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Global Capitalism

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US Monopoly Capitalism: an Irrational System

Publicado en: Economía y finanzas
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Global Capitalism

  1. 1. 2 Agenda 1.  Globalization 2.  Is US capitalism an “irrational” system? 3.  The Sales Effort 4.  Government Absorption of Surplus 5.  Labor and Monopoly Capital 6.  Conclusion 7.  Questions
  2. 2. 3 Background Information The term globalization comes forth in the 1970s and 1980s to designate a complex of processes and changing forces, that act on a global scale and transpose national borders, moved by the evolution of international trade and the development of new technologies along the twentieth century – the so-called “third industrial revolution”. In this process, companies transpose national borders to produce and commercialize their products, and turn into multinational companies, on a first stage, and transnational companies, on a second stage. They become so huge and powerful that one comes to discuss the implications of these processes to the different national States. “…avec la configuration globale, ce sont les États qui vont se faire concurrence pour attirer les investissements étrangers sur leur territoire. Ce retournement de situation est le produit d´une double évolution. D´un côté, les gouvernements ont lancé à partir du milieu des années 1980 une grande réforme libérale des codes ou lois sur les investissements étrangers. De l ´autre, les firmes ont modifié leur stratégie d´investissement à l´étranger en abandonnant progressivement la stratégie de marché pour une stratégie globale.“ (Charles-Albert Michalet) Before this scenery, the role of the State as government is challenged. The State-government looses its centralizing [instead of keeping its absolute power], and comes to be one more player in the market. This does not imply, however, a decreasing of its importance as a manager of politics and of strategic decisions, fundamental roles of the State governments. “…states will remain the key actors in international relations, and, even if their influence is declining relative to other actors, the patterns of interactions the major states create will still be of central importance in the years to come.” (Prof. Chris Brown, LSE) The term globalization designates a complex process of changing forces that reshape the International scenario and the roles of the global players Globalization Source: Coutinho, Rodrigo: “Globalization and its consequences, alternatives and paths to Brazil.” (Rio de Janeiro: CEBRI, 2008)
  3. 3. 4 Background Information On this international arena, in which globalization is an irreversible reality, and from which States may benefit, some alternative politics [economic and / or social] can be adopted by countries for its effective insertion in the process of globalization “…a wider agenda for international relations will be addressed, in which the traditional concerns of power politics take second place or, at the very least, are placed in a wider context.” (Prof. Chris Brown, LSE) “The state is being subtly deformed as an instrument of human well-being by the dynamics of globalization, which are pushing the state by degrees and to varying extents into a subordinate relationship with global market forces. (Falk, 1996) Globalization, thus, present states with alternatives on how to play according to the new “rules”; being not participating in the process not an option Globalization Source: Coutinho, Rodrigo: “Globalization and its consequences, alternatives and paths to Brazil.” (Rio de Janeiro: CEBRI, 2008)
  4. 4. 5 •  “The giant firms that dominate our economy were in a permanent war with their employees, customers, and the entire society.” •  According to the author, Baran and Sweezy1) updated Marx’s work: •  By documenting behaviors and effects of the huge multinational firms whose dominating power Marx saw on the horizon •  Adam Smith warned his readers in The Wealth of Nations that the “joint stock” companies (corporations) emerging in Britain threatened the atomistic competition he championed •  “We must recognize that competition (…) has ceased to occupy that position, not only in Britain but everywhere else in the capitalist world. Today the typical economic unit in the capitalist world is not the small firm producing a negligible fraction of a homogeneous output for an anonymous market but a large-scale enterprise producing a significant share of the output of an industry, or even several industries, and able to control its prices, the volume of its production, and the types and amounts of its investments. The typical economic unit, in other words, has the attributes that were once thought to be possessed only by monopolies.” In their book Monopoly Capitalism, two Marxist economists, Paul Baran and Paul Sweezy described the capitalist system in negative terms, updating Marx’s work Is US capitalism an “irrational” system? 1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy Competition The Tramp working on the giant machine in the film's most famous scene Charlie Chaplin, Modern Times (1936)
