The Major Problems of Private Capitalisms

The functioning of capitalist economies depends crucially on the decisions made by a relatively small number of capitalists. In the typical larger corporations that prevail in the United States and many other capitalist economies, boards of directors selected by the enterprise’s major shareholders are the decision makers. Usually composed of nine to twenty individuals, these boards are very small collectives of capitalists. They make the basic decisions of what to produce (which goods and services), how to produce (what technologies and inputs to utilize), and where to produce (what geographic locations to occupy for producing and distributing their outputs). These decisions are part of what directing the enterprise means.

The capitalists also gather into their hands the surpluses produced by the capitalist enterprises they direct. Those surpluses are the differences in each enterprise between the value added by workers and the value of the wages and salaries paid to them. Capitalists gather the surpluses because the laws, traditions, and ideologies governing capitalism decree that the total output produced by workers is immediately and automatically the property of their employers. At the end of each working day, the workers lay down their tools and equipment and leave the site of production. They also leave behind whatever they produced, because the production of that output was simultaneously its appropriation by the employers.

When the employers sell the output, they realize revenues. They usually use one part of those revenues to pay the employed workers who made the output. They spend another part of those revenues to replenish the tools, equipment, and raw materials used up in production. The remaining part of the revenues is the surplus, roughly the difference between the enterprise’s revenues and the basic costs of producing whatever the enterprise sells.

4.1 Distributing the Surplus

The capitalists must distribute the surplus among a variety of people and enterprises that perform functions considered necessary to keep those capitalists in business. For example, part of the surplus must be distributed to managers who work in the enterprise’s sales department, whose task is to sell whatever the enterprise produces. Sales managers need salaries and budgets (for staff, equipment, and so on) to make sure the enterprise’s outputs are sold. But the managers and their staff are not among the workers who make whatever the enterprise sells. The work of managers and their staff is not productive of output in that sense, but it is surely crucial to the success and viability of the capitalist enterprise. Only if the enterprise’s outputs are sold will its capitalists obtain the revenues needed to keep the capitalist enterprise in business (for example, to pay workers their cash wages and to buy the tools and equipment needed to replace those that wear out). Capitalists usually pay for their sales departments by distributing a portion of the surpluses they appropriate from the output-producing workers. The same sort of analysis applies to lawyers, security guards, creditors, and others who provide non-output-producing activities that capitalists require.

The capitalists also distribute portions of the surplus to the government as taxes and fees to secure crucial public services on which the enterprise’s survival depends, such as public education, police, road maintenance, and so on. Capitalist corporations typically distribute another portion of the surplus to shareholders as dividends to secure their investments and confidence in the enterprise. Finally, capitalists distribute a portion of the surplus to themselves to pay for expanding the enterprise as a competitive strategy to stay in business. In the language of business, the portions of the surplus that capitalists pay out in dividends and use for expansion are called “profits.”

Directing a capitalist enterprise includes the processes of appropriating and distributing the surplus generated within it. Those processes are as basic to directing a capitalist enterprise as are making and enforcing the decisions about what, how, and where to produce. In capitalist economies, the people who direct enterprises—who appropriate and distribute surpluses and who decide what, where, and how to produce—are capitalists. Moreover, they are distinguished from workers, those hired by capitalists, by the fact that workers are excluded from directing capitalist enterprises. Thus the object and focus of this book—workers’ self-directed enterprises—represents an economic evolution beyond and different from capitalism.

How capitalists direct enterprises plays a major role in shaping capitalist societies. For example, to whom and for what purposes capitalists distribute the surplus influences the culture and politics, as well as the economics, of capitalist societies. If capitalists are concerned about matters of crime and security, they can and will distribute large portions of the surplus to preventing crime, prosecuting those they deem criminals, and obtaining security. That will create a demand for and call forth a supply of workers to learn and perform those tasks. Capitalists’ distributions of surpluses to those ends will influence the entire society’s perceptions and conceptions of criminal dangers.

To take another example, if capitalists believe that top managerial executives such as CEOs play crucial roles in generating enterprise profits and growth, they can allocate huge portions of the surplus to them as salaries, bonuses, stock options, and so on. This will likely result in widening income inequality, especially if combined with decisions to relocate production from higher to lower wage locations, to replace workers with machines, and so on. Stagnant or falling wage levels, combined with growing allocations of surpluses to top managers’ fast-rising pay packages, can generate a political and cultural polarization based on growing income and wealth inequality.

Capitalists who are concerned about securing sufficient sales of their enterprise’s outputs may allocate large portions of their surplus to sales efforts, advertising, and so on, thereby shaping, enlarging, redirecting, or otherwise changing the mechanisms of advertising, the mass media, and cultural institutions.

