The second sign, this time quite dramatic, was the collapse of the international monetary system in 1971. On August 15, 1971 President Richard Nixon ordered a stop to gold payments for US dollars. This action ended the fixed exchange rate between the dollar and gold and with it the Bretton Woods agreements on which the international system had been based since 1944. It was possible for the United States to do this unilaterally because of the dominant position of the dollar in international trade and capital flows. Why it was done, however, requires some deeper analysis.
On the surface Nixon's actions appeared to be a response to the rapid deterioration in the U.S. balance of trade in the Spring of 1971. It dropped from a surplus of $2603m in 1970 to a deficit of $2260m in 1971. Only during the Great Depression (1934-40) had the U.S. gone into deficit on its trade account in the 20th Century. Deficit on capital account had been endemic and inevitable as long as foreign nations continued to hold the dollar as a foreign exchange reserve and as long as the Eurodollar market continued to expand. But the trade balance had always been in surplus, primarily due to the competitiveness of American food and manufacturing exports.
Nixon had known about the deterioration of the trade balance for some time. Indeed, a Department of Agriculture commission had recommended as early as 1969 measures to increase earnings from agricultural exports to help regain a surplus. But the sudden and rapid deterioration was nevertheless a shock. The centrality of the trade deficit seemed clear from the fact that on August 15th Nixon not only ended convertibility but also slapped a "surcharge" on imports that was aimed directly at reducing or abolishing the new trade deficit.
Finally, a wage and price freeze accompanied those measures and was partly rationalized as necessary to reduce inflation in order to improve the competitiveness of American goods in international trade.
At this point, the question must be: did these problems and the measures aimed at solving them indicate a breakdown in the underlying growth mechanism of Keynesian accumulation? There is at least one sense in which we can say yes immediately. The Bretton Woods agreements presupposed the ability of national governments to carry out the adjustment process internally. Only this made fixed exchange rates viable. Nixon's unhooking of the dollar from gold was an admission of his inability to handle adjustment in the usual ways. But there is more.
In the model that we have been using so far, the good health of the economy is defined by growth, and crisis in turn is defined by the breakdown in growth. This is true whether at the level of the individual economy or at the level of the global economy. This is also true whether we understand by growth the expansion of the output of goods and services or a broader process of structural expansion and change.
The rise in inflation, of course, tended to undermine real wages so that they only rose slightly. In fact, during most of the 1970s real wages rose only about .9% a year. In other words, real wages were almost constant during this period. Thus inflation was a fairly effective weapon in the hands of business to maintain relative shares of output between business and labor.
We can see here a situation in which a problem for some is a solution for others. Inflation here is a problem for workers because it undermines their real wage. But it is a solution to business problems about maintaining their profits. This inflation, however, cut two ways for business. Although it helped reduce real wages, it also made American goods less competitive with imports and in foreign export markets. Moreover, as prices rose, workers fought to keep their real wages from falling and kept pushing nominal or money wages up and up and up. The result was a wage-price spiral of accelerating money wages and other prices.
This wage militancy on the part of workers converted inflation from a solution for business into a problem. Not only was accelerating inflation bad for sales (and the balance of payments, obviously) but it was also destabilizing. Business, as we know it today, must do a tremendous amount of planning. It must plan its investments and its sales. To do this planning well, it must have a relatively stable and predictable environment. Accelerating inflation was one increasingly unstable part of the business environment in the late 1960s and 1970s.
Despite this success at the level of the wage, however, there was also a rapid rise in non-wage income, e.g., transfer payments to the needy, so that on the whole there was a clear shift of relative shares of national income against business and in favor of consumption.
Thus we can see that not only was the rate of profit declining -- measured as a percentage of corporate income -- but so were export markets and the share of national income going to industry. All of these factors tended to undermine business' relative position in the economy and to create a bad "business climate."
Now from business' point of view the primary culprit in the wage-price spiral that produced inflation and rising unit labor costs was labor and its exorbitant demands. Because workers were demanding wage increases greater than the increases in productivity, they were undermining the productivity deal on which post-WWII growth and price stability had been based. On the other hand, from the point of view of labor, workers were simply trying to keep up with price increases to avoid seeing their real wages decline.
What was actually going on was a power struggle over the distribution of the product. When business raises prices, workers try to raise wages. When workers succeed in raising wages business raises prices (assuming demand conditions allow them to get away with it). When real wages exceed the growth in productivity, there will be a real shift in relative shares. If government intervenes, as it did in this period, with its taxing and spending power, then it too can affect the distribution of income. Business is obviously dead set against any reduction in its relative share of income and output. So is labor, but in this historical period it was labor that was on the offensive. If the rate of profit or business' share of income falls then it becomes irritated and goes on strike, refusing to invest in productive enterprise. It tends to shift its money into what economists consider non-productive activities such as corporate takeovers, financial speculation, land speculation, and so on. Much of this did in fact occur in the 1970s. Indeed as we will see, much of this is still going on.