  5. 5. 6 •  Baran and Sweezy1) observed that most industries become oligopolies after going through a competitive phase, dominated by a few huge multinational firms •  They also argue this creates an entry barrier for smaller firms – bigger firms have economies of scale (lower per-unit costs) – which will either fail to survive or will be incorporated by them •  In 2007, 76 of the largest 150 economic entities in the world were corporations, while 74 were countries •  ExxonMobil has larger total revenues than the GDP of Belgium or Egypt; Wal-Mart is bigger than Malaysia; Royal Dutch Shell is bigger than Sweden •  More than 90% of the 200 largest transnational companies are from industrialized countries, mostly Europe, North America and Japan •  According to the authors, “when corporations are this huge and this powerful, governments and citizens have limited power to oppose them •  Marx saw the increasing complexity and cost of machinery that accompanied the growth of huge corporations as the principal reason that owners of small firms would ultimately be “hurled into the proletariat”. Baran and Sweezy argue most industries become oligopolies after going through a competitive phase, creating entry barriers for new entrants Is US capitalism an “irrational” system? 1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy Corporations
  6. 6. 7 •  Age, size and reputation confer other advantages which increase entry barriers for new entrants: •  Brand loyalty (and marketing) •  Long-term contracts with large buyers •  Ties with government (lobbying) •  e.g.: US automakers against Japanese in the 1980s and Alcoa (aluminum) in the 1990s, whose CEO at the time was Paul O’Neill, who became U.S. Treasury Secretary; steel in the 2000s, orange juice and food today •  Expansion of government to ensure that businesses remain profitable (and prop up consumer demand): when companies efficiency increases, unemployment tends to increase and wages tend to decrease or suffer pressure •  As a result, government spending is required (e.g. the social welfare state in the 1930s and 1960s, which created the social security system, minimum-wage and unemployment-compensation laws, the Wagner Act (which required employers to recognize and bargain with unions when workers voted to unionize), and tax laws helping the middle and working classes to buy homes) •  An ever-growing military budget also keeps production humming at the giant firms Brand loyalty, long-term contracts and lobbying provide companies additional advantages, and when they gain efficiency, government has to intervene Is US capitalism an “irrational” system? 1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy Corporate Advantages Source: FY2010 "President's budget" Historical tables Inflation Adjusted Defense Spending (USD billions)
  7. 7. 8 •  Entry barriers tend to create “monopolies”, or a “monopoly capitalism” in the words of Baran and Sweezy1) - term that applies to modern capitalist economies like the U.S. economy: •  U.S. society is organized to maximize profits of few corporations - “maintain scarcity in the midst of potential plenty” and this inequality is an inevitable outcome of monopoly capital •  That is why in the US, millions live in abysmal poverty despite the vast wealth that exists for the few; and in underdeveloped countries, hundreds of million of people suffer from disease and starvation even though there is enough food in the world for everyone and enough medicine to cure much existing disease •  Companies tend to reduce costs to increase profits, and declining costs imply continuously widening profit margins (Companies pass as little of the savings as possible to consumers) •  e.g. Microsoft (lowered the price of Windows but still had gross profit margins of 90%), Gap (uses sweatshop laborers in the Third World but keeps their prices high), (buys books at 60% below list price and offer consumers a 10-30% discount), Wal-Mart (squeezes suppliers using its vast size and market power) •  Profits are necessary to “accumulation of capital” – for new investments, payment of dividends and CEOs compensation through stock options According to Baran and Sweezy, the system becomes a “monopoly capitalism”, in which the pursue of profits is necessary to the “accumulation of capital” Is US capitalism an “irrational” system? 1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy Entry Barriers Source: The Economist, Aug, 26, 2010.
