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Broken Dialectics, Or Paradise Lost

Marx wasn’t known for his writing satire, but if he was he might restate his dialectic today to go something like this… A center right party comes to power promising to increase prosperity by reducing regulations on industry, including the financial sector. Eventually the financial businesses take advantage of the deregulation to create an economic bubble. Which bursts, bringing a center left party to power. They reregulate, making them targets for criticism from the right. And the cycle starts all over.

All joking aside, it could be argued we’ve seen two turns of the wheel in the last twenty years. The deregulation of the savings and loan industry lead to a crisis in the late eighties that helped get Bill Clinton elected, then the banking crisis of 2008 helped elect Barack Obama.

Of course traditionally an economic dialectic was not thought to be dependent on something as ephemeral as the ideological nuances of a particular administration. The great tide of history was thought to be pushed by a much bigger watch-spring. The aspirations of entire classes of people say, or the creation of transformative technology.

But we seem to have entered a post-industrial era which doesn’t fit the grand patterns as described. Consider two dialectics, one by Marx and the other by one of his more important conservative critics.

For our purposes here we can take a dialectic to mean the arc of economic history driven along a path by opposing forces, or more broadly any grand recurrent pattern of economic development. Of course Marx saw class struggle as the essential push behind his dialectic. The dominant class (the thesis) conflicts with a rising class under it (the antithesis) and they eventually conflict to create a new dominant class (the synthesis, which becomes the new thesis). And so on.

One of the most valuable notions in Marx is the observation that capitalist economies go through regular, periodic crises (see also The Irrational Markets Theory). Marx saw these are part of the rising conflicts between the thesis and antithesis then current, and he said the crises would grow in severity until they resulted in revolution.

Which fits, except that our recent downturns seem more like troubling repetitions than reinforcing crescendos building into an apocalypse. Consider this - after a sharp economic downturn sparked by a post Civil War financial panic, a railroad strike shut down half a dozen cities. The strike was only put down by federal troops after a month of rioting and bloodshed. In spite of sometimes heated rhetoric about radicalism, our current political and economic fights are comparatively tame affairs.

One thing that does seem reliable about history is that someone is always predicting its end, and they will always be wrong. Götterdämmerung turned into a debate over marginal tax rates. The grand ideological battle of the 19th and 20th century was settled in a compromise.

In fact, until the Great Depression the global economic crises did seem to get worse with each cycle. Since then the crises have been significantly softened by government action – as we shall see, an important sign that we are no longer in Marx’s world.

So have we achieved the bright, shining Capitalist future? Not hardly. That future was to be provided by technological innovation, and the one thing technological innovation hasn’t given us is uniform, reliable prosperity.

Marx’s ideas about the role of technology in the dialect were interesting. Marxism suggests that technology will determine important social patterns – the need for factory labor causing rural people to move into swelling cities for example – but that the technology is deployed and directed by the capitalist class. Which has to answer to its own set of inescapable imperatives, being as much locked into the dialectic as the workers.

But for the dialect described by Walt Rostow in The Stages of Economic Growth: A Non-Communist Manifesto the driving force seems to be technology itself. Rostow says that technological innovation, in the pursuit of material wealth, pushes economies though a set pattern – the eponymous stages of growth.

The third stage Rostow describes is what he calls take-off – the point at which mass industrialization becomes a self-reinforcing process. He calls it “the great watershed” in human affairs. The fourth and fifth stages follow within a few decades, culminating in what he calls the age of mass consumption. That is the period during which production simultaneously provides the wealth ordinary wage workers need to become middle class consumers, along with the goods they desire to consume. Prosperity becomes the self-reinforcing cycle; more workers making more goods earn more and spend more, requiring more goods. And we’ve seen this happen repeatedly; Rostow himself describes watching factories in post WWII Europe shift from having bicycle stands out front to opening up parking lots for employees’ cars.