The next questions must be: what circumstances made it possible for workers to be successful in their efforts to raise wages faster than productivity, what accounts for the rapid rise in transfer payments that raised the share of output going to workers and what accounts for the decline in the growth of productivity.
These investments in "human capital" were partly the result of studies carried out in the late 1950s that suggested that a great deal of American economic growth could be explained by improvements in the quality of capital and labor, e.g., by technological change embodied in physical and human capital.
But there was another reason that caused the vast expansion in at least some of these payments: dramatic and violent militance on the part of the poor and dispossessed in American society. While human capital investments in education and research and development, and even some poverty programs sprang new-born from the foreheads of policy planners, others, such as food stamps, expanded welfare programs (such as Aid for Dependent Children, Legal Aid, and so on), were either created or expanded in response to the violent upheavals in America's central cities during the 1960s. When the poor took to the streets in the urban insurgencies of the mid-1960s, in Watts, in Newark, in Detroit and elsewhere, they were quite explicit in their aims: the direct appropriation of wealth, wealth that was denied them because they had no jobs, or only very poorly paid jobs. Social scientists who studied these uprisings came very quickly to dub them "commodity riots" because of this character. In their wake money flowed into the central cities in a wide variety of forms.
Therefore, it is not an exaggeration to say that much of the rapid expansion in transfer payments during the 1960s was the direct result of the social struggles of the unwaged. Young blacks, Chicanos and even whites went into the streets with guns to take what they were not allowed to earn. Welfare mothers fought for and gained increased welfare payments for the work of raising the next generation of workers. And so on. Even in the schools, part of the expansion of human capital investment was in response to the militance of groups of black and Chicano students demanding that their people have more access to education and scholarship money and aid.
The impact of these transfer payments was two-fold. First, they directly raised the share of total national income going to workers at the expense of business. It was not just a transfer of money from one part of the working class to another, say from middle class to the poor. On the whole the payments were also subsidized by business taxes as well. Second, by so dramatically raising unwaged income -- especially welfare, food stamps, and unemployment compensation, the increases raised the floor under the wage hierarchy. The effect of this was to make the loss of a job less menacing for workers who had them, and the gaining of a job less pressing for those who did not. Both phenomena tended to strengthen the bargaining position of workers with relation to business. Those who had jobs could be more militant in their strikes and job actions. Those who did not have jobs could be more choosy about what jobs they took, at what wages and under what conditions. Because of this, we can see that the increase in transfer payments not only raised workers' income in the community outside the factory and office, but it also had an influence on the rate of growth of wages. I will return to that momentarily.
Leaving aside for the moment the effect on wage bargaining, what were the direct results of these investments? Did they tend to increase the quality and productivity of the labor force? There are plenty of reasons to think that the net effect was quite the opposite. Instead of producing a stable, obedient labor force in the ghettos, the poor took the money and used both money and programs to strengthen their struggles with the state. They converted Community Action Programs into launching pads for their own demands. For them the money was not an investment but a long overdue subsidy to their consumption.
In the case of investments in education, instead of producing a quiet, well trained, obedient labor force in the schools, students took the money and used it for their own purposes. They played with it, they smoked it, they used it to finance their student power and anti-war struggles against school authorities. From the Free Speech Movement at Berkeley in 1964 to the nationwide campus takeovers during the Cambodian invasion in 1970, students were building their own struggles rather than becoming docile additions to the labor force.
Among the "minority" students who received new funds, there were certainly those who took the scholarship money and studied, but there were also those who used their new position to fight for black studies and for further gains.
On the heels of the civil rights and anti-war movements, also came the women's movement -- a new kind of civil rights struggle -- one aimed at the traditional sexism and patriarchy of capitalist society. Women came to form their own organizations to fight for their own needs as a group. Individuals worked together and drew strength for their own personal battles in the home and in their families. Although not always recognized as such, the struggles of welfare mothers for increased welfare payments was an important component of the women's movement, one that demanded payment for work already being done, as opposed to others who demanded access to new forms of waged work.
As a result of these social conflicts and of the militance of the recipients of the expanded transfer payments, much of the investment in human capital can be seen to have had a very low rate of return. Not only did those receiving the money fail to become more productive, but they often became even less productive than those who had come before. The same was true in the ghettos. This is some of the background to the decline of the "work ethic" and of the crisis in productivity. The following songs reflect on the poverty based violence of the mid-1960s:
BLACK DAY IN JULYBlack Day in JulyMotor City madness has touched the countryside and through the smoke and cinders you can hear it far and wide the doors are quickly bolted and the children locked inside Black Day in July Black Day in July Black Day in July Black Day in July
In the mansion of the governor Black Day in July Black Day in July
In the office of the president Black Day in July Black Day in July
(Gordon Lightfoot, The Best of Gordon Lightfoot) You can listen to this song online through
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BURNIN' AND LOOTIN'This morning I woke up in a curfewoh God, I was a prisoner too -- yeah could not recognize the faces standing over me they were all dressed in uniforms of brutality How many rivers do we have to cross
(That's why we gonna be) Oh stop them
Give me the food and let me grow
Weeping and a wailing tonight
Give me the food and let me grow We gonna be burnin' and a-lootin' tonight REPEAT BURNING AND LOOTING AND FADE (Bob Marley and the Wailers on Burnin', Island Records, 1973
You can listen to this song online through |
One of the most commonly discussed has been the shift in the composition of the economy. The late 1950s and 1960s saw a rapid rise in the so-called service sector. This sphere of economic activity, which includes such diverse activities as fast food, health, and financial services, grew rapidly in terms of total output and in terms of employment. In fact, the majority of the new jobs created during that period was in the service sector. How did this affect productivity? Well, in general productivity in the service sector has been lower than that in manufacturing. So as the relative size of the service sector grew, so did its negative influence on aggregate productivity. In other words, without any change in average productivity in manufacturing and services the mere fact that services became an ever larger percentage of overall economic activity meant that its lower productivity tended to slow down the growth in the national average.
