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OPINION: The Socialist Critique – What It Is and Why We Need It

by Andrew Gripp, published

The "S" Word

Americans are dissatisfied with the state of the economy – a topic that is bound to receive considerable attention this election season. In explaining why GDP and wage growth are not what they might be, both parties can be counted on to blame the usual bogeymen: Republicans will point to burdensome regulations, high income taxes, and a punishing corporate tax rate, while Democrats will point to insufficient government stimulus, an under-funded education system, and greedy CEOs and corporations. But what neither party can be expected to scrutinize is the economic system itself.

Of course, such a criticism rarely enters the political discourse today, and for a number of historical reasons (e.g.: both the oppression and co-optation of socialists prior to World War II, the stigma attached to socialism during the Cold War, rising living standards in recent decades). But it is important not to forget that America had a strong socialist and radical tradition for nearly a century, one that enabled the election of socialist mayors, state legislators, and members of Congress. Even some of the most revered founders of the country supported proto-socialist policies: Thomas Paine, for instance, outlined a welfare-state system that today would be described as social democratic in nature; Washington favored profit-sharing among a firm's workers; and Jefferson supported the distribution of land so as to economically empower all citizens.

But regardless of why the socialist critique is marginal today, such a critique – especially one informed by the insights of Karl Marx – helps to explain many of the fundamental problems that ail the U.S. economy. Whether it is the stagnation of wages, the displacement of workers through automation, wealth and income inequality, or the capture of political power by the economic elites, each of these phenomena can be explained not as anomalies of the capitalist system, but as predictable features of its function and evolution.

The Socialist Critique

The critique begins with a theory of history: during the transition from feudalism to capitalism, land that was worked collectively was overtaken by the new capitalist class (a process called "primitive accumulation"). Those dispossessed workers then made a living by selling their most lucrative resource: their labor.

Yet under this new capitalist arrangement, workers are not paid in full. Instead, the capitalist withholds payment for some of their productive output ("surplus value") in order to turn a profit. Some of this surplus is then re-invested in the form of technology: capitalists realize that in order to stave off competition, they have to produce goods more cheaply (thus creating "relative surplus value").

Yet this natural reaction has several negative consequences for the owners of business. First, since the input of workers – their labor – is the basis of value and thus the source of profit, the increasing reliance on technology (called a rise in the "organic composition of capital") means there is relatively less labor to exploit in order to create profit. Moreover, as technology becomes more diffuse among competitors, capitalists must turn to more extreme measures to stay in business, such as by having employees work harder (to create "absolute surplus value"), or by reducing costs, such as through depressing wages and laying off workers. In the long run, Marx claimed, this general race to the bottom would cause the rate of profit to tend to fall and would contribute to economic breakdown.

Where We Are

In many ways, Marx's theory speaks to the state of the economy today. Over the last several decades, the adoption of technology has led to greater productive efficiency: since 1973, productivity has increased almost 75 percent. Yet this has not translated into correspondingly higher wages: between 1973 and 2013, the wages of middle-wage workers increased by 6 percent, and the wages of low-wage workers fell by 5 percent. (The wages of high-earners, those in the 95th percentile, rose 41 percent.)

Moreover, Americans are working longer hours. Between 1979 and 2007, the average number of hours worked increased by 11 percent (highest among low-wage workers, followed by middle-wage workers). In 2014, Gallup reported that full-time salaried employees worked 49 hours each week and full-time wage employees worked 44 hours per week. Americans work more hours per year than those in most industrialized nations, including Japan, the U.K., Sweden, and Germany.

Yet despite Marx's claim about the tendency of the rate of profit to fall, corporate profits in the United States have managed to avoid a steady decline. In fact, while the American economy has experienced a lackluster recovery from the Great Recession, corporate profits, CEO pay, and the stock market – indices of the well-being of the ultra-wealthy – have hit all-time highs in recent years.

These figures reflect to what extent the functioning of the economy (and how we measure its health) have been skewed – as Marx predicted – in favor of those who benefit from it most. For the last several decades, those with economic power have managed to secure the passage of policies (often with bipartisan support) that have hurt the working and middle classes, including the adoption of trade deals with insufficient protections for workers, the toleration, since Reagan, of job-killing anti-trust practices, and tax policies and loopholes that reward the wealthy and burden workers.

How We Got Here

Perhaps most significant is the combination of these economic policies with a series of moves to deregulate the financial services industry – a combination that caused the Great Recession.