Rostow says what will come after mass consumption is “impossible to predict,” although he implies a great deal by citing Thomas Mann’s Buddenbrooks, a novel in which one generation makes money, the next rises in society and the third creates art.

But recently something unexpected has happened to Rostow’s dialectic – the technology continued to improve and the factories didn’t need the workers. In short, deindustrialization.

Wikipedia quotes the Organization for Economic Co-operation and Development (OECD) as saying that U.S. industrial production and manufacturing output rose from the eighties to the present. But “total industrial employment has been roughly constant at around 30 million people since the late 1970s…. (and) increasing labor productivity has led to higher levels of output without increases in the total number of workers [emphasis added]” It goes on to say that since the total number of workers has increased dramatically, there has been “a massive reduction in the percent of the labor force engaged in industry (from over 35% in the late 1960s to under 20% today). Industry (and specifically manufacturing) is thus less prominent in American life and the American economy now than in over a hundred years.”

So just as Marx predicted, the management has had to use the technology to remain competitive, even when it means eroding the aggregate purchasing capacity of consumers. For his part Rostow accurately predicted that technology would tend to move to less developed economies. But he never properly dealt with what would happen to the countries maturing into this late stage of mass consumption while the industries migrate in pursuit of lower wages.

One suggestion is that the more developed counties should move up the chain of production and specialize in higher and higher value added products. That way they use our comparative advantage in education and sophisticated technology to make things that can not be made in an economy at an earlier stage of growth. And to a certain extent that has happened, although as time goes on it’s harder and harder to do and it doesn’t require the same size of workforce. It’s not a rising tide that is going to lift all boats.

So goods are still plentiful, and cheaper than ever. And what we might call our potential aggregate material productivity - our ability to make stuff - is greater than any time in history. But we have a distribution problem. This aggregate material wealth is no longer connected to as great a level of mass wage fueled consumption. In fact, overcapacity in the factories has lead slack employment, which in turn spirals into increased overcapacity, and so on. The mirror image of the mass consumption cycle.

Our economy continues to be vulnerable, when it should be robust.

As we said, that inversion of mass consumption does fit Marx’s predictions. But rather than provoking cataclysm, it’s provoking stagnation. He’s not any more useful than Rostow at the moment. It’s hardly breaking new ground to point out that we seem to be in some kind of dialectical interregnum – all our grand economic plans are crumbling and shabby, empty cities of magnificent design where no one can stand to live.

Lets take a moment to glance at a couple of differing critiques of our current situation before look for a working dialectic. For one thing, saying the contemporary American economy has problems distributing the results of its immense productivity is a drastic simplification, with ideological implications. Defenders of laissez-faire economics have argued that the distribution by the market may not be equitable, but it obeys it’s own powerful logic. The keystone of that logic is described by the efficient-market hypothesis. That theory has taken a terrible beating of late, as the market has demonstrated once again that as a system for distributing resources an unregulated market is anything but consistently logical. Or efficient.

But setting aside the technical and ideological arguments, the question remains: why is the richest and most productive economy in history still haunted by the threat of recurrent high unemployment, in spite of being justly famous for regularly creating hundreds of thousands of jobs a month? This is obviously a problem that the marketplace hasn’t solved, or we wouldn’t be talking about it.

Some critics have argued that the problem is not a lack of productivity, but that pursuit of lower wages. It appeals to our physiocratic instincts to say the reason this country’s middle class is in trouble is because we no longer make as many consumer products here, and we can’t address our situation without considering the changing relationship between what were once quaintly called the core economies and those in the rapidly developing counties.

Clearly much of the mass production has moved to new territory, taking with it the vitality and the rapid creation of value it's known for. Marxists have described that as another sign of capitalism’s approaching end – deindustrialization as a pathology built into late capitalism.