This seems to be simply a technical question -- one of statistical measures -- but it is not. For we cannot be content with the statistical observations. We must account for the rise of the service sector. Why did services account for an ever larger share of national output? Why did not its share remain the same?
Many answers have been offered for this trend. Most concern the changing structure of preferences among consumers. But this too must be explained. For a long time, critics of "consumerism" have complained that Americans only wanted more "things" -- how is it that they diversified their desires in other directions? Without digging too deeply into the abundant literature on "post-industrial society," I would like to focus on just two parts of the service sector and observe how their expansion has perhaps been related to the kinds of social struggles mentioned above.
Fast food and the restaurant business in general has been one of the rapidly growing parts of the service sector. Government statistics show a fairly dramatic increase in the percentage of meals eaten outside the home. Partly this can be explained by the rising number of women in the labor force, who, not being at home, eat out, and who, by their absence perhaps, induce others to eat out. This, in turn, must be seen as one of the important results of the women's movement mentioned above. As part of their struggles, women have fought to escape the isolation cell of the home and to integrate themselves into the larger society -- partly through waged jobs. Some have done this while remaining wives and mothers. Others have done this by refusing such traditional roles and opting for a "career" in waged work. At any rate, it is not something that just happened, it is a part of social change.
The increased number of meals eaten away from home can also be ascribed to women's increasing reluctance to serve as full-time cook to their families. Far more often today, they are inclined to say "I don't feel like cooking, let's eat out!" And this is true whether or not they are holding down a waged job as well as the job of housewife. Moreover, in their demands that men share equally in housework, many women have put men in a similar situation where they too regularly resist having to do housework like cooking and prefer to eat out. This is a form of struggle and helps account for the increasing numbers of families taking meals outside the home.
The second area of services that is susceptible to a similar analysis is that of health services. Partly the rapid rise in health services is ascribable to the accelerating cost of new medical technologies. But partly it is due to increased reliance on frequent trips to the doctor. Health services are traditionally the domain of women's work -- and most of it has been done in the home. Whether it concerns taking care of children or adults, women have traditionally assumed the responsibility as one more aspect of housework. This is also true whether the illness is physical or psychological. Women have provided chicken soup and bedrest for colds, and they have provided patience and nurturing for feelings of inadequacy or frustration.
Among the results of the women's movement has been a growing refusal to provide unlimited amounts of such care Ñespecially when waged jobs make it difficult. Increasingly, women have told men to take care of themselves. If the men didn't want to make themselves chicken soup then they could trot right down to the family doctor and get some penicillin! If the children were sick then women have increasingly expected men to help out -- and that too has led to quicker trips to the doctor and to the pharmacy. Similarly, women's work outside the home has made them less available for the care of the old and feeble -- and has certainly increased the latter's reliance on professional help as well as struggles for medicare and medicaid. All of this has increased demands for health care.
While these phenomena that I have discussed certainly do not exhaust the explanations for the rise of these service sectors, they do suggest how such expansion needs to be explored as a part of the social struggles of the 1960s and 1970s. Such relationships make clear how we must dig below statistics to understand what they represent and to understand what is going on in social terms. This is the kind of understanding we need to make sense out of the crisis of productivity.
We are now ready to take on the third of the questions posed above: what circumstances made it possible for workers to be successful in their efforts to raise wages faster than productivity?
Part of the answer has already been suggested. The success in the struggles of the unwaged to increase their income raised the floor under the wage hierarchy. With higher welfare payments, more easily available food stamps, and so on, there was less pressure on low waged and medium waged workers to accept business' terms during negotiations. There was less to fear from losing a job. With low and medium waged workers being more militant and having more success in raising wages, higher waged workers were also strengthened because the wages in less rewarding jobs were rising beneath them.
Moreover, for low waged workers who often changed jobs, the existence of community struggles around welfare, food stamps and so on, meant that even when they left their jobs they were still in an environment of conflict and contestation. During this period, when there was virtually no area of American life free from turmoil, it is probably not an exaggeration to say that conflict was in the air and infected everyone. Success in one area gave heart to those fighting in another.
