Great Depression. Butinvestor confidence responded in time to the evidence that demandexpansion could and would be maintained, so that low capacityutilization would not undermine profitability.On the saving side of the problem of business capital accumulat ion, the post-war macroeconomic structure depended heavily oncorporate profits. In the United States, for example, householdsavings were directed in large part to investment in owner-occupiedhousing, and business relied primarily on earnings and depreciationallow ance s and . increasingly. on the saving of pension funds.7Thus profits played a double role in the post-war regime. On theone hand, profits today increased investor confidence in profitstomorrow and thereby spurred investment demand. On the otherhand, profits provided part of the savings required for investment.The International OrderIt has been noted that the United States emerged from the warpolitically and economieallv dominant, with the abilitv to shape theinternational order to its liking. American political dominanceenters the story at several points. First, the "Pax Americana" facilitated an orderly flow of goods between the so-called less developedand the advanced countries. An orderly flow of goods at '"reasonable"' prices: those were the davs when oil sold for two dollars abarrel . Second. American poli t ical dominance played an importantrole in the political dominance of the Centre-Right in WesternEurope. The splintering and isolation of the trade-union movementvirtually everywhere in Europe but the United Kingdom, at oncecause and consequence of the ascendance of conservative parties,played a significant role in maintaining and enhancing profit margins. The containment of trade-union militancy postponed for aconsiderable period of time the threat that high employment inherently poses to profitability under capitalism, about which we shallhave more to say presently. Third, political dominance save the

See Stephen A. Marglin, Grow th, Distribution, and Prices,Cam bridge,MA: Harvard University Press. l984. Chapter 17.0


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important role in providing l iquidity through the eurodollar market.In actual fact, a fixed-rate regime requires the opposite of whatTriffin supposed, namely, an excess demand for the reservecurrency. Without persistent excess demand, the vagaries of supplyand demand will result in per iodic pressure on the whole structureof exchange rate parities; when the key currency is in excess supply,it is obviously difficult to maintain the fixed-rate system.For some period of time, political dominance may be sufficient tocreate and maintain an excess demand for the hegemon's currency.To the extent mili tary might and poli t ical power made the UnitedStates a safe haven for rentiers grown fearful for the prospects forpr ivate wealth in their own countr ies , the result would be a s trongdemand for dollars irrespective of the economic position of theUnited States. But an excess demand is unlikely to persist for along time unless the hegemon is economically dominant as well, sothat its goods are in short supply in world markets.In the event, World War II made the United States the dominantpower economically as well as politically. I t has been observed thatfor many years after the cessation of hostilities, there was a widerange of goods which only the United States could produce competi t ively. In consequence of the importance of these goods to production and particularly to capital formation, the dollar was ineffect undervalued in economic terms, as well as in demand forpolitical reasons.The cont ibut ion of the Bret ton Woods ar rangements to thesuccess of the post-war capitalist regime is controversial, but therewere undoubted advantages . Indeed, one of the supposed disadvantages of the fixed-rate system, the lack of a mechanism for correcting surpluses and deficits, was probably a positive factor in thegrowth of the capitalist world economy in the early post-warperiod. As has been noted, the United States enjoyed considerablesurpluses during this period. Not only would a floating rate systemhave failed to eliminate these surpluses "automatically", as recentexperience has shown, but the quality of capital f lows would likelyhave been much less beneficial if a floating-rate system had been inoperat ion. Exchange ra te uncer ta inty puts a greater premium onliquidity, so that the foreign investment which is the necessary concomitant of a trade surplus, would very likely have taken the formof accumulation of financial assets. The assurance (or illusion) ofstability that a fixed-rate system provided undoubtedly facilitatedthe recycling of United States surpluses into fixed capital formation. Direct foreign investment, concentrated in Western Europe,was doubtless a boon to American profits , but i t also contr ibuted tocapital formation and productivity growth abroad, particularly as itwas a vehicle for other countr ies to plug into more advancedAmer ican technologies .A second advantage that a fixed-rate system affords, at least so12 long as the reserv e currency is un de rva lue d, is the possibility for the


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reserve-currency country to expand aggregate demand without toomuch heed to a balance-of-payments constraint . Pursuingexpansionary policies, a country with the economic weight of theUnited States would not only st imulate i ts own economy, but wouldthrough i ts imports s t imulate production and income abroad. Allcountries would benefit from such "international Keynesianism.'"The United States did not in fact play its Keynesian card internationally until the mid-1960s, and then more in response to theexigencies of President Johnson's policy of guns and butter than inresponse to a sense of responsibility for the international economy.And, ironically, by this t ime the days of American economic andpoli t ical hegemony were numbered. The late 1960s were the t imewhen the trade surpluses shrunk, and American poli t ical powercame increasingly under at tack. But, par t ly because of the expansionary stance of the United States at this time, the 1960s were a

period of general prosperity, the most golden years of the goldenage.For a long time, the United States willingly accepted the costs aswell as the benefits of its political and economic hegemony. Forinstance, the United States was prepared to incur short-run costs topromote European recovery and, beyond recovery, developmentand integration. The long-run interests of the world capitalisteconomy as a whole were served by improved productivity inEurope and Japan even though the relative posit ion of Americanexports suffered as European countr ies looked increasingly to eachother .There were of course substantial benefits to leadership. In thefirst place, prosperity is a non-zero-sum game, and America, as thebiggest player in the game, stood to profit the most. There werealso more immediate and tangible benefits . Because of the widespread use of the dollar as an international means of payment, theUnited States could earn a banker 's prof i t in exchanging short termliabilities for long term assets. In the extreme version the reservecurrency country can finance direct foreign investment by merelyprinting banknotes, an accusation levelled at the United States,particularly by the French, in the late 1960s, when the US currentaccount was more or less in balance, but its foreign direct investment continued as if it were the 1950s, when the US currentaccount was in large surplus.