There are some things about that idea that make sense, for example the notion that rising labor power forces management to look overseas just as it forces management to look to new technology. But it would also be too much to try to deal with the breadth of those theories here. Let’s just take time for two quick notes. One, the theory of neocolonialism suggests that system exists to keep the 3rd world from developing, that the nations on the periphery are trapped in underdevelopment so they remain dependent. But now, one of the big problems for the United States is serious competition from some of those counties. The U.S. is as dependent on China as visa versa.

And two, if late capitalism is on the verge of impending doom, it’s a doom that’s been impending for quite some time now.

As we saw, for their part neo-liberals like Rostow argue that the solution is to move into higher value added products, which has happened to some degree, although that’s not the solution for most workers. So the distribution problem remains in spite of all the dialectics. Why are our technology and productivity not bringing a more permanent and well-distributed kind of wealth? Something odd is happening in this economy. It’s as if we’re not moving up along the path of history so much as we are moving sideways, and our economy is become erratic and fragile while we’re doing it.

The idea of a dialectic still works, in that we do have repeated patterns of economic development that appear to follow a set course. To return to the Marxist observation about migration to the cities, only ten percent of Americans live in rural areas now, as opposed to 1920 when it was closer to 50%. The same kind of shift happened in Victorian England, and is happening in China today. When the factories mushroom, poor people move from the country to the cities to work in them.

But inherent in both dialectics is the notion of progress of a particular kind, the idea that the material condition of the population would improve over time. And it has. Consumer goods are cheap and sophisticated enough so that people can get things their parents and grandparents only dreamed of. But social critics have long noticed that material abundance does not make us feel prosperous and it hasn’t made us secure.

Make no mistake, this is not an aesthetic critique; the problem is deeper than the often discussed modern feelings of unease. In spite of our aggregate material prosperity massive dislocations are only a downturn away, there are large numbers of people who are homeless and even more who are permanently unemployed, and one regularly cited study by the Institute of Medicine found that as of 2002, eighteen thousand Americans were dieing prematurely every year for lack of health insurance.

So if our economy is not doing what we want, why no revolution? For one thing Marx never conceived of capitalists (with overwhelming political power rooted in their wealth) allowing governments to take the kind of action necessary to rescue the economic system. But that’s exactly what’s happened. Often with considerable struggle, the economically powerful in America have in the past have been made to recognize moments that threaten the survival of the economic system and supported governments that take appropriate action. The classic example being the New Deal.

In the end we have more metaphorical blood spilled on the floor of Congressional committee rooms than real blood on the factory floors.

And the missing capitalist paradise? One problem with Rostow is that he allowed for no limitations to capitalism’s ability to solve problems though technological innovation. As he put it, the only resource with no limit is the human imagination.

He assumed a non-zero sum game. The problem being that just because the pie is always getting bigger, does not mean everyone is getting a bigger piece. Parenthetically we might say he made the opposite mistake from Marx, appropriately enough. Marx assumed the shortsightedness and greed of capital. Rostow assumed capitalism wisdom and generosity, or at least its productivity with a natural tendency to make everyone rich.

So both writers made mistakes about the emotional content of their systems. They described the economy as a set interlinking, impersonal forces. Machines. Which suddenly produce profound human happiness when a threshold is passed. In Marx that threshold is a kind of revolutionary progress, in Rostow it’s a level of productivity, but in both cases it’s a sudden paradise dependent on a quantity of material prosperity.

The problem being that the emotional content made the systems move, and material prosperity didn’t stop them moving. To see this more clearly, reconsider the forces the two economists described as pushing their dialectics forward. Rostow never states it simply, but in his case the motion of the machine is driven by technological innovation. Marx does describe his in detail – it’s driven by the conflict between competing social classes.

Both of those are important forces, but they are really secondary. The real watch spring is much more personal in scale, in that social competition and technological innovation are both driven by human desires. That means the real forces pushing these historical movements are the psychological wants and needs of individuals.

Why is this important? Because that push does not disappear because of a new level of productivity. Economists largely assume people’s desires to be uniform and consistent, in other words, to be factored into the equation and forgotten. At least until utopia is achieved, when all human desires are fulfilled – in the capitalist context, when the economy is productive enough to make all people feel prosperous.