Yet another factor was that the demand of ghetto dwellers in the big cities put direct pressure on city and state public workers who had to deal with an insurgent population making their jobs more difficult and demanding. As a result, public employees such as firemen, sanitation workers, policemen and teachers began to organize themselves for self-defense. They formed the most rapidly growing sector of new union labor and demanded greater compensation for increasingly trying jobs. The police and firemen wanted help and compensation for working in extremely hostile areas of the cities, whose inhabitants often saw them, especially the police, as intimidating agents of the state. Teachers who had to deal with rebellious students also grouped for self-defense against what they saw as gross overwork -- both the size and number of their classes and the threats to their persons and authority from alienated youth.
As a result of their efforts, in many large cities, of which New York is the best known example, public employees won substantial gains in wages and benefits during the mid and late 1960s. Their victories, combined with a business flight from a "deteriorating business climate" that undermined the tax base constituted one basic cause of the "fiscal crisis of the cities" that erupted in the mid-1970s.
Because public employment was growing rapidly in this period -- partly as a result of the expansion of public services -- the simultaneously rapid rise in wages and benefits (such as pensions) meant that these struggles were an important element of the overall explosion in worker income.
In other sectors of the economy workers were also successful in fighting for higher income. In some cases, such as the auto industry which was hiring growing numbers of black workers, young workers brought their militance off the streets and into the factories. In other cases, workers just took advantage of the long economic boom of the 1960s and a labor market made somewhat tighter by the manpower needs of Vietnam, to bargain for an acceleration of wage gains.
The net result of these conflicts was indeed an acceleration in wage gains. The average rate of increase of average gross weekly earning (nominal earnings) between 1960 and 1964 was 3.0%. Between 1965 and 1969 it rose to 4.7%. And then between 1970 and 1974 the average was 6.2%. (Note: this data and all of the above in this essay comes from the Economic Report of the President, 1983.)
While it would take much too long to present all the detail, nevertheless, I want to point out that the kinds of conflicts and results I have been discussing above with reference to the United States were typical of many changes occurring elsewhere in the world at about the same time.
In Western Europe, for example, many of the problems of productivity and wages were similar and traceable to similar social conflicts -- militance of various social groups -- both within the sphere of production and that of reproduction. In England, the counterpart of the ghetto uprisings in the United States, was growing unrest among the black immigrant population who held the lowest paying jobs and were crowded into the poorest neighborhoods. In France and Germany there were also increasingly serious problems with the large number of immigrant workers who had been brought in to undercut local worker's wages. There were also difficulties with peasants throughout Europe, who were mobilizing in those days against the planned reduction in their numbers.
Perhaps the most obvious parallels were between the student uprisings in the United States and those in Europe. In the United States the major issues were student power and Vietnam. In Europe, although Vietnam was sometimes an issue, the main point of contention between the students and their governments was usually the antiquated and inadequate university system. It should not be forgotten that while American students were in the streets in May of 1968, students in Paris and throughout France were seizing their universities. They did this, of course, at the same time that some 10 million French workers also seized their factories, in the greatest upheaval of the French political system since the Commune of 1870. At almost the same time students were on the offensive in Eastern Europe, especially Czechoslovakia and were in the streets fighting Russian tanks when they were sent in to reverse a series of local reforms.
Finally, it should be obvious that during this whole time much of the Third World was seething with revolutionary unrest. Not only Southeast Asia, but also parts of Latin America, Africa and South Asia. So widespread was the unrest that it was a major facet of first Kennedy's and then Johnson's foreign policy to develop and deploy widespread counterinsurgency forces.
Most importantly, and the real reason why it makes sense to speak of an international cycle of struggle, is that these diverse conflicts were interrelated in many ways. In the Third World, the slogan "One, two, three ... many Vietnams" was the order of the day and Ernesto "Che" Gevarra was an international symbol of revolt. In the United States students circulated the revolt of Southeast Asian peasants into the heartland of academia. Black movements in the United States were also responsive to the struggles then burning in Southern Africa. Immigration everywhere circulated the experience and attitudes of militance across the face of the globe.
Thus the collapse of the Keynesian era was not simply an American affair. The Bretton Woods agreements presupposed, as we have seen, the generalized ability of national governments to control and manage social conflict within their borders. It was just this ability that was undermined during the cycle of conflicts of the late 1960s. If economic variables could no longer be managed adequately to ensure growth, it was because of a failure of the associated political and social mechanisms of Keynesian reproduction.
The twenty years that have followed the abandonment of the Bretton Woods agreements in August of 1971 have been years in which policy makers in government, in isolation and in cooperation, cast about, here and there, looking for ways to regain control over the economy and the growth mechanisms. That decade was largely one of adhoc solutions. There was, and still is, a noticeable lack of comprehensive strategy. Policies have changed repeatedly and have had only marginal success. If there is any overall characterization of these strategies possible, it must be one of crises. Rather than the marginal, fine-tuning approach of the Keynesian years, the last decade has been one of policy lurches and jolts. Policies have come and gone; they have been concrete and they have existed through their absence. All in all they have been policies of crisis.
