1

The Rise and Fall of Neoliberal Capitalism

David M. Kotz

Harvard University PressFebruary, 2015

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The Golden Age of Capitalism

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Homelessness after 1980

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Three Puzzles1. Why had the previous form of capitalism been

replaced by a harsh new form?

2. Why had long-discredited free-market economic ideas returned?

3. How could a capitalist economy bring sustainable economic expansions if wages stagnate or fall?

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Outline1. What is the contemporary form of capitalism,

that arose around 1980?

2. Why did it arise?

3. How has it worked?

4. Why did it give rise to a big financial crisis and Great Recession in 2008?

5. What lies ahead?

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Neoliberalism as Ideas only

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Broader Meaning of Neoliberalism

Neoliberalism is a coherent, mutually reinforcing set of economic and political institutions, together with supporting dominant ideas.

The coherence of the institutions of neoliberalism is their support for the predominant role of market relations and market forces in the regulation of economic activity.

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Neoliberalism: Capital Fully Dominates Labor

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Location of Neoliberal Institutions

Global economy

State-economy relation

Labor market

Corporate sector

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Examples of Institutions of Neoliberal Capitalism

GlobalizationDeregulationWeakening of social regulationPrivatization and contracting out of public goods

and servicesCutbacks in social programsTax cuts for business and the richMarginalization of collective bargainingCasualization of jobsUnrestrained competitionMarket principles penetrate inside corporationsFinancialization

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Neoliberal Capitalism and the Capital Accumulation Process

Neoliberal capitalism -- and the previous regulated capitalism -- are institutional structures that promote and stabilize the process of capital accumulation.

History shows a sequence of such “social structures of accumulation” emerging and, after one or a few decades, eventually is replaced by a new institutional structure.

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Big Business Representatives Affiliated with the Committee for Economic Development,1944

Champion Paper Coca-Cola Eastman Kodak Fidelity & Casualty Co General Foods Goldman, Sachs & Co Hormel Foods J. P. Morgan & Co. Quaker Oats R.H. Macy and Company Scott Paper Studebaker Union Pacific Railroad Co.

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Big Business Representatives Affiliated with the Committee for Economic Development, 1948

Allegheny Ludlum Steel General Mills Anderson, Clayton and Co Goldman, Sachs & Co Arkansas Power & Light Company Hormel Foods Bankers Trust Company International Harvester B. F. Goodrich J.P. Stevens Bristol-Myers Lehman Brothers Bausch and Lomb Optical Libbey-Owens-Ford Glass Champion Paper National Broadcasting Co Chicago, Indianapolis & Louisville Railway New York Life Insurance Co. Cincinnati Street Railway Company Northern Pacific Railway Company Cleveland Electric Illuminating Company Northwest Bancorporation Coca Cola Owens-Illinois Glass Colgate-Palmolive Pennsylvania Railroad Company Continental Insurance Co Philco Corning Glass Works Procter & Gamble Crown Zellerbach Quaker Oats Eastman Kodak R. H. Macy Federated Department Stores Scott Paper Ford Motor Shell Union Oil Co General Electric Sinclair Coal Company General Foods Texas Power and Light Company United Air Lines

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CED on Collective Bargaining

"To compensate for the weakness of their individual bargaining position, wage earners need the right to combine into organizations for collective bargaining.“ –1944

“America cannot afford industrial strife… It would put in jeopardy not only the attainment of our domestic goals of high production and employment but the existence of our free economy as well.” -- 1947

“International peace and prosperity depend, to a large degree, upon the achievement of industrial peace and prosperity in this country.” -- 1947

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CED on Keynesian Policy

“Constructive policies respecting taxation and public expenditure … and enlightened control over credit and money can greatly retard or prevent excessive swings of the business cycle….” and maintain “the flow of buying power needed to sustain high level of employment and productivity” – 1946

“…monetary and fiscal policies are essential functions of government ... [that] encourage or discourage financial expansion." -- 1948

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CED on Social Programs

The federal government “should continue to provide…a program of … unemployment insurance and old-age pensions – for the benefit of those who are unable to work or … are for any reason unable to find sufficiently remunerative employment to protect themselves against want. Such individual protection against hazards should be extended as rapidly as possible.” – 1944

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New View of Trade Unions

Henry Ford II in 1946 stated that the corporation had "no desire...to turn back the clock...We do not want to destroy the unions"

Dwight D. Eisenhower in 1952: “I have no use for those --regardless of their political party -- who hold some foolish dream of spinning the clock back to days when unorganized labor was a huddled, almost helpless mass.... Today in America unions have a secure place in our industrial life. Only a handful of unreconstructed reactionaries harbor the ugly thought of breaking unions. Only a fool would try to deprive working men and women of the right to join the union of their choice.