As wages began to stagnate, Americans started to borrow in order to afford increasingly costly expenses, such as education, healthcare, and housing. But this tsunami of credit did not come from nowhere: it came from a number of sources, including the recycling of capital from countries with which the U.S. held trade deficits, from American workers' own surpluses, and from low interest rates (which also fueled asset bubbles, as in the real estate market).

, "Without acknowledging the fact,  had substituted rising loans to their workers in place of the rising real wages their workers had enjoyed for the previous century."

As the Marxist economist Richard D. Wolff observed

For years, this substitution proved effective: credit, extended by the financial sector, provided the purchasing power consumers lacked necessary to prop up aggregate demand and keep the economy humming. But the financial sector, history shows us, overextended. Banks and brokers, chasing perverse incentives and believing in the inexorable climb in housing prices, recklessly produced mortgages; those next in line packaged these mortgages into spurious securities and sold them to duped investors; and those who saw the subprime lending crisis coming took out insurance policies on the whole house of cards collapsing and profited enormously as a result.

Marx, believing that value comes from productive labor, understood that financial wealth was "fictitious" and parasitic: while finance could play a positive role in directing surpluses toward productive enterprises, he recognized that some in the financial sector extract wealth from the economy through usurious loans and bonds and that the proliferation of debt would end up stifling rather than expanding productive output.

Why We're Still Here

Since the recession, government policies informed by neoclassical and Keynesian economics – and heavily reliant on the financial sector – have failed to overcome the problems inherent in the system.

Countries that embraced austerity saw economic contraction, but countries that embraced stimulus have hardly fared better. Fiscal stimulus has barely made a difference, since most consumers saved their new discretionary income or used it to pay down their debts. And monetary stimulus in the form of low interest rates and quantitative easing has propped up asset prices (stocks and housing) but has not promoted significantly higher investment or consumer spending: instead, corporations have hoarded trillions in cash and engaged in short-term financial alchemy rather than invest in workers or research and development (which has been well documented by Rana Faroohar).

In short, these policies have failed: the wealth has not trickled down. Most new income generated since the Great Recession has gone to the top 1 percent. Income and wealth disparities are as wide as ever. Meanwhile, millions of people who were once part of the workforce prior to the crisis have since dropped out of it. And those who are fortunate to be working have had to take lower paying jobs, accept part-time and temporary work, and try to string together a living in the "gig economy" of freelance labor. Because of idle workers and capital, GDP is operating well below its capacity.

Many liberal economists have begun to realize that significant changes to the "rules" of the economy are needed. They recognize that it is through empowering the working and middle classes – roughly 95 percent of the country – that there will be greater shared prosperity.

The Need For Radical Change

But what many mainstream economists fail to consider is that radical changes are needed at the micro-level to avoid the standard trends in the capitalist system that produce wage stagnation, unemployment, and financial and economic crises.

Richard Wolff argues that what is needed is not government control in the form of state capitalism or a command economy, but the empowerment of workers in the workplace, or workplace democracy. Promoting what he calls "workers' self-directed enterprises" (WDSE), Wolff argues that rather than receiving top-down corporate management, workers should manage themselves collectively by determining how the firm operates and how its surpluses are distributed.

Such a management style, he claims, would prevent many ills from arising: workers would not needlessly cut their wages or adopt technology that would drastically reduce their numbers; they would not allow the drastic inequality in income that prevails today between "makers and "takers;" and they would manage production so as not to harm consumers or the environment.

Such changes can come about through voluntary action as well as through constitutionally valid governmental policies. Countries from around the world have had successful experiments finding employment for workers by promoting innovative business models, especially cooperatives. WSDEs – in combination with increased government spending on education, training, and healthcare – can go a long way in reversing the trend toward economic insecurity and inequality and increasing opportunity and equitable growth.

Other measures, such as strengthening unions, must be taken to ensure that workers keep a greater share of their labor. Protecting their wages not only increases their income but also prevents the financial sector from converting surpluses into destabilizing investments.

It is precisely this kind of message that needs to penetrate the political discourse. The popular campaign of Bernie Sanders, a self-described democratic socialist, shows that many Americans not only recognize the perils of economic inequality, but also that they are willing to consider supporting radical measures to alleviate it. In an election where voters are being asked to choose between two candidates who embody the worst of what our neoliberal politics and economics represent, the socialist critique is needed now more than ever.

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