In the traditional pre-1930s crisis a fundamental aspect of crisis was the way in which business sought to throw crisis back at workers. In other words, if wage increases or other labor gains ate into profits business would go on strike and use high unemployment to force down wages and restore its profit margins. Well, the mechanisms changed in the 1970s but the principle remained pretty much the same. Throughout the 1970s we see low business investment and growth along with a variety of government policies that put pressure on workers to accept lower wages or undermined those wages indirectly. Let us briefly examine the major crises of the 1970s and 1980s in turn.
The rupture of Bretton Woods in 1971 meant that some other way of organizing international exchange had to be found. After a series of meetings and some juggling in 1971 and 1972, the general solution adopted was floating exchange rates.
Under floating exchange rates, countries allow the value of their currency in terms of other currencies to be determined by the forces of supply and demand in the foreign exchange markets. In other words, if the dollar is "floating" then its value, in terms of French new-francs (NF) let's say, will rise with an increase in the demand for dollars. If the French, or those holding NFs, want to buy American goods then they must buy dollars to do so. This would produce such an increase in the demand for dollars and a rise in the price of dollars. If fewer dollars are wanted the value of the dollar will fall, e.g. it will take fewer NFs to buy a dollar. If on the other hand those holding dollars increase their desires for goods that can only be bought with French NFs, then the supply of dollars in the foreign exchange market will grow and the value of the dollar will fall (and, of course, that of the NF will rise). And so on.
With such a system of floating exchange rates, the problem of adjustment, is, in principle, handled by changes in exchange rates. It is taken out of the hands of governments. How does this work? Well, suppose that a given country is running a trade deficit -- say the U.S. in the period following 1971. Then its excess demand for foreign currencies to buy imports has as a counterpart a large supply of dollars that will depress the value of the dollar. As the dollar falls, imports become more expensive (it takes more dollars to buy a given amount of a foreign currency) and American exports become less expensive. Therefore, the fluctuation in the exchange rate tends to result in a fall in imports and a rise in exports which together tend to correct the balance of trade deficit.
Now, two things need to be said about the new system. First, it has not been universally used; and second, where it has been used, governments and their central banks have regularly cheated! It has not universally been used because many countries did not want the instability in exchange rates that went with it. They wanted more certainty and stability than they thought they could achieve by floating their currency.
One common solution was to tie a weak currency to a stronger one. For example, ex-colonies often tied their money to that of their one-time colonial master's. So, for example, in French West Africa several ex-French colonies tied their currency to the French franc. Similarly, many countries tied their currency to the dollar. The system is considered a generalized float mainly because the major economic powers such as the U.S., Great Britain, France, Germany, Japan and so on let their currencies float.
The second comment -- that some countries cheated -- means that those countries who allowed their currencies to float would sometimes intervene in foreign exchange markets to prevent violent, or what their central bankers considered unwarranted, fluctuations in exchange rates. Suppose a given currency, say the deutchmark suddenly began to drop in value and West German central bankers concluded that the precipitous drop was due to speculative selling of the mark. This kind of thing happened fairly frequently because multinational corporations, including private banks, have been able for a long time, especially since the rise of the Eurodollar market to move very large quantities of value across borders, i.e., from one currency to another, very quickly. This kind of intervention through which central bankers have sought to keep the value of the currency fairly stable, has led to the current system of floating exchange rates being dubbed a "dirty float".
However dirty the float the new climate of more or less floating rates meant a new flexibility for governments in using the exchange rate for economic purposes. One of the most common of these purposes has been the undermining of consumption, of the real value of wages. One principle means has been the intentional devaluation of a country's currency or, more passively, an allowed depreciation. (Devaluation is used to designate a government dictated reduction in temporarily fixed rates. Depreciation refers to a market dictated decline in the value of a currency which the government can allow by not intervening.) The major impact of such devaluations is often to render imported consumer goods more expensive --including many basic food stuffs which have come to be imported as local land has been diverted to export agricultural production-- and thus reduce the value of the wage. This is the kind of thing the Mexican government has been doing regularly in the last few years.
In these ways we can see how floating rates can be useful to government or business policy makers when they cannot impose reductions in wages in any other way. They can either devalue the currency attacking the import component of wages or they can let internally rising prices produce a decline in exports and ultimately a depreciation in the exchange rates. At that point, it appears to be the market, not the government which disciplines the workers. This way of using money as a weapon of austerity has been commonplace in the last ten years. It has been a standard policy tool both of local governments and of the IMF which has come to oversea more and more of the policy decision of Third World countries, especially those involved in the international debt crisis who have appealed to the IMF for help.
Hot on the heels of the monetary crisis came another: the international food crisis of 1972-74 during which time global food prices soared, supplies dropped and many starved. The most dramatic rise in prices came in 1972 as a direct result of American policy under President Nixon and his Secretary of Agriculture Earl Butz. In an attempt to raise prices Butz ordered a cutback in plantings of cereal grains. In order to raise demand, the U.S. allowed the negotiation of massive new sales to the Soviet Union. The result was a sharp and dramatic jump in food prices that accelerated overall inflation.