The System ofProductionCapital- labour relations, summarized in the "system of production," exhibited much more continuity with the past than did themacroeconomic s t ructure and the internat ional order . The organization of wo rk in factories, the use of m ach inery , the orga nizatio n 13


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of firms as large corporations - all this had a long history. Whilethese forms of production developed af ter World War II , i t couldhardly be said that they represented a new departure.More dramat ic was the extens ion of what Richard Edwards 9 hascalled "technocratic" and "bureaucratic" systems of control ,machine-paced and rule-directed systems which share a commonaim of replacing the direct and personal knowledge, authority, andresponsibil i ty of the worker by their impersonal counterparts in themachine and the rule book. Andrew Glyn et.al.10 use the term"Taylorization" to describe this process, after the father of "scientif ic management," Frederick W. Taylor . Even here innovation inthe system of production was largely confined to Europe. TheUnited States had been experimenting with Taylorism since beforeWorld War I , although it must be said that Taylorism had alwaysbeen more of a capital is t project than an achievement: workersconsistently resisted being Taylorized. And Japan never took theroad to Taylorization, and indeed never had to. The knowledgesys tem of Japanese workers , as Masahiko Aoki 1 1 shows, was neverused to thwart the aims of management, and consequently therewas not the same felt need on the part of Japanese capitalists toundermine workers ' knowledge, authority and responsibil i ty inJapan as in the West. 1 2

The Rules of CoordinationThe term "rules of coordination" descr ibes the methods by whichthe actions of agents, individuals, f irms, and states are brought intoline with each other as well as into line with the exigencies of themacro structure and the system of production. Capitalis t economieshave always relied to a great extent on the price mechanism as amode of coordination, profits guiding the allocation of capital aswell as stimulating its accumulation, and wages guiding the alloca-9 Richard Edwards, Contested Terrain: The Transformation of the Workplace in the Twentieth Century, New York: Basic Books, 1979.10 Glyn, Hughes, Lipietz Singh, op.cit., 1988.11 Masahiko Aoki,A NewParadigmFor Work Organisation:The JapaneseExperience, Helsinki: WIDER Working Paper, 1988.12 It was not a coincidence that the expansion of Taylorist production inEurope picked up momentum after the second World War. The dislocation of war, and the sense that the torch had passed from the Old Worldto the New, made Europe more open to American methods and system.14 Productivity missions, under Marshall Plan aegis, spread the word.


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tion of labour as well as stimulating effort. But the price systemnever functioned in the moral, cultural, and political vacuum whichmainstream economic theory assumes. Poli t ical compulsion and cultural values have always played an important role in every set ofrules for coordinating economic activity.In particular, capitalists have never been entirely comfortablewith the price mechanism as a means of extracting labour fromworkers, or to use the Marxian terminology (which is only reasonable since Karl Marx pioneered the analysis of the problem), as ameans of converting labour power into labour . Typically what theworker sells is not a definite amount of corn delivered to thecapitalist 's barn but a quantity of time spent in the capitalist 's f ield.The capitalist is left with the problem of transforming the worker 'slabour power into corn. Nor is the capitalist in general free to makethe most productive use possible of the t ime he has purchased. Thelength of the working day, its intensity, the organization of work -which is to say, the system of production - remain objects ofstruggle,.Piece-rate wages represent one attempt to induce the worker tobecome the agent of the extraction of labour from his own labourpower, but piece-rates have historically been at best a partialsuccess. For one thing, piece-rates can be used only when the individual worker produces an identif iable product which can bedirectly attributed to his or her efforts. Equally important, evenwhere there is an identif iable and attr ibutable product, piece-ratesthemselves are the object of dispute and struggle, particularly in anenvironment in which technology and effort are rapidly and continuously changing. How the gains of productivity growth are to beshared in the revision of piece rates is the dynamic counterpart ofthe or iginal problem: how to extract labour from labour power. Inthe struggle over piece rates it is evidently in the interest of theworker to minimize effor t and apparent productive capacity: hisbest effort has a way of becoming the norm by which he and hismates are subsequently calibrated. Management is obviously at adisadvantage in monitor ing a worker 's performance if the workerspossess the greater par t of knowledge about the production process.Taylorism may be seen as an attempt to solve this problem. Byrecombining and reconsti tuting workers ' knowledge into a new system in which the capitalist or his agents - engineers, planners, andtime-and-motion specialis ts - monopolize the knowledge of production, management intends to circumvent a major obstacle to theextraction of labour .1 3 Here the system of production joins up with

For more details on this argument, see Stephen A. Marglin, LosingTouch: The Cultural Conditions of Worker Accom modation and Resistance,Helsinki: W IDE R Working Paper, forthcoming. 15


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the rules of coordination - or rather the solution to inherent problems of coordination is sought in the system of production.But Taylorism has proved only a partially effective solution tothe labour: labour power problem. Workers consistently resist Tay-lor ization. No wonder that the capital is t rules for coordinating production have, before and since Taylor , provided other solutions tothis problem. One is the use of the wage mechanism itself, what hascome in the economic literature to be called "efficiency wages".The basic idea is an old one. Over a century and a half ago, theearly apologist for the factory system and later bete-noire of Marx,A ndr ew U r e , 1 4 asked "how with.. . surplus hands the wages of finespinners can be maintained at their present high pitch," in otherwords why the wage rate fai led to respond to demand-supply condit ions and to clear the labour market. His answer contained thecentral idea behind efficiency wages: "one of the best informedmanufacturers made me this reply: 'We f ind a moderate saving inthe wages to be of l i t t le consequence in comparison of contentmentand we therefore keep them as high as we can possibly afford, inorder to be enti t led to the best quali ty of work. A spinner reckonsthe charge of a pair of mules in our factory a fortune for life, he willtherefore do his utmost to retain his s i tuation, and to uphold thehigh character of our yarn' . " Long before economists invented theterm efficiency wages, capitalists were using the wage mechanism topurchase the commitment, loyalty, and effor t of their workersalong with their labour power.But for at least an equally long period the carrot of efficiencywages has been complemented by the st ick of direct supervisionand control of the production process. Indeed, supervision and control are arguably the key to the emergence of the factory as acentral feature of the capitalist system of production in the late 18thand early 19th century. 1 5 Supervision and control - monitor ing ofthe production process - have been key elements of the rules ofcoordination ever s ince.How effective efficiency wages and supervision are in extractinglabour from labour power depends cr i t ically on the economicarrangements in force, for these arrangements determine the costof job loss to the worker if he or she fails to respond to the carrotor the stick - and is found out. The chief determinants of the cost

Andrew Ure, The Philosophy of Manufactures, London: CharlesKnight, 1835, p.336.15See Stephen A. Marglin, "What Do Bosses Do? The Origins and Functions of Hierarchy in Capitalist Production," Part one, Review ofRadical16 Political Econom y, 6:60-112.