  8. 8. 9 •  Mature industries with monopoly power means virtually no price competition: •  Companies avoid price cuts to avoid price wars; and when some increase prices, if competitors follow suit, good, if not, they rescind the price change, but usually others follow (e.g. for three decades prior the oil price shocks of the 1970s, GM was the price leader in the auto industry, setting prices that were then matched by Ford and Chrysler; and was not uncommon, during this period for these price increases to be three times the overall inflation level) •  Price competition occur when firms are fending off a foreign competitor or when jockeying for market share in less mature industries (dumping) •  According to William Sheperd, “cooperation in price setting is extensive” in the modern era (e.g. from 1954 to 1994, Ivy League colleges conspired to fix the scholarships offered to students to prevent colleges from offering more generous scholarships to lure top students away from competing schools) And mature industries, with monopoly power means no price competition, unless when dumping prices to fend off a competitor or gain market share Is US capitalism an “irrational” system? 1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy Tacit collusion and Price Leadership
  9. 9. 10 •  An even better strategy than colluding with competitors is to buy them out or absorb them to lessen competition •  With mergers firms attempt to: •  Lessen competition (horizontal merger) •  Explore profitable new areas by buying into them •  Gain greater control over the supply chain (vertical mergers) •  Mergers that lessen competition could be prevented by governments under anti-trust laws but the author points that US Presidents since Reagan have favored mergers but Obama signaled to enforce antitrust laws •  According to William Sheperd, mergers often reduce efficiency; that most mergers are actually “empire-building” strategies where the main goal is to gain greater control over markets And M&A work as a tool for companies to lessen competition, explore profitable new areas or gain control over the supply chain, and not always prove efficient Is US capitalism an “irrational” system? 1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy Buyouts and Mergers
  10. 10. 11 •  Big firms are supposed to have the funds to put into research and development, and a common belief about multinational corporations is that they are innovative, constantly designing new and better products for our consumption •  However, some believe these firms will not undertake the cost of innovating because they know that their results will be stolen by competitors (Thorstein Veblen called it a form of “industrial sabotage”.) •  Today, corporations manipulate patent and copyright laws to prevent the entry of new competitors, and they repackage items as “new and improved” when the product is essentially the same (e.g. “classic” Coke – from sugar to high fructose corn syrup) •  Baran and Sweezy observe that big corporations allow individual entrepreneurs or small businesses to do the vital pioneering work; when these succeed the big corporations move in, buying out and absorbing the smaller creators •  Meanwhile, the inventors are only too happy to cash out, by being bought out and absorbed (e.g. the internet boom of the 1990s and the startups) In this system, innovation is usually neglected by large corporations, until a new entrant proves successful – then, they move in by absorbing them Is US capitalism an “irrational” system? 1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy Big Firms and Innovation
  11. 11. 12 SURPLUS = GDP – PRODUCTION COSTS (the “surplus” is a macroeconomic approximation of Marx’s concept of surplus value, the part of the total value of output that does not go to workers but becomes profits or is paid to the government) •  Baran and Sweezy1) argue that under monopoly capitalism, prices tend to rise and costs to decrease, thus surplus tends to rise (Baran and Sweezy only consider as production costs the necessary costs, like wages and salaries, being the surplus the rest; thus: SURPLUS = PROFITS + INTERESTS + TAXES + ADVERTISING + MANAGEMENT COSTS (and, as profits and interest payments are usually used to finance investment (I), and taxes to finance government spending (G), and advertising and excess management as waste) SURPLUS = I + G + CORPORATE WASTE •  Profits must find an outlet every year; the accumulation of capital is an imperative for survival in capitalism: “businesses must grow or die”. Baran and Sweezy developed the concept of “surplus” – the difference between what society produces (GDP) and the costs of producing it Is US capitalism an “irrational” system? 1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy Rising Surpluses, Crises and Waste
  12. 12. 13 •  However, as Baran and Sweezy1) put it, “sooner or later, excess capacity grows so large that it discourages further investment.” •  Thus, the only way to avoid a recession would be to ensure that spending in other sectors goes up. However, new technologies will not always be outlets for investment as companies slow their introduction when it is more profitable to do so – Companies have no incentive to invest in new technology given low wages •  This would be one example of the irrational nature of the U.S. economic system: “corporations are desperately searching for opportunities to invest their profits, and in new technology they have a perfect vehicle for profitable investment. But often, companies opt instead to stick with existing, profitable methods and products, even while there are new technological advances and new products that could be explored.” •  Baran and Sweezy also note that overseas investment by US companies does not absorb surplus in the long term as profits from these investments are higher than new foreign investments (and that held true for most years since 1966) •  The authors argue that “the rising surplus generated by monopoly capitalism must find an outlet, but the investment opportunities are often insufficient”; which means that “corporations must find other ways to dispose of the surplus”. And one key way for doing that would be the sales effort. Not what has been done during the 1990s which ended with the internet bubble in 2000 or the real estate investments since 2000 and which generated the real-estate bubble that generated the recession started in 2007. And, according to Baran and Sweezy, the rising surpluses have to find and outlet for its profits in the form of investments either in the industry or somewhere else Is US capitalism an “irrational” system? 1) In Monopoly Capital: An Essay on the American Economic and Social Order (1966), Paul Baran and Paul Sweezy Rising Surpluses, Crises and Waste