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Why Big Business Supported Regulated Capitalism

1) Big business had been unable to crush organized labor and decided to strike a deal

2) Fear that the great depression would return

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Fear that Depression Would Return

“This generation, after the worst depression … in our history, knows that our economy can have great fluctuations of production, employment and prices.”

“We also know what the costs of extreme swings in business conditions are: …

● the resulting deep sense of injustice and frustration;

● the growing receptivity to futile or dangerous ideas that appear to promise relief from all ills…” (emphasis added) – 1948 CED document.

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Why Big Business Supported Regulated Capitalism

3) Strength of Socialist and Communist parties in the Developed capitalist countries.

4) Emergence of a large bloc of Communist Party ruled states.

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Selected Business Roundtable Members, 1972 and 1979

Allied Chemical Corporation*+ Firestone Tire & Rubber Co.*+ Aluminum Company of America* Ford Motor Company*+ American Can Company*+ General Dynamics Corporation*+ American Electric Power Company* General Electric Company*+ AT&T+ General Foods Corp.*+ Atlantic Richfield Company*+ General Mills, Inc.*+ B.F. Goodrich+ General Motors Corporation*+ Bank of America+ Gulf Oil Corp.*+ Bethlehem Steel Corporation*+ International Harvester Company*+ Burlington Industries, Inc.*+ International Nickel Co.*+ Burlington Northern, Inc.*+ International Paper Co.*+ Campbell Soup Company*+ J.C. Penney Co., Inc.*+ Champion International Corp.*+ J.P. Stevens+ Chase Manhattan Bank*+ Kennecott Copper Corporation*+ Chrysler Corporation*+ Mobil Oil Corporation*+ Citibank*+ Morgan Guaranty Trust Co. of N.Y.+ Coca Cola+ Morgan Stanley & Co., Inc.+ Consolidated Edison* Procter and Gamble+ Corning Glass Works*+ R.H. Macy & Co., Inc.*+ Crown Zellerbach Corp.*+ Scott Paper Company*+ Dow Chemical Company*+ Sears, Roebuck and Co.*+ E.I. du Pont de Nemours & Company*+ Shell Oil Company*+ Eastern Air Lines*+ Texas Power & Light Co.* Eastman Kodak Company*+ United Aircraft Corp.* Exxon Corporation*+ United States Steel Corporation*+ Federated Department Stores, Inc.*+ * Member in 1972 + Member in 1979

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Business Roundtable Reports late 1970s

1977 report called for tax cuts for business to spur investment.

1979 report called for cuts in social security benefit levels with more reliance on private savings for retirement income.

1979 report criticized cost to business of social regulations.

1979 report proposed that the finding of an “adverse health effect” from bad air quality should be limited to conditions resulting in “permanent damage or incapacitating illness.”

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Business Roundtable Reports 1981

“The business community feels strongly that all four parts of the economic recovery plan [Reagan Administration’s plan for cuts in social spending, tax cuts, regulatory reduction, and tight monetary policy] are essential, interrelated, and must be acted upon...”

“An economic crisis confronts the American people and requires far-reaching changes in economic policy.”

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Right Wing Think Tanks

Expenditures in Million of Dollars

1970 1980

American Enterprise Institute 0.9 9.7

Hoover Institution 1.9 5.7

Heritage Foundation NA 5.3

Total 2.5 20.7

Brookings Institution 5.5 9.2

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Political Donations

1964: More big business donations go to Lyndon Johnson than to Barry Goldwater.

Johnson won an overwhelming victory over Goldwater in the 1964 presidential election.

1980: Big business donations go overwhelmingly to Ronald Reagan.

Reagan defeated the incumbent President Jimmy Carter.

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6%

8%

10%

12%

14%

16%

18%

Figure 3.4. Rate of Profit in the U.S. Nonfinancial Corporate Business Sector

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1) Effect of Declining Rate of Profit

Business Roundtable slide show 1973:

“After-tax profits peaked in 1966 ... but declined sharply in the ensuing period of cost-squeeze”

“Starting in 1966 ... unit labor costs accelerated sharply, and the aftermath was excessive inflation and a severe profit squeeze.”

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2) Expansion of Social Regulation

Starting in late 1960s government social regulation expanded greatly: 1) Environmental regulation2) Occupational safety and health regulation3) Consumer product safety regulation

This was not part of the original bargain.