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of job loss are the rate and duration of unemployment and the levelof unemployment insurance.1 6The essential point about the role of unemployment was made byMichal Kalecki,1 7 who argued that high employment would eventually undermine worker discipline and adversely affect productivityand ultimately profits (even though the impact on profits would bedisguised for a time by the positive effects of high capacity utilizat ion that generally goes along with high employment) . Kalecki drewthe conclusion that sustained full employment was not in the interest of capitalists and would therefore be unlikely under capitalism.In short, when alternative jobs are plentiful, the cost of job loss isrelatively low. When alternative jobs become scarce, the cost of jobloss rises.

4 Evolution OfThe InstitutionsInnovations with respect to the welfare s tate and the managementof aggregate demand after World War II had a significant impacton the rules of coordination. Over time, as we shall see, the cost ofjob loss fell dramatically, which reduced the effectiveness of efficiency wages and supervision as coordinating rules. In due course,this had important repercussions on both the supply of saving andthe demand for investment, that is , on the macroeconomic structure.These developments played themselves out in the relationshipbetween productivity growth and wage growth. Over the 1950s, theOECD countr ies in general maintained a neat balance betweenproductivity and wage growth, so that profits remained a roughlyconstant share of output. Japan was able to contain wage growthmore successfully, so that the Japanese profit share actually grewsubstantially during the 1950s. The overall stability of the profitshare reflected the stability of the growth process, and this, it hasbeen suggested, would in the circumstances of the times translateinto improved profit rate expectations: the actual performance ofdemand did much to dispel the fears of depression and excesscapacity. At the same t ime, high rates of growth probably added tothe resources which corporate retentions of earnings and deprecia-

See Juliet Schor, "Wage Flexibility, Social Welfare Expenditures andMonetary Restrictiveness," in Marc Jaruslic, ed., Money in Macropolicy,Hingham, MA:Kluwer-Nijhoff, 1985.17See Michal Kalecki, "Costs and Prices," in Selected Essays on theDynamics of the apitalist Economy, op.cit., 1971. 17


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t ion allowances made available for accumulation; households foundthemselves with incomes r is ing more or less continuously and consequently found it relatively easy to save while learning how tospend their new r iches. Thus both the demand for investment andthe supply of saving grew at an even faster rate than output, and bythe end of the 1950s the share of GDP devoted to gross businessf ixed investment in the OECD countr ies as a whole was 20 per centhigher than at the beginning. ( In Japan and Europe the increasewas even more str iking; i t was the United States, where the growthprocess was less smooth, which held the average down.) During thisperiod, the rules of coordination and the macroeconomic structurereinforced each other , both resting on a system of production thatgenerated a high rate of productivity growth and continued wagegrowth.Thus the new economic arrangements of the post-war per iodinit ial ly worked smoothly. Internally, the welfare s tate, the powerof t rade unions to ra ise wages , and demand management combinedto maintain high capacity utilization and stable profits. Internationally, American hegemony maintained a smooth f low of raw materials from the less developed countries at stable and low prices (thecommodity pr ice shocks of the Korean War years were a f lash inthe pan) . Within the OECD countr ies , the excess demand for thedollar and the disposition of the United States to recycle tradesurpluses init ial ly al lowed growth to proceed unconstrained byproblems of external balance.To be sure, there were clouds on the horizon. The cost of job lossfell, in l ine with the new arrangements for demand management(which kept unemployment low) and with the growth of the welfarestate (which increased both the coverage and levels of unemployment insurance) . But the memor ies of the Depress ion made workers and trade-union leaders alike hesitate to act in terms of the newrealities, that is, in ways that would threaten the steady march ofproductivity and profits . On the international s ide, al though thedifference in rates of productivity growth - the United States consistently lagged Europe and Japan - undermined the dollar , theinit ial undervaluation perpetuated excess demand for the dollar fora considerable per iod of t ime, and even allowed the internationalorder to survive for a time with the key currency country clearlyheaded for deficit.Things began to unravel in the 1960s, especially in the secondhalf of the decade, even though the underlying trends would notbecome evident for some time. Productivity growth began to slacken in the 1960s and real wage increases which were unproblematicwhen productivity was growing at as fast , became highly problematic as productivity growth fell behind.

There are many reasons why productivity growth fell . Somefavour the mature economy thesis which explains the slowdown in18 term s of the exh austio n of the possibilities of techn olog y and the


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1970 than in the mid 1950s, but soon (before the first oil shock)Japanese profi ts too were substantial ly reduced, f rom an average ofabout 35 per cent of corporate output in the mid 1960s to 30 percent in 1973. There was, in short, well before the oil shock, ageneral " ful l employment prof i t squeeze" throughout the OECDcountr ies . This was not a phenomenon associated with business"cycles", that is with swings of a few years' duration, but the resultof a long period of sustained growth, rising wages, high employment, and increasing economic security for working people.This full employment profit squeeze had a direct effect onaccumulation. The rate of growth of the capital stock fell in thewake of the profi t squeeze; for the OECD countr ies as a group thedecline was from a rate of over 5 per cent per year in the late 1960sto about 4 per cent in the late 1970s. But this decline was the resultof a fall in the output:capital ratio rather than a fall in the investment share. Indeed, the share of GDP devoted to business investment proved remarkably resil ient in al l countr ies except JapanHow can the resil ience of the investment share be accounted forin terms of a logic of accumulation based on the centrality of prof i ts? The argument developed by Marglin and Bhaduri 1 9 leads to ananswer along the following l ines: investment remained strongbecause, unti l the very end of the golden age and possibly beyond,profit expectations declined by much less than profit realizations.The paradox is explained by the gradual erosion of fears of depression; profit expectations improved as these fears dissipated despitestatic and even declining profits. Indeed, profit expectations onlycaught up to actual profits as the tide began to recede markedly inthe late 1960s, and even then actual profits fell by more thanexpected profits. This relative resilience of profit expectations wasreinforced by declining real interest rates as inflation acceleratedand was accommodated by relatively passive monetary policy.If this explanation is correct , then t ime-ser ies data obscure ratherthan i l luminate the connection between profit and investmentshares. Had the profi t share remained constant, the investmentshare would have risen, which would have offset the fall in thecapital :output rat io and allowed the capital s tock to continue togrow in the 1970s at more or less its accustomed rate.The view that profits strongly influence investment is supportedby the cross-country data. For example, unti l very recently theJapanese profi t share has exceeded the Brit ish share by roughly thesame margin - 50 per cent - by which the Japanese investmentshare has exceeded the Brit ish. And overall the cross-country correlation between the two shares, while not as s tr iking as these twoextreme figures, is impressive.