4.2 Private Capitalism and Democracy

The problems of capitalism flow in part from who directs productive enterprises and how they direct them. In capitalism, the directors are the capitalists; workers are excluded from direction. Driven by competition and other aspects of the system, capitalists direct the what, how, and where of production and the distribution of the surpluses they appropriate in their enterprises in very particular ways. Capitalists define goals such as maximizing profits and achieving high rates of growth or larger market shares, and then direct their enterprises accordingly. Capitalists routinely pursue those goals, often at the expense of their workers. For example, they fire workers and replace them with machines, or they impose a technology that exposes workers to health and environmental risks but increases profits, or they relocate production out of the country to exploit cheaper labor. However, if enterprises were organized differently—if workers collectively directed enterprises (and thus excluded capitalists)—the problems of enterprises would be solved in different ways, with different social consequences. I will develop this key point in detail in part III of this book.

In societies where the private capitalist organization of production prevails, the workers—the vast majority of the people—must live with the results of capitalists’ decisions in directing enterprises. However, they are allowed no general participation in those decisions. Sometimes, workers, alone or allied with others, can influence capitalists’ allocations of an enterprise’s surplus. If, for example, workers threaten job actions while consumers threaten to boycott an enterprise’s products, their alliance might achieve changed surplus allocations to meet their respective demands. These might include, for example, job-site daycare facilities for workers’ children, medical insurance for workers and their families, and even pay supplements beyond basic wages. Capitalists recognize, in such cases, that the reproduction of their enterprises requires allocating some surplus to such usages.

Generally, the appropriation and distribution of enterprise surpluses is the exclusive right and responsibility of the capitalists, not the workers. Thus the problems of modern capitalism—for example, environmental degradation, extremely unequal distributions of income and wealth, and recurring, socially costly business cycles—result in significant ways from how capitalists direct their enterprises. Derivative problems—for example, the undermining of democracy as corporations and the rich protect their disproportionate wealth and power by corrupting politics—also result, to a significant degree, from how capitalists direct their enterprises.

Modern markets confront each capitalist enterprise with the competitive threat that another enterprise will be able to offer an alternative product of higher quality, lower price, or both. The uncertainties of changing tastes and preferences, changing interest rates for loans, changing prices for necessary inputs, and so on confront enterprises with a vast array of threats to their survival. Political shifts in the larger society mean that the taxes they have to pay, regulations they have to endure, and subsidies they may lose can also threaten their survival.

The typical capitalist enterprise’s response is to seek more profits, increase the size of the company, or gain a bigger share of the market. Different enterprises stress one or another of these goals, depending on which is more important or available for its survival. Achieving these goals strengthens the capacity of the enterprise to prevent or lessen or absorb the endless array of threats it faces. Likewise, achieving these goals improves the enterprise’s capacity to take advantage of any opportunity that arises. Thus, for example, greater profits enable an enterprise to make the investments needed to tap a new market; faster growth attracts capital and good press reports; and a larger market share can secure lower prices for larger quantities of purchased inputs.

In short, what capitalists do is governed by the system that unites the enterprises directed by capitalists, the markets in which they buy and sell, and the larger society and government for which they provide the bulk of goods and services. Capitalists respond to the signals they receive from the markets, the media, the government, and so on. The goals they pursue—profits, growth, and market share—are their rational responses to those signals. That pursuit is how the capitalist system defines their tasks or jobs. How well capitalists achieve these goals plays a major role in determining their remuneration, their social prestige, and their self-esteem.

Indeed, some capitalists come to internalize the system’s rules and imperatives. They define themselves and mold their personalities in conformity with the behaviors imposed on them as capitalists. So it may seem and be said—even by capitalists themselves—that they are greedy or have other character flaws. However, when capitalists, for example, try to squeeze more work out of employees while trying to pay them less, replace workers with machines, relocate production to low-wage areas, risk their workers’ health with cheap but toxic inputs, and so on—those are behaviors prompted in them by the realities of the system within which they work and for which they are rewarded and praised. Many capitalists do these things without being greedy or evil. When capitalists do display greed or other character flaws, those flaws are less causes than results of a system that requires certain actions by capitalists who want to survive and prosper.

The many different problems and failures of the capitalist system we have been discussing pertain to private capitalisms, whether they are more or less regulated. These problems and failures follow in large part from the internal organization of capitalist enterprises. Their directors often respond to the threats and opportunities facing the enterprise in ways that damage the interests of their workers, the workers’ families, and the larger communities. That is how the system works and generates its particular and often serious economic problems.

What happens if we shift our focus from economics to politics? Politics in the United States has become utterly dependent on and corrupted by financial contributions to candidates, political parties, lobbyists, think tanks, and special committees, recently further enabled by the Citizens United Supreme Court decision. The disparity of interests between capitalists and workers and the disparity of the concentrated resources they can and do devote to supporting their favored positions, politicians, and parties undermine a democratic politics.

