Capitalism Hits the Fan

Let me begin by saying what I think this crisis is not. It is not a financial crisis. It is a systemic crisis whose first serious symptom happened to be finance. But this crisis has its economic roots and its effects in manufacturing, services, and, to be sure, finance. It grows out of the relation of wages to profits across the economy. It has profound social roots in America’s households and families and political roots in government policies. The current crisis did not start with finance, and it won’t end with finance.

Rising Productivity, Wages, and Consumption

From 1820 to around 1970, 150 years, the average productivity of American workers went up each year. The average workers produced more stuff every year than they did the year before. They were trained better, they had more machines, and they had better machines. So productivity went up every year.

And, over this period of time, the wages of American workers rose every decade. Every decade, real wages—the amount of money you get in relation to the prices you pay for the things you use your money for—were higher than the decade before. Profits also went up.

The American working class enjoyed 150 years of rising consumption, so it’s not surprising that it would choose to define its own self-worth, measure its own success in life, according to the standard of consumption. Americans began to think of themselves as successful if they lived in the right neighborhood, drove the right car, wore the right outfit, went on the right vacation.

Wages and Productivity Diverge

But in the 1970s, the world changed for the American working class in ways that it hasn’t come to terms with—at all. Real wages stopped going up. As U.S. corporations moved operations abroad to take advantage of lower wages and higher profits and as they replaced workers with machines (and especially computers), those who lost their jobs were soon willing to work even if their wages stopped rising. So real wages trended down a little bit. The real hourly wage of a worker in the 1970s was higher than what it is today. What you get for an hour of work, in goods and services, is less now that what your parents got.

Meanwhile, productivity kept going up. If what the employer gets from each worker keeps going up, but what you give to each worker does not, then the difference becomes bigger, and bigger, and bigger. Employers’ profits have gone wild, and all the people who get their fingers on employers profits—the professionals who sing the songs they like to hear, the shareholders who get a piece of the action on each company’s profits—have enjoyed a bonanza over the last thirty years.

The only thing more profitable than simply making the money off the worker is handling this exploding bundle of profits—packaging and repackaging it, lending it and borrowing it, and inventing new mechanisms for doing all that. That’s called the finance industry, and they have stumbled all over themselves to get a hold of a piece of this immense pot of profit.

The Working-Class Borrowing Binge

What did the working class do? What happens to a population committed to measuring people’s success by the amount of consumption they could afford when the means they had always had to achieve it, rising wages, stop? They can go through a trauma right then and there: “We can’t anymore—it’s over.” Most people didn’t do that. They found other ways.

Americans undertook more work. People took a second or third job. The number of hours per year worked by the average American worker has risen by about 20 percent since the 1970s. By comparison, in Germany, France, and Italy, the number of hours worked per year per worker has dropped 20 percent. American workers began to work to a level of exhaustion. They sent more family members—and especially women—out to work. This enlarged supply of workers meant that employers could find plenty of employees without having to offer higher pay. Yet, with more family members out working, new kinds of costs and problems hit American families. The woman who goes out to work needs new outfits. In our society, she probably needs another car. With women exhausted from jobs outside and continued work demands inside households, with families stressed by exhaustion and mounting bills, interpersonal tensions mounted and brought new costs: daycare, psychotherapy, drugs. Such extra costs neutralized the extra income, so it did not solve the problem.