Stephen A. Marglin and Amit Bhaduri, "Profit Squeeze and Keynesian20 Theory," W IDE R Working Paper, Helsinki: 1988.


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retton WoodsandPax mericanaThe harm done to accumulation by the profit squeeze was compounded by international developments. Bretton Woods wasundermined by slower productivity growth relative to real wagegrowth in the United States than elsewhere. The productivitygrowth differential was presumably due primarily to the differencein initial conditions - the United States was way out in front at theend of the war. The recycling of United States trade surpluses intoforeign direct investment helped to improve productivity and competitiveness abroad, and ultimately helped to turn the solution tothe dollar problem of the 1950s (too few dollars) into the problemof the late 1960s (too many dollars). The requirements of international liquidity made the reduction in the US surplus not only tolerable but functional for a time, but the development of the eurodollar market soon rendered the United States superfluous as a sourceof liquidity. During the 1960s the dollar was transformed from anundervalued to an overvalued currency, and as the decade wore onthe United States, increasingly torn by strife over the VietnamWar, looked less and less like a safe haven, despite the return ofpolitical unrest to Europe after an interlude of 20 years.The first symptom of change was that European countries wereable to remove exchange controls that had been imposed to copewith the dollar shortage of the immediate post war period. Moreominous signs appeared as the 1960s wore on: the deterioration inthe US balance of payments persisted, and the United States pulledback from full convertibility of the dollar into gold. Finally, BrettonWoods could no longer function and in 1971 was definitively andunilaterally abandoned by the United States. The consequenceswere momentous, if somewhat delayed: faced with an external constraint for the first time since the war, the United States could nolonger play a leadership role in the management of aggregatedemand internationally. In the late 1970s, when the United Statesattempted to induce a global expansion by stimulating aggregatedemand, the rest of the world was no longer willing to accept aflood of US dollars, except at a price which sent shudders throughthe financial community from New York to Zurich and from London to Tokyo. Though modest in terms of more recent experience,the fall in the dollar appeared to threaten the stability of the international financial system. The United States did not persist inexpanding aggregate demand, and the stage was set for a new headof the United States central bank, Paul Volcker, to introduce arestrictive thrust into Federal Reserve management of monetarypolicy.Other international developments had a more immediate bearingon the macroeconomic structure. The defeat of American forces inVietnam formally signalled the end of the Pax Am ericana and an 21


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end was close at hand to the smooth flow of third world raw mater ials at knock-down prices. OPEC was quick to take advantage ofthe changes in America 's world posit ion; there was nothing accidental in the t iming of i ts dramatic entry into prominence in 1973.If instead of in 1973 OPEC had tried to raise oil prices and restrictproduction in 1953 or in 1963, American marines would almostcer tainly have been dispatched to teach the lessons that were taughtto the Lebanese in 1957 and the Dominicans in 1965.It seems likely that the increase in the price of energy contributedto the reduction in the output:capital rat io, which accounts in largepart for the slowdown in the rate of accumulation in the 1970s.Outside the energy sector , value added per unit of capital wouldsurely have fallen as a larger share of output was required to payfor energy. But, as Glyn, Hughes et.al.20 show, it is difficult to sortout the contr ibution of energy pr ice increases from other changesthat occurred almost s imultaneously, par t icular ly the sharpdecreases in the rate of capacity utilization.

5 The End OfThe GoldenA ge: An AssessmentWe now have the ingredients at hand to essay a preliminary answerto one of the key questions that has motivated this s tudy: are we tounderstand the demise of the golden age, and hence to conduct thesearch for new institutions, in terms of problems internal to each ofthe economies of Western Europe and the United States or interms of the re la t ions among the OECD countr ies and betweenthese countr ies and the rest of the world? Evidently the histor icalaccount can be read two ways: f irs t , that the essential problem wasan internal one, the full employment prof i t squeeze that resultedfrom the failure of the system of production and the rules of coordination to accommodate the basic conflict between labour and capital ; second, that the essential problem lay on the international s ide,in the erosion of profits that resulted from the energy shocks traceable to the erosion of American hegemony, and the demise ofinternational arrangements that effectively suppressed the constraint of external balance for the United States as hegemonicpower and a l lowed re la t ively expansionary demand managementpolicies both in the United States and elsewhere. In the f irs t reading, the end to the golden age comes about 1970, when productivitygrowth began to decl ine markedly throughout the OECD countr ies .In the second reading, the real end comes in 1979 when OPEC IItr iggered a new round of inf lat ion that revealed - revealed but did2 0 op.cit., 1988.2