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More Reasons Why Big Business Supported Neoliberal Restructuring by the late 1970s

3) Intensifying international competition put pressure on big business to cut wages, taxes, and costs of complying with government regulation.

4) The Great Depression came to appear as a historical accident, and perhaps a result of government mistakes rather than any problem of the capitalist economy.

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Role of Free-Market Ideas

Free-market theory claimed deregulation of business and markets, privatization, and tax cuts for business and rich “investors” would benefit everyone.

These measures would unleash saving and investment, creating jobs and leading to faster growth.

Everyone would benefit.

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A Rising Tide Lifts All Boats (large and small)

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Average Annual GDP Growth Rate, U.S.

4.0%

3.0% 3.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1948 - 1973 1973 - 1979 1979 - 2007

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Personal Saving as a Percentage of Disposable Personal Income

0%

2%

4%

6%

8%

10%

12%

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Investment in Two Periods

3.6%3.0%

9.0%

7.3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1948-73 1979-2007

Average Rate of Capital Accumulation Net Private Investment as a Percentage of Net Domestic Product

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Consumer Spending as a Percentage of GDP

58%

60%

62%

64%

66%

68%

70%

72%

Three Developments in Neoliberal Capitalism

1) Increasing inequality

2) Asset bubbles

3） Financial institutions’ risky behavior

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Annual Growth Rates of Wages and Salaries and Corporate Profit

4.5%

3.0%

1.7%

0.4%

4.2%

0.1%

3.3%

5.3%

0%

1%

2%

3%

4%

5%

6%

1948-1966 1966-1979 1979-2007 2000-2007

Wages and Salaries

Corporate Profits

Percentage Increase in Average Real Family Income for Quintiles and the Top 5%

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131.4%

103.0%108.6%

112.6%

99.6%

86.7%

0.6%

11.0%18.0%

28.2%

51.7%

74.0%

0%

20%

40%

60%

80%

100%

120%

140%

Lowest fifth Second fifth Third fifth Fourth fifth Highest fifth Top 5 percent

1948 to 1973 1979 to 2007

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Income Shares of the Richest 1% and Richest 0.1% as a Percentage of Total Income, 1920-2007

0%

5%

10%

15%

20%

25%

30%

Top 1% Top 0.1%

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The Rising Tide Lifted only Some Boats

House Price Index Relative to Homeowners’ Equivalent Rent

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100

110

120

130

140

150

160

Three Unsustainable Trends

Three developments three trends unsustainable over the long run1) Rising levels of household and financial sector

debt2) Toxic financial assets spread throughout the

financial system.3) Growing excess productive capacity

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Debt of Sectors of the U.S. Economy as a Percentage of GDP, 1948-2007

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0%

20%

40%

60%

80%

100%

120%

140%

Financial Sector Debt Nonfinancial Corporate Sector Debt

Household Sector Debt

Outstanding Value of CDOs in the Global Economy, Billions of US Dollars

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$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

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Capacity Utilization in Manufacturing for Business Cycle Peak Years

80.1%

86.6%87.7%

81.7%

79.7%78.6%

72%

74%

76%

78%

80%

82%

84%

86%

88%

90%

1960 1969 1973 1990 2000 2007

Explaining the Crisis of 2008

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Three Developments

 

Three Trends Structural Crisis

 

    

Rising Inequality

 Rising Household and Financial Sector Debt

Falling Consumption

 

 Great

Recession   Neoliberal Institutions

 

Asset Bubbles    Financial Institutions’ Risky Behavior

 

Spread of Toxic Financial Assets     Excess Productive Capacity

Real Estate Bubble Deflates

Falling Investment       Financial Institution Insolvency

    Financial

Crisis

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What Lies Ahead?

The U.S. economy and much of the global economy are stuck in a structural crisis.

Austerity policy represents an attempt to double down on neoliberalism – but it cannot work as it did before 2008.

History suggests that stagnation will continue unless and until there is major institutional restructuring.

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Three Possible Directions of Restructuring

1) Statist, nationalist form of capitalism

2) Regulated capitalismbased on capital-laborcompromise

3) Transition to an alternativesocialist system

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The Rise of a Strong Popular Movement?

If strong a strong popular movement arises, the capitalists might be pushed to compromise, leading to another period of regulated capitalism.

However, either statist or regulated capitalism would bring another long period of relatively rapid GDP growth.

This would likely destroy civilization due to global climate change.

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Socialism

If a strong popular movement arises, this will open the possibility of transition beyond capitalism.

A socialist system can bring rapid output growth but it need not do so.

A planned economy in developed countries could bring increasing economic welfare with declining production of goods.

Socialism would mean an economy that exists for working people rather than the other way around.