The result for American and many other workers was an attack on the value of their wage. The jump in prices produced many reactions including refusal by some dockers to load grain for the USSR and boycotts of meat --when the price increases of grain were passed along by meat producers. The jump in prices resulted in the transfer of buying power from consumer to farmers and grain merchants. It was one factor that helped prevent the growth of real wages.
For workers in the Third World, the results were often much more dramatic. With less grain in world markets and much of what was there being taken by the Russians, there was little available, and then only at high prices, to meet needs elsewhere. And, -- it must be remembered, the period 1971-1974 was one of widespread drought and famine in South Asia and Central Africa. In Afghanistan and the Sahel millions suffered and died for lack of relief. It is an ugly story. For others, elsewhere, it was an object lesson: that it was still possible for nature to be used as a weapon against recalcitrant populations. In the above two cases, it was used against nomadic people who had for years refused to convert to sedentary living under the control of local governments. In other areas, such as Bangladesh in South Asia it was used against rebellious peasants in an unstable and new country.
This international food crisis, it must be remembered, was engineered. It was an engineered increase in scarcity -- not a scarcity dictated by nature but one created by policy. Prices were intentionally increased. The direct object was to increase the value of American exports to strengthen the balance of trade. The direct effect was to undermine the value of the wage at home and life elsewhere. It was a policy choice made by the American government -- to feed people in Russia, and thus help stabilize that country, while reducing food for people elsewhere.
Today, by the 1980s there was a continuing food crisis in central Africa. A return of the droughts of the 80s has provided African governments with new occasions for the repression of segments of their populations. The ecological fragility of the land that has made this possible dates from the colonial era when the colonialist powers took the best land for export crops and pushed subsistence production on to marginal -- drought sensitive -- land. This pattern has persisted during the independence period of many African countries providing indigenous elites with control mechanisms similar to the colonial ones. Until this pattern is broken politically hunger will remain endemic to those regions.
The onset of the global energy crisis is usually dated from 1974 because that is the year the Organization of Petroleum Exporting Countries quadrupled prices for their crude oil. The price increase caused an energy crisis because it made energy from crude oil more expensive and thus "scarcer." It should be clearly understood that the price increase was dictated. It was not the result of a sudden running out of oil. It was an attempt by the OPEC countries to recuperate some of the value they had been losing over the previous decade due to declining terms of trade (i.e., the ratio of their export prices to their import prices). Moreover, the governments of the OPEC countries were responding to their growing internal problems of rising expectations and demands from their own populations which they could only meet with increased revenues from oil exports.
American and Western European reaction was that of outrage. Government spokespersons raved and ranted about greedy sheiks stealing "our" oil. Henry Kissinger, Nixon's National Security Advisor, even sent some Marines into the Mohave Desert to train -- as if an invasion of the Middle Eastern oil fields was under consideration. Yet, as later accounts have made clear, American negotiators had actually let the OPEC representatives know that the US would not really object to price hikes. What was going on?
The reality was that increases in the price of energy suited American policy makers just fine. It was anticipated that the price hikes would result in an enormous transfer of wealth from Western consumers to oil producers, but that these last would have to spend the money on imports and invest it in Western banks. There were those, such as some members of the Trilateral Commission (a tripartite body created by David Rockefeller and Zibignew Brezinski in 1973 to maintain Western consensus despite the diplomatic blunders of Kissinger/Nixon), who saw in the price increases a wonderful opportunity to transfer wealth from consumers to business. Higher oil prices would mean higher prices for all consumer goods requiring energy in production and this inflation would undermine real wages. The loss of real wages would be transferred in a roundabout manner into Western Banks and hence become available for business investment. The OPEC countries would become, in effect, a new kind of financial intermediary. A nice ploy, a way of striking back at all those millions of workers/consumers who had undermined profits by raising nominal wages faster than productivity. The billions of dollars would go a long way toward re-establishing the traditional shares of national income.
Carrying out this strategy came under the rubric of dealing with the problem of "recycling petrodollars." Financial means had to be found to make these new and massive movements of value smooth and efficient. The primary institutions to handle these flows became, as expected, Western banks with a little help from their friend, the International Monetary Fund.
The only hang-up in this adhoc scheme for taking advantage of the militance of the OPEC countries was that for a real transfer to take place, the increased value of oil imports would have to be offset by a decrease in the value of other, preferably consumer imports. In other words there would have to be a real drop in wages and standards of living. Unfortunately for business plans, the reactions of workers/consumers to the increased prices associated with OPEC was to fight back, to demand higher wages to offset the higher prices; it was the same reaction that had developed in the late 1960s. The result was that nominal wages rose and real wages remained about the same. There was a failure to produce the necessary drop in real wages! As a result, balance of payments problems were much more severe than anticipated. The increased oil imports were complemented with continued imports of other goods and balances of trade went deep into deficit.
The result of this, coupled with the restrictive Keynesian measures undertaken to fight the inflationary effects of the oil price rises, was to throw most of the Western World into deep recession -- into what was, until the more serious Reagan Recession of 1981-82, known as the Great Recession because it was the deepest and most serious since the Great Depression.