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not cause - the United States to be unable to continue to expandthe world economy by st imulating the American economy and USimports . In this reading, the post-war regime foundered on theshoals of pluralism.The part of wisdom is probably to reject both of these singlecause explanations. Having emphasized the interaction of complementary insti tutions as the key to understanding both successand failure, it makes relatively little sense to search for a singleessence. The internal problems which produced a prof i t squeeze areadequate to explain why the growth in the investment shareachieved in the 1950s and 1960s did not continue into the 1970s,though even here international problems (OPEC I in par t icular)contr ibuted to the profi t squeeze. But i t is the emergence of anexternal constraint in the late 1970s that explains why the UnitedStates, and hence other countr ies , were no longer disposed to useKeynesian policies to maintain the high levels of employment andcapacity utilization as in the earlier period. Thus there are differentexplanations for the decline in growth rates (where internal issuescome to the fore) and the r ise in unemployment rates (where theemphasis is on the international s ide) .The retreat f rom Keynesian policies of demand management, i tshould be said, was based on internal as well as on external considerations. From the vantage point of capital , expanding output andemployment would only exacerbate the problem of workforce discipline and motivation which had already cut deeply into productivitygrowth and profits.Moreover , gains in product ion and employment would come atthe cost of higher rates of inflation. Now reasons for disliking inflat ion are many and varied, and the deepest reasons are probablypsychological rather than economic, at least if we confine our attention to rates of inflation characteristic of the industrial economies inthe post-war per iod. In a world where all values - ethical , moral ,and social as well as economic - are in flux, price stability servesthe important symbolic value of connecting the older generation toits past, to a world which seems, in retrospect at least, simpler,safer, and surer.Speculative as this explanation might be, there is no reason to beapologetic. I t is the worst kept secret in the economics professionthat no one has a convincing story about why inflation, even at thehighest rates that prevailed in the OECD countr ies in the 1970s andearly 1980s, should be regarded as such an evil that all economicpolicy had to be directed to i ts containment. (For the United Statesalone, the costs of containing inflation - in terms of output foregone since 1980 - are estimated in the trillions). The best storymainstream economists can offer is that inflation is like pregnancy:there is no such thing as a little bit. Single digit inflation, if allowedto continue, will inexorably develop into double digits , and doubledigits into triple digits. Th e next thing we kno w is tha t the adv anc ed 23


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capitalist countries will be in the position of Germany in the 1920s,when money lost all its value.In contrast with psychological costs of inflation, which are widelyshared, its economic costs (and gains) are infinitely complicated towork out. But it is worth reflecting on the fact that the sure losersfrom inflations of the kind that prevailed in the industrial countriesare the very rich who constitute the bulk of the holders of assetsdenominated in nominal terms. Unl ike common s tocks or houses orother assets whose income rises more or less in line with the underlying income stream, bond income and pr incipal are generally f ixedin nominal terms. Now according to a recent survey in the UnitedS ta tes ,2 1 40 per cent of federal , s tate, and corporate bonds and 70per cent of nontaxable holdings, chief ly municipal bonds, are heldby the wealthiest 2 per cent of American families . Even withoutintroducing psychological considerations, it is easy to see why therich would oppose inflation.In short , while there may be a presumption that the retreat f romKeynesian policies was rooted in international considerations, thesewere at the very least reinforced by domestic considerations of bothcapital:labour conflict and the acceleration of inflation. Once againinternal and external problems became inter twined, perhaps inextricably so.

6.LessonsOf The Golden AgeThe preceding discussion is not intended as a summary of all thepapers that have been prepared in the course of the WIDER project - most of which are available separately as WIDER WorkingPapers. Nor does the entire set of papers purport to cover thewhole field. In particular, we have given relatively little attention tothe increasing importance of managerial capital ism; trans-nationalcorporations; the r ise of competit ion from the newly industr ial izedcountr ies l ike Brazil and South Korea; the direct impact onaccumulation of the increase, relative to the pre-war per iod, ingovernment spending on civil and mili tary account - to mentiononly some of the considerations without which the story of thegolden age and i ts demise is incomplete.We believe there are methodological , analytical , and policylessons to be drawn from our research. The main methodologicalpoint is the need to integrate history and theory. In our view thefailure of most economic analysis, particularly neoclassicallyinspired analysis, to provide any useful insight into the successes

Survey of onsumerFinances, Federal Reserve Board, September 1984,24 pp.679-792.


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and failures of post-war capitalism lies in excessive abstraction.The key word is "excessive". All theory is abstraction and wehave nothing against abstraction in pr inciple. The problem oftheorizing is to trade off the potential generality of the theory,which leads one to insti tutional sparseness, against the need to saysomething specific about specific problems in specific historical circumstances. The balance is obviously a delicate one, but i t seemsclear enough that the kind of theory which dominates in theeconomics profession has erred in the direction of too much generality. In pursuing generality, neoclassical theory has become sosparse in its institutional specification that it has next to nothing tosay about concrete problems.By contrast , the theory of growth that underlies the presentresearch project is f irmly rooted in capitalist institutions. We drawheavily on Marxian and Keynesian tradit ions to make up for whatwe perceive to be the def iciencies of mainstream theory: the Marxian tradition for the discussion of the system of production, particularly the analysis of labour extraction, and the Keynesian traditionfor the discussion of macroeconomic structure, par t icular ly theanalysis of saving and investment. Each tradit ion makes assumptions that tie the analysis closely to the conditions of a developedcapitalist society.Both of these tradit ions make the rate of prof i t central to thegrowth of the capitalist economy. In part this is because both tradit ions, drawing on classical economics, place considerable emphasison profits as a source of saving. In our view, the distribution ofincome, par t icular ly between corporations and households, is central to the determination of the overall propensity to save, in sharpcontrast with the mainstream insistence on a uniform propensity tosave that is independent of distr ibution. Observe that the "neo-Keynesian" t radi t ion,2 2 in which we would situate our own view ofsavings and investment, has in some respects par ted company notonly with the mainstream but, arguably, with Keynes himself.Our view of saving differs from the mainstream of the professionfor two reasons. First , when we speak of "saving" we have something very different in mind from what the mainstream intends bythis term. In the mainstream view, saving consists of additions tothe stocks of all durable goods, whereas our interest focuses onplant , equipment and re la ted "product ive" capi ta l .Second, we mean something very different by the term "household." In accordance with the logic of their theory, purists in themainstream attribute virtually all saving to households by reason ofthe beneficial ownership that one way or another is at tr ibutable tohouseholds. In our view, saving by organizations l ike corporations