In fact, we must question the very possibility of genuine democracy in a society in which capitalism is the basic economic system. A functioning democracy would require that all people be provided with the time, information, counsel, and other supports needed to participate effectively in decision-making in the workplace and at the local, regional, and national levels of their residential communities. The economic realities of capitalism preclude that for the overwhelming majority of workers, in stark contrast to corporate directors, top managers, their professional staff, and all those with significant incomes from property (above all, their property in shares of capitalist enterprises). Such persons also have concentrated wealth in the forms of their enterprises’ surpluses and/or their personal property that they can donate to their preferred representatives among the society’s major institutions, parties, and candidates. The political leadership created through such networks in turn advances these groups’ interests in a capitalist system that rewards them richly. Only a highly mobilized and coordinated organization of the workers could hope to secure the financial resources that might begin seriously to contest the political power of capitalists’ money by combining very small contributions from a very large number of donors. This possibility has sufficiently concerned capitalist interests that they have devoted enormous resources to sustaining opposition to workers’ organizations. That opposition helped to produce the last fifty years’ decline in US labor union membership as a percentage of workers and of political parties seeking to represent workers’ interests against those of capitalists.

It is important to note that combinations and coalitions of corporate directors, top managers, large shareholders, and their various professional staffs have often used their financial resources in struggles among themselves. These groups have and pursue some conflicting interests. However, their struggles do not blind them to common interests in securing the political conditions of the capitalist economic system. Thus they worked together to secure the massive US government intervention to overcome the capitalist crisis that hit in 2007, even though the bailouts went more to some firms and industries than to others. Similarly, they nearly all endorsed the refusal of the Bush and Obama administrations to undertake a federal hiring program to slash unemployment, even though firms and industries would be differently affected by such a program.

In the decades since the 1970s, stagnant real wages, rising hours of paid labor performed per person and per household, and rising levels of household debt all combined to leave working families with less time and energy to devote to politics—or indeed to social activities and organizations in general.* Working-class participation in politics, already limited before the 1970s, shrank very significantly during the neoliberal period. At the same time, the soaring profits of US business and personal wealth of the richest Americans increasingly poured into US politics. In the first place, they had quickly growing resources that allowed them to influence politics to a greater extent than ever before. In the second place, they had greater incentives to do so than ever before. The inequalities of individual wealth and income in the United States were growing. The profitability of business, and especially of the largest corporations, was likewise growing. This posed a challenge. Rising economic inequalities are always issues of concern to those at the top because of the risks of envy, resentment, and opposition. There is always the possibility that the economically disadvantaged will seek to use political means to recoup their losses in the economy. The 99 percent might turn to politics to negate the economic gains of the 1 percent. Thus it became—and remains—more important than ever for the 1 percent to use their money to shape and control politics.

The last three decades of US politics did not see a change of political opinion from more left to more right. Rather, what happened was a relative withdrawal from politics of those social groups that favored social-welfare and income-redistribution policies (the New Deal “legacy”) and a relative increase in the participation of business and the rich, who used their money to shift the tone and content of US politics.

The result of this political shift has compounded the social costs and negative impacts of the economic crisis since 2007. Our dysfunctional economic system has suffered the added burden of a dysfunctional political system. Political parties and politicians stumble over one another in pandering to corporations and the rich. Thus the TARP program of 2008 provided money to bail out banks and other corporations while also claiming to help the millions facing foreclosure. While the bailouts were accomplished, foreclosure assistance was trivial and far below even what little had been promised. If this was trickle-down economics, workers saw only a very slight trickle. Bush and then Obama have insisted on limiting government programs to reduce unemployment to those that “provide incentives and encouragement to the private sector” to hire more people. The political establishments in both parties refuse to discuss federal programs to hire the millions of workers who are unemployed. Instead, the crisis since 2007 has prompted all levels of government to cut many programs and payrolls, imposing “austerity” budgets just when the mass of people need exactly the opposite. A virtual political taboo precludes public discussion of how the costs for more government spending and larger government payrolls could be defrayed by taxing corporations and the rich. That would be an anti-crisis “trickle-up” government economic policy that does not entail deficits or raise the national debt.

What prevents another New Deal–type trickle-up economic policy from being adopted now is a political system compromised by its dependence on money drawn predominantly from certain social groups. Not surprisingly, those groups insist on trickle-down economics. The government helps them first, foremost, and overwhelmingly. The rest of the economy and society then wait to see what, if anything, actually trickles down.

Meanwhile, the total losses for the US economy for the years since 2007 far exceed what could have been spent to keep the economy going. Since 2007, many millions of newly unemployed and around 20 percent of our productive capacity have been sitting idle. Those people want to work; our economy wants and needs the wealth they could create to solve many of our nation’s and the world’s problems. However, our private capitalist economic system cannot bring together the unemployed with the idle tools, equipment, and raw materials to produce that wealth. And a dysfunctional political system does nothing about that.

The development of US capitalism, especially since the 1970s, has produced extreme economic inequality, the second major crisis in the last seventy-five years, and a political system in which money trumps democracy. To change this requires a cure for capitalism that targets both its economic and political problems directly and effectively. In part III of this book, I sketch the main features of such a cure.

 

* See the ample documentation of this point in Robert D. Putnam, Bowling Alone: the Collapse and Revival of American Community (New York: Simon and Schuster, 2000).