But if we know anything about human psychology, we know that it is not simple or predictable. Prosperity is an elusive and slippery feeling. It seems more based on immaterial judgments – comparisons we make with our neighbors, competition between ourselves and others – which in an important sense can not really be addressed by material prosperity at all.

Mainstream economists have tended to assume that sufficiency of aggregate material goods is synonymous with a rich nation, or to be more precise, a society with a large stockpile of value. They might recognize individual variations from that pattern, but they make no allowance for the mental complexity in their systems.

But some have painted a more complex picture. Veblen pointed out that material goods are important to individuals for their symbolic value, something that is deeply subjective. Others have said that what we want to make us feel wealthy can change over time, and some have even gone so far as to say what we value (in the economic sense) follows Maslow’s hierarchy of needs. The argument being that once a lower such as physical safety is satisfied, then we pursue higher needs, such as the respect of peers.

How can this influence a dialectic? For example, we can say that there is something eternal in ambition. No economic theory can work for long without taking it into account. But it doesn’t operate the same way in every case. An 18th century Dutch merchant and a 21st century New York bond trader might both be motivated to impress their wives, but the house the earlier man might have bought to do so might be laughably inadequate in the eyes of his latter counterpart.

In a sense, material goods can never provide substantial prosperity for everyone, because the point of having them is to have more than someone else. That’s hardly a revelation. But what happens when some kinds of material prosperity begins to be taken for granted?

Veblen’s theories suggested that under some circumstances the same goods that provided psychological value could lose that ability. For example two cars in a family was once taken as a sign of status, but no longer. Simply because cars have become cheap. And adding a third one doesn’t help that much; the same level of psychological value can now only be achieved through a car that is substantially different or technologically superior, and much, much more expensive.

It might be easy to make a moral judgment about this pattern, to say conspicuous consumption by buying a new car is wasteful. But that argument is hard to maintain in a rigorous economic sense; we simply have no uniform or objective way of judging what consumption is wasteful and what is not.

But the impacts for the economy as a whole are fascinating. Reconsider Rostow’s picture of the last few decades of American economic growth. Technology was driving an increase in material wealth. But there were two processes at work – one technological and one psychological.

For their part, consumers bought larger and larger amounts of consumer goods, in the hope that material prosperity would translate into psychological prosperity – chasing a goal that eluded them because the goods had become inexpensive. At the same time, even as the factories were being shipped overseas, something that looked like value was still being created in the stock, real estate and derivatives markets. Of course much of that proposed value proved to be false, but it did come into existence to satisfy a psychological need, not a physical one.

Of course the shift to psychological value is slow. And most of what we’re calling proposed value is fungible, in that it can be translated into material prosperity, at least until it is proven false. Both kinds of value can coexisted and economic transformations are rarely total – people didn’t stop farming even after their neighbors move to the city. And it’s worth pointing out that we are dealing with trends in the average attitudes of a large number of people. Just because the center of gravity is moving in one way does not mean another part of the population is moving in another.

But the point is that the crux of activity shifted, and that shift distorted the working of the economy. Excess consumption lead to excess debt and a low savings rate. Reliance on rapidly growing financial and real estate markets led to excess speculation. The high levels of these two things, debt and speculation, ultimately proved to be unsustainable, damaging to the economy as a whole.

The aggregate psychological needs to the individuals can put an economy out of balance. And helped bring the predictions of dialectic paradise to a crashing end.

But the story doesn’t end there, because (as for Rostow’s economic Buddenbrooks family) the degree of satisfaction achieved by debt and speculation also lose their appeal over time. We enter a stage of growth where consumers begin to move away from mass produced goods, just because mass produced goods are so available.

And that promises to be a very different world.

analysis/economics/dialectic.txt · Last modified: 2010/05/11 02:39 by ram