22 See Footnote 5. 25


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and pension funds is not reducible to households, at least notbehaviorally, whatever the legal s i tuation might be.At issue here is an important difference with the mainstream asto how saving behavior is to be viewed. The mainstream sees savingbehavior , l ike all economic behavior , as purposefully calculated:the preferred models, like Modigliani's life-cycle hypothesis orFr iedman's permanent- income hypothes is , are concocted in termsof utility maximization over a long period of time. It obviously fitssuch a f ramework to assume that households take account of thesaving done by the corporations or pension funds of which households are beneficial owners. The corporation or pension fund is ineffect simply an extension of the household.We see households as more reactive than ref lective, for the mostpart responding to the st imulus of income by the action of spending, with some saving taking place as incomes rise simply becausethere is a lag in the adjustment process. There are, to be sure,exceptions: the salaried professional whose life prospects arereasonably certain and whose life experience reinforces the notionthat he or she is "in control" - a necessary precondition for theuti l i ty-maximization framework to make psychological sense.2 3 Andthen there are the r ich and super-r ich - about whose savingbehavior we know next to nothing.Since we regard long-period utility maximization as an exceptional basis for household saving behavior rather than the normalbasis, we consider corporations and pension funds to be distinctbehavioral enti t ies , which cannot be assimilated to households.Unlike the "assimilationists ," 2 4 we regard the relatively highobserved rates of corporate profit retention as indicative of a structural relationship between profit and saving - not the mere substi tution of one kind of household saving for another.For all these reasons, we put relatively little emphasis on thehousehold as a source of saving in the modern capital is t economy(Japan being in this , as in other matters , a s tr iking exception to thegeneral pattern) . Our working hypothesis is that the more incomestays in the hands of organizations l ike the corporation and thepension fund, the higher will be the community 's propensity tosave.

A colleague once observed that the life-cycle hypothesis is exactly thetheory of saving behavior one might expect of a middle-aged college professor24 See, for example, Martin Feldstein, "Tax Incentives, Corporate Savings, and Capital Accumulation in the United States," Journal of Public26 Economics,2 (1973):159-171.


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But the role of profits in determining the propensity to save isonly part of the story, and the other parts of the Marxian andKeynesian theories are very different, indeed diametr ically opposedto each other, despite the fact that the rate of profit is central toboth. The Marxian theory focuses on a chain of causality runningfrom real wages and productivity to the rate of profit, whereas theKeynesian theory emphasizes the interconnections between profitand investment demand.Marx begins from the notion of a "subsistence wage" inheritedfrom Smith and Ricardo. Although Marx went to great lengths toemphasize the histor ical , social , and moral elements that enter intowage determination, "subsistence" st i l l suggests to many a biologically determined standard of l iving bordering on malnutr i t ion oreven starvation. In our view, it is not biology but community standards which play the central role in determining real wages.Community standards depend in large par t on the course of classstruggle and the balance of class power between capitalists andworkers. In par t , the norms that govern real wages come out of ashared cultural tradition about what constitutes a fair day's pay.Wages are thus a matter of convention in two senses of the ter m ,one being the idea of custom, the other the idea of an agreement,accord, or contract . Indeed, "conventional wage" better f i ts ourunderstanding of the Marxian view of wage determination thandoes the older terminology of subsistence, with its misplaced connotation of a biologically determined wage rate.Over a period of time like the one this book covers, the conventional wage cannot be conceived of as an unchanging norm: productivity growth must be reckoned in. However, it is not primarilythrough the demand for labour , as mainstream theory would haveit, that productivity has affected wages. Rather, it is through thecultural assumption, common to the advanced capital is t countr ies ,that workers may, by right, lay claim to a share of productivitygrowth. Community standards combine with the power of theworking class to dictate that wages should rise roughly in line withproductivity. As t ime goes on, the presumption of wage growthtakes on a life of its own, in the form that collective bargainingagreements assume and in the general expectations of workers andcapitalists. I t was precisely the persistence of the momentum ofwage growth as productivity growth declined in the late 1960s whichled to profit squeeze in most of the industrialized capitalist world.It will immediately occur to many to ask how a conventionalwage can suspend the laws of supply and demand. The answer liesin that , in the Marxian perspective, demand and supply operatequite asymmetrically in the long run. Over the long period thesupply of labour is highly elastic at the conventional wage becauseof the "reserve army" of labour . The reserve army is not a s tat icconcept, not a number of bodies to be counted, but a force whichexp and s (and co ntra cts, albeit with gre ater difficulty and a consid- 27


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erable lag, hence the problem that Rowthorn and Glyn 2 5 address)to fit the needs of capitalist growth.Students of economic development will recognize the reservearmy as an adaptation of W. Arthur Lewis 's "unlimited supplies oflabour . " 2 6 Intended by Lewis as a descr iption of poor , denselypopulated countr ies , par t icular ly in Asia, this conception, in ourview, is equally applicable to the capitalist economies of WesternEurope , Nor th Amer ica , and Japan .The post-war reserve army was constituted out of a variety ofsources. In virtually all the capitalist countries, workers were drawnfrom the farm and the kitchen: the agricultural labour force shrankto insignif icance and women entered into capital is t production inincreasing numbers. Europe (and Canada) also relied heavily onimmigration, as the United States had done in an ear l ier epoch ofexpansion.

With the labour supply highly elastic at the conventional wage,the wage rate is in the first instance a supply side issue. In ourperspect ive , the main impact of demand is on output and employment. The demand for labour operates on the real wage only indirectly, through its impact on the conditions of conflict and accomodation.The determination of wages gets us halfway to the determinationof profits. The other half of the Marxian story is productivity.Mainstream views emphasize technology to the vir tual exclusion ofother considerations in tel l ing us how to think about productivity.In the Marxian perspective, technology is an important but not thesole determinant of productivity. Productivity also depends uponthe system of production which, under capital ism, ref lects both theunderlying antagonism of the interest of bosses and workers andthe accommodations made to allow the two classes to get on withthe business of pro du ction in spite of their fund am enta l differences.Once again, naked power and cultural norms both play a role;together they determine what is acceptable as a "fair day's work,"the other side of the coin of a "fair day's pay." Mechanisms oflabour extraction, ranging from close supervision and monitor ing tothe payment of efficiency wages, are ways by which the capitalistseeks to enhance labour productivity. "Stints" and "pacing" areways by which workers defend themselves. The important point forpresent purposes is not the specif ic accommodation through which

Bob Rowthorn and Andrew Glyn, "Coping With Unemployment: SomeSuccess Stories," WIDER Working Paper, Helsinki: 1988.26 See W. Arthur Lewis, "Economic Development With Unlimited Supplies of Labour," Manchester School 22 (May 1954): 146. Widely re-28 printed.