At that point, many of the OPEC petrodollars had to be used for financing temporary balance of payments deficits rather than for business investment. The IMF set up a special "oil facility" to help private banks cover the necessary loans to governments who could not meet their payment needs. This was the contribution to the debt crisis which is still with us. In 1977 it would be necessary for the Fund to set up a Supplementary Financing Facility (later called an Enlarged Access Facility) to help countries cope with their debts. All in all, the recycling process did not turn out quite as planned.
Needless to say, all of these problems were accentuated with the second oil shock in 1979 when OPEC again raised prices, again to offset declines in terms of trade. That second oil shock was handled more smoothly than the first -- practice did make more perfect -- but it was smaller and was soon to be eclipsed by more potent weapons.
The question which had to be asked as the decade of the 1970s grew to a close, was whether these crises, these crisis strategies had helped to restore growth? Had they helped shift the balance of shares of income and wealth in favor of business? The answer was that they had not done a very good job at all. Real compensation per hour had fallen in 1974 and again in 1979, but not enough to set a trend. It would not be until contractionary policies during the first two Reagan years had thrown the world into the deepest recession since the 1930s that a definite downward trend of real wages became apparent.
In fact, one of the most noticeable characteristics of the recovery of 1976-1978 was that it was led by consumer spending, not by business investment. It was a constant complaint by local and international policy makers all during this period that business investment was so anemic.
What this made clear was the limits to the usefulness of monetary manipulation to undermine real wages with inflation. It was not surprising when Reagan, as we will see later, reversed course and pursued a sharply deflationary policy. Inflation could undermine wages, but as long as workers were strong enough to push up nominal wages fast enough to compensate real wages would remain stable and no real income transfer would occur. What this suggested was that what really had to be done was to undercut the ability of workers to achieve such compensatory wage increases. How could this be done?
By the end of the 1970s the acceleration of inflation had brought the International Monetary Fund to repeatedly emphasize that the rising price level was the number one economic problem of the world and to call for action against it. As the IMF reports on inflation made clear "fighting inflation" was really a euphemism for "fighting wages" and while the IMF called for contractionary macro measures to slow the growth of aggregate demand, the prime microeconomic culprit was "structural rigidities" in labor markets, i.e., the ability of workers to keep wages growting faster than productivity.
Effective macro action was finally taken by the United States when Jimmy Carter brought Paul Volcker into the Fed with a mandate to fight inflation. Volcker's strategy was simple: reduce the growth of the money supply and force up interest rates. Fed action drove interest rates to historic highs cutting both investment and consumption and plunging the world into a depression - which quite directly cut back on inflation.
However, at the same time the contractionary monetary policies cut inflation, they also did two other things: first, they dramatically raised the cost of outstanding international debt which had been borrowed at floating interest rates and second, by throwing the world into a depression dramatically reduced international trade, thus making it impossible for debtor countries to obtain the foreign exchange (through exports) needed to repay the more highly priced debt. The result was the international debt crisis of the 1980s which began in August of 1982 when Mexico announced its inability to service its foreign debt. The response of the IMF and creditor banks was to condition the rollover of debt on the adoption of highly restrictionary economic policies by the debtor country governments - restrictionary policies which were aimed primarily at wages and consumption, i.e., at cutting the power of workers.
On the surface the demands of "conditionality" were for cutbacks in national government budget deficits and currency devaluations. In detail this turned out to mean cutbacks in subsidies to consumption and increased costs of imported consumer goods (as well as industrial goods) which slashed standards of living in the countries where these policies were imposed. Such austerity policies have produced much anger toward the IMF in countries whose governments went along with such policies, anger which is expressed in the following song:
CALL IT DEMOCRACYPadded with power here they comeinternational loan sharks backed by the guns leaders of market hungry military profiteers with the fellows whose word is a swamp and whose brow is smeared with the blood of the poor who rob life of its quality sinister cynical instrument north south east west IMF dirty MF |
see the paid-off local bottom feeders see the loaded eyes of the children too IMF dirty MF and they call it democracy Bruce Cockburn (written 11/85 Toronto) You can listen to this song online through |
Beyond such policies aimed at cutting living standards has been a strategy, one that is still being played out, to undercut the structure of working class strength in the post-World War II period by restructuring American and global industry in such a way as to cut the floor out from under the strongest sectors of the labor force. This was the direction chosen by Carter in the summer of 1980 just before the election but one he was never able to implement. It is a strategy that in the United States comes under the rubric of re-industrialization, or later, under Reagan/Bush as "supply-side economics".