  13. 13. 14 The Sales Effort •  Whether or not corporations find outlets for all their profits, the total investment in capital goods, and thus in capacity, constantly expands. Through good times and bad times, firms continue to add capacity to their production systems. •  There is a catch to this expanded capacity, firms must find additional buyers for their expanded products. The Sales Effort is a concentrated push by corporations in Monopoly Capital to persuade consumers to utilize the full extent of their purchasing power (1/2) The Sales Effort
  14. 14. 15 The Sales Effort •  Consumers buy about two-thirds of all output in U.S. capitalism, and corporations’ survival rests largely on the maintenance and growth of consumer spending. •  For the Sales Effort to work, consumers must have enough income to buy their share of the output. •  The contradiction is that consumers purchasing power is restricted by the efforts of corporate owners to cut workers’ wages and salaries. •  Baran and Sweezy state that the sales effort depends on the manipulative practice of branding. Because consumers know little about most of the products they buy, they are susceptible to labels, trademarks, and brand names which offer a sense of security in the product, where real or imagined. •  “The most important idea in advertising is new, it creates an itch. You simply put your product in there as a sort of calamine lotion. However, there is a deeper bond which can be made with a project, nostalgia. Its delicate, but potent…” •  In the year 2007, U.S. firms spent $280 billion selling products to consumers here and abroad. The Sales Effort is a concentrated push by corporations in Monopoly Capital to persuade consumers to utilize the full extent of their purchasing power (2/2) The Sales Effort
  15. 15. 16 The Sales Effort •  One result of this explosion in advertising has been a drop in consumers’ personal savings. The U.S. savings rate, which averaged over 9 percent between 1940 and 2000, reached a post-Depression low of 0.4 percent in 2005. •  “In the United States the savings rate is lower, and advertising spending as a percentage of GDP is higher, than in any other industrialized nation” (Scherer 1990) Results of The Sales Effort on the American consumer The Sales Effort
  16. 16. 17 The Sales Effort •  “Price Competiton has largely receded as a means of attracting the public’s custom, and has yielded to new ways of sales promotion: advertising, variation of the products’ appearance and packaging, planned obselescence, model changes, credit schemes, and the like.” (Baran and Sweezy 1966) •  Advertising is an integral part of capitalism: it stimulates aggregate demand by creating new desires, it stimulates production, and it employs non productive workers in ad agencies and the media. •  Braran and Sweezy saw it as “a massive waste of resources, a continual drain on the consumer’s income, and a systematic destruction of his freedom of choice between genuine alternatives.” (Baran and Sweezy 1966) The changing strategies of the Sales Effort The Sales Effort
  17. 17. 18 Advertising in America •  On average, Americans now spend more than a year of their lives watching commercials. •  By age 20, the typical American will have seen 1 million commercial messages. •  On average, for every additional hour of television watched in the United States, consumer spending increases by $200. •  Parents average 6 hours per week shopping, but only 40 minutes per week playing with their children. While some shopping is clearly necessary, shopping for recreation now occupies a more prominent role in families than spending quality time with children. •  Graph: United States Advertising expenditures 1920-2007 in constant 2007 dollars. (billions) Creating the ‘itch’ to buy Advertising
  18. 18. 19 Government Absorption of Surplus •  As monopoly capitalism has evolved, the government sector of every developed country has expanded, absorbing more and more of the surplus. •  US Government spending as a percentage of GDP increased steadily from 10 percent in 1929 to 33 percent in 2008. •  Much of the expansion of government spending in the United States has been in the area of military spending, benefiting corporations directly through defense contracts. •  In addition to defense contracts, the US government funnels money to corporations in the form of corporate welfare – subsidies and tax breaks amounting to over $150 billion per year. •  While the government is a key absorber of surplus, the way that U.S. government absorbs surplus is typically most favorable to the giant firms, frequently wasteful, and contradictory to social needs. •  In 2005, the United States ranked 26th out of 29 OECD countries in the amount of GDP devoted to social expenditures like welfare. Surplus capacity and who to give it to Surplus
  19. 19. 20 Labor and Monopoly Capital •  Baran and Sweezy argued that Marx’s theory of alienation aptly described workers’ experiences in monopoly capitalism. •  This is explored in two books: •  Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century by Harry Braverman. •  Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Managerial “Downsizing.” by David Gordon Marxist Theory, American Labor, and US Monopoly Capital Monopoly Capital
  20. 20. 21 Labor and Monopoly Capital •  The drive to accumulate more capital forces firms to invest in ever more productive techniques. •  One way is