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papers which attempt to apply formal models to the question ofprofit squeeze, tel l more nuanced stor ies , in which both aggregatedemand and aggregate supply schedules shif t . 28Neo-Keynesian theory, i t has been observed, shares the Marxianview of saving as a function of the distribution of income. Where itoffers a novel and distinctive interpretation of growth is in itsemphasis on the capitalist as investor, and particularly on hispsychological state as a determinant of the propensity to invest. Inthe neo-Keynesian view, businessmen as a class, if not individually,have the power of self-fulfilling prophecy. Suppose businessmen areoptimistic about the future and therefore about the prospects forprofit , and that they are consequently disposed to take a chance incommitting their capital to specific forms, as investment requiresbut saving does not. Then investment demand will be high and. therate of profit will have to be high in order that the requisite savingbe for thcoming; that is , in order that the demand for investmentand the supply of saving be equal, as macroeconomic equil ibr iumrequires. By the same token, if investors are pessimistic and littleinvestment demand is for thcoming, the rate of prof i t required toequate desired investment with desired saving is relatively low. Inshort, the "animal spirits" of businessmen, their state of confidence, rather than rational calculation, br ings about a corresponding state of affairs. As Keynes put it in the preface to Essays inPersuasion, "There is a subtle reason drawn from economic analysis why . . . faith may work. For if we act consistently on theoptimistic hypothesis, this hypothesis will tend to be realized; whilstby acting on the pessimistic hypothesis, we can keep ourselves forever in the pit of want."This is not the place to elaborate the neo-Keynesian theory ofinvestment in any detail. Suffice it to say that a variety of auxiliaryassumptions are entailed in the neo-Keynesian view. These rangefrom endogenous, or at least passive, money to the assumption ofslack resources, in the manner of a Marxian reserve army. Here weshall focus on only one of these assumptions, namely that adjustments in the real wage accommodate propensit ies to invest andsave. The essential point is the sluggishness of money wages compared to pr ices: pr ices respond to demand with greater alacr i ty thando money wages. In the General Theory, this process accompanieschanges in the level of capacity utilization and output, or rather

Samuel Bowles and Robert Boyer, op.cit. and Stephen A. Marglin andAmit Bhaduri, op.cit.29 That ground is partially covered in Marglin and Bhaduri, op.cit., 1988,and more exhaustively in Stephen A. Marglin, Grow th, Distribution, andPrices, op.cit., 1984, and Marglin, "Investment and Accumulation." inThe New Palgrave,John Eatwell, Murray Milgate, and Peter Newman(eds.), London: Macmillan 1987.0


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drives producers to change the level of capacity utilization, whichadjusts in accordance with the dictates of profit maximization. Butfrom the point of view of growth, it is changes in the distribution ofincome which are pr imary, and these changes can take placewhether or not capacity uti l ization changes.In short, in the neo-Keynesian view, it is investment and savingwhich jointly determine rates of profit and growth, even as each isseparately determined by the rate of prof i t . Productivity is determined by technology, and the real wage is a residual, determinedby the output that remains af ter businessmen's appeti te for accumulation has been satisfied.Evidently this is a very different point of view from the Marxian(not to mention the mainstream) view. In contrast with Marxiantheory, the rate of profit and the rate of growth are determined bythe macroeconomic structure. The system of production plays arole only insofar as it influences investors' animal spirits.An obvious question at this point is whether two such diametr ically opposed interpretations of the basic mechanisms of capitalistgrowth can be harnessed together into a s ingle, coherent theory.There are at least three alternative tacks that might be followed.First, we might treat inflation as a safety valve which resolves thetension between the pressure of conventional wages and productivity and the pressure of aggregate demand on profits. Inflation canerode both the real wage and investment, as well as the real valueof government spending, and thus "harmonize" the conflict ingclaims on a limited economic pie. In this hybrid of Keynes andMarx, conventional wages and productivity on the one hand andinvestment and saving on the other jointly determine the profi t rateand the growth rate; each of these elements operates withdiminished force relative to a pure strain of the Marxian or Keyne-sian model. This is the tack followed in Marglin (1984). 3 0An alternative is to treat the conventional wage and aggregatedemand and supply as constraints which may or may not be binding. That is, the space of outcomes is partitioned into distinct sub-spaces, each associated with a regime in which the conventionalwage or aggregate demand (o r supply) drops out of the picture.This "regime" approach is followed by Edmond Malinvaud (1980)in a somewhat different context. 3 1A third possibil i ty is to drop the assumption that producers determine output by profit maximization but retain the notion thatcapacity uti l ization responds to aggregate demand. In this model,aggregate demand affects the profit rate solely through the effect

3U Marglin, 1984, op.cit. ch. 2031 Edmond Malinvaud,Profitabilityand U nemployment,Cam bridge: Cambridge University Press, 1980. 3


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on capacity utilization, whereas the real wage is not determined bycapacity utilization alone. This model, unlike the pure Keynesianone, has room for a Marxian conventional wage. Michal Kalecki 32is the intellectual father of this approach, although in Kalecki theconventional wage is transformed into a mark-up determined bywhat he calls the "degree of monopoly." The papers by Marglinand Bhaduri (1988) and by Bowles and Boyer (1988) can be interpreted as Kaleckian hybrid's, Keynesian model's with an admixtureof Marx. The difference between the two is that Marglin-Bhaduriemphasise the investment function and Bowles-Boyer focus on thelabour extraction function. In this sense, the two papers are complements rather than substitutes in the story they tell of the goldenage and its demise.None of these theories, however they might be combined withone another, offers more than a bare-bones analytic structure, anapproach to understanding growth in the post-war capitalisteconomy rather than a detailed blueprint of how the post-warregime functioned. In particular, these theories do not have much,if anything, to say about the international economy, nor do theyhave much to offer on the relationship in the post-war regime of thestate to other actors in the economy.The basic premise of this research in respect to both the state andthe international economy is more Marxian than Keynesian: thestate and the international economy are each regarded fundamentally as arenas of conflict. This approach does not however preventat least some of the contending players from mutually benefitingfrom compromise and agreement, explicit or tacit, which mayendure for substantial periods of time. This was the case, at leastuntil the golden age began to tarnish, both as regards the internalclass compromise that governed the intervention of the state in thedomestic economy and the international understandings that underlay American hegemony.

eyondKeynesand MarxA major innovation of this WIDER project is the attempt to situatethe theory of growth within an institutional framework, and toexplain the successes and failures of the post-war regime in terms ofthe mutual interaction of these institutions. One virtue of thisapproach is that it allows us to transcend the reductionism inherentin separating the analysis of the internal and external aspects of thegolden age. Not only does the emphasis shift from "externalshocks" like OPEC I and II (which became symptoms rather than

Michal Kalecki, Selected Essays on the Dynam ics of the apitalist32 Economy, op.cit.,1971,Chapters 1-8.