It has also been the strategy being pursued by American business as it closes down or threatens to close down those parts of American industry where workers are strongest and invests in new areas where workers are not yet organized. At the policy level, discussions about this strategy for some years took the form of a debate between those (mainly liberals) who wanted the state to play a central role and called for a national "industrial policy" and those (mainly Reagan and friends) who want to leave the process in the hands of private industry with little direction but many tax breaks and deregulation provided by the state. Although the debate continued, under Reagan, Bush Sr, Clinton and Bush Jr., the policies implemented, both nationally and internationally, have been pro-market and are best described by a term that used to be used mostly in Latin America: neoliberalism. With neoliberalism corporations are increasingly freed from restraints placed on them by workers and consumers and allowed to operate where and how they please, thus dramatically increasing their ability to pit workers against workers, comnunities against communities. In neoliberalism the national government acts as guarantor of this freedom, of the repression of rights that it requires, while supranational state institutions, such as the International Monetary Fund and the World Trade Organization take on larger and larger roles in imposing neoliberal rules on people everywhere to facilitate corporate restructuring.
Partly, this restructuring takes the form of the introduction of new technologies Ñsuch as roboticsÑ to displace recalcitrant workers. In this case we are not surprised to find this proceeding rapidly in the automobile sector where workers have been so strong. When the head of General Motors says for every dollar an hour increase in wages he plans to introduce another thousand robots, we understand him perfectly.
Partly, this restructuring takes the form of the abandonment, or rather the export, of industries where workers have been strong enough to achieve high wages and the expansion of investment in newer, often high-tech industries where the labor force is new and less well organized. Plus, in the case of the electronics industry both of these two processes are proceeding rapidly. At first electronics assembly was exported to the Third World to escape higher paid American labor. Now, such assembly is being repatriated but performed by a new generation of perceptive robots. Moreover, now highly qualified software programmers are being imported en mass from countries like India to undercut the power of programmers in US to command high wages.
There is a counterpart of this industrial restructuring in the sphere of reproduction. The most obvious example is that of education. Part of the crisis of the Keynesian era, as we have seen, was the failure to mobilize a generation of "human capital." The low rate of return on such investment was taken into account and resulted in dramatic reductions in the availability of money for study. Gone are the days when education was highly subsidized. Beginning with Carter, accelerated under Reagan and Bush and still unreversed by Clinton and Bush Jr., there has been a concerted effort to reduce the number of students in higher education and expand those in vocational training and low wage jobs. For those who are in school there are dozens of experiments in establishing new and closer connections between school and work. These range from attempts to introduce elementary students to the "world of waged work" to a rapidly expanding role of business in determining the structure and mission of high schools and the university.
To conclude, it is enough to point out that the crisis continues and that while the abandonment of Keynesianism has led to the embrace of neoliberalism, the recurrent crises that have characterized it, largely due - as you will see in the sections that follow - to resistance, has prevented neoliberal policies from generating the kind of long term stable growth characteristic of the Keynesian era.
That resistance and the consequent failure are due to the fact that neoliberalism, unlike Keynesianism in its day, is not based on any kind of general public consensus over the rules of the socio-economic game. It is rather a strategy and an ideology that valorizes business at the expense of everyone else and as a result there is great and widespread resistance. Moreover, in recent years (as has been so flagrantly obvious with the Enron scandal and Bush Jr. economic policy) the greed of the rich is driving policy decisions to the point of undermining the ideological cover that usually cloaks the harm to the poor and middle class of neoliberal policies - and as a result producing even more outrage and opposition.
1. What is meant by "the collapse of the international monetary system on August 15, 1971"? Why did Richard Nixon do what he did on that date? Give both a superficial answer and a deeper answer.
2. Plot the data you were given on the rate of profit and correlate its fluctuations with what you know about the post-WWII period.
3. Explain the circumstances under which inflation (a general rise in the price level) can constitute a solution to a problem (for whom?) and those under which it becomes a problem itself (again, for whom?).
4. Explain the meaning of the concept of "human capital." Explain the historical rationale for government investment in the improvement of human capital.
5. Discuss the relationship between the expansion in transfer payments in the 1960s and the militance of American workers. (Note: explain the causal relationships running both ways.)
6. Discuss the reasons for the crisis of productivity in the late 1960s. Review the material in Chapter Two and the new aspects developed in this chapter. What do you think of the explanations offered for some of the shifts toward the service sector?
7. Discuss the relationship between the Great Society programs of the 1960s and the wage "explosion" that began at that time. Discuss at least two connections.
8. What is meant by the expression a "cycle of conflict"? Does it make any sense to speak of an "international" cycle of conflict?
9. Explain how "adjustment" occurs under a floating exchange rate regime.
10. Why have all currencies not been floated in the last ten years? What are the reasons why some countries prefer to keep their rates pegged to some other currency?
11. How do floating rates help governments attack high wages and discipline the workers of their country?
12. How did American policy contribute to the creation of a "food crisis" in the early 1970s. How did various groups of workers suffer as a result of these policies? Who benefitted?
13. Analyze the forces at work in the oil crisis which began in 1974. What were the interests of the OPEC countries (leaders and citizens)? What were those of the American government and business? Who got hurt? Who gained?
14. How did the response of American, and other, workers show the limits of the use of commodity (e.g., oil) inflation to undermine real wages?
15. What was the "recycling" problem? What were the difficulties? How were they handled? What were the hopes of business? What happened?
16. What is the problem of re-industrialization? Explain this in terms of rates of return and in terms of social conflict. What alternative methods are being debated for handling the problem?