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causes) to more fundamental issues, but individual causes are seenin their relation to the whole. The question no longer is whetherthe demise of the golden age was the result of the breakdown ofinternal cohesion of the productive system or the result of thebreakdown of internat ional ar rangements . I t becomes ins tead howthe internal and international insti tutions played upon each otherand how these insti tutions stopped reinforcing one another andbegan to undermine each other , in short , how the successes ofindividual parts of the system bred failure of the system as a whole.Major policy conclusions follow from this way of looking atthings. The first is that partial solutions which deal with only oneaspect of the problem - the internal or the international - are likelyto be temporary stop-gaps at best . For example, coordination ofeconomic policies might reproduce the international Keynesianismthat character ized the last phase of American hegemony in the1960s. It is quite likely that such a measure, permitting a simultaneous expansion of the major industr ial economies, would providesubstantial rel ief on the employment f ront, but s ince coordinationfails utterly to address the problem of profit squeeze, it couldhardly make much of a contr ibution to restor ing the growth rates ofthe golden age.By the same token, auster i ty and l iberalization, the conventionalwisdom practically everywhere in the capitalist world today, wouldat best address only par t of the problem. Even on the most optimistic assumptions about the effects on worker motivation and in turnon labour productivity, it is unlikely that capitalists would respondto higher profit margins with a higher rate of accumulation; theuncertainties of the international economic order are l ikely to dampen investor enthusiasm as fears of major depression did earlier.Even more tel l ing, the benefits would at best be temporary. Giventhe dominant system of production and rules of coordination, anypolicies which are successful in maintaining a high rate of growthand employment over a substantial per iod of t ime must underminethe effectiveness of the carrot and stick in calling forth the bestefforts of workers.We believe that full employment and high growth can berestored, but only on condit ion that policy makers face up to theneed for a profound restructur ing of the system of production, andalong with i t the rules of coordination, the macroeconomic structure and the international order . A common element in the successof small countr ies l ike Austr ia, Norway and Sweden in maintainingemployment levels through the last decade is the muting of theantagonistic basis of the capitalist system of production. This too isthe "secret" of the Japanese model; indeed a kind of corporatismpermeates the Japanese model even more thoroughly than i t doesthat of the successful European countries.I t must be admitted that these alternatives raise many questions.For one thing, we have very l it tle und erstand ing of how m acro- 33


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micro l inks would develop under al ternative structures, that is . howthe macroeconomic structure would connect to the system of production and the rules of coordination. For example, what would bethe connection between wages, productivity, investment andgrowth? Is the goal to break the l ink at the connection betweenprofitabil i ty and investment, to provide mechanisms of accumulat ion which do not depend on the expectation of prof i ts to inducedemand and the realization of profits to supply savings? Or shouldthe goal be the more modest one of f inding a new bargain betweenlabour and capital which realistically promises a substantial periodof both high profits and high employment? Should we, for example,envision trading wage restraint for greater democracy and part icipat ion in production decisions?Finally, i t must be recognized that , however necessary, no reformof the system of production itself will be sufficient for a renewal ofprosperity. There must as well be a restructuring of capitalisteconomic relations internationally. A central issue here is whetherthere are al ternatives to hegemony. I f no single country any longerhas the poli t ical and economic clout to dictate to the others , is therenevertheless a set of practices, a system of behaviour, which one ormore major powers can follow in order to induce cooperativebehaviour on the par t of the others?In the answers to these questions may lie the future of capitalism.

APPE NDIX IOutlineofProjectThe m acroeconomic research project was set up at W IDE R in the sum merof 1985. (A list of participants of the research group is provided in Appendix II.) The project sought to understand the making and the unmaking ofcapitalism's golden age in terms of the arrangements which fostered sustained growth and high unemployment in Northern and Southern countries alike after World War II, and the forces which began to underminethe effectiveness of these arrangements in the 1960s and, increasingly so,in the 1970s and the 1980s. A particular focus was the interplay of externaland internal considerations in the determination of growth and employment.On the basis of initial discussions, a total of 14 research papers werecommisioned to examine at various aspects of this debate. These paperswere presented in draft form at a research conference held in Helsinkifrom August 12-14, 1986. Revised papers, incorporating comments andsuggestions from the conference, are being published in the form of twovolumes.The first volume, which analyses the causes and consequences of thevulnerability to external shocks and poor economic performance of Latin34 Am erican countries in the 1980s, particularly in comparison with East and


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South Asian Economies, is tentat ively enti t led No Panacea: The Limits toEconomic Liberalization. Th e second volum e is enti t led, The Golden Ageof Capitalism: Lessons for the 1990s. Appendix III gives the tables ofcontents of these two volumes.

Openness Autonomy and vulnerabilityThe papers collected in the first volume, despite differences of emphasis,are remarkably cohesive in terms of their analysis of the causes and consequences of the higher vulnerabil i ty of Latin American economies to theexternal shocks of the 1970s and 1980s. All reject currently fashionablesingle-cause theories , such as inappropriate exchange rate regimes, or misguided policies of import substi tut ion. Going beyond negative agreementabout how not to analyse the problem, these papers emhasise the importance of the historically-evolved political and social context as a transmission mechanism for the effects of external shocks, such as changes in termsof trade, the costs of debt service, flows of new capital, and the globalrecession. The policy implication is that any uniform medicine - such asthe orthodox medicine of devaluation, l iberalisat ion, and contraction - isl ikely to be counter-productive, in Latin America part icularly. For policyto be effective, it must take account of the diversity of the political andsocial environment in which the economy operates .

The GoldenAgeThe second volume analyses the rise and fall of the golden age of capitalism in order to f ind ways of understanding and ameliorating current globaleconomic problems. We make two passes at this target , one his torical andone theoretical . The his torical section consists of two chapters . Chapter 2discusses the his torical evolution of the key arrangements which togetherprovided the his torical framework of the post-war regime. Chapter 3analyses the evolution of a part

marglin (1988) - lessons of the golden age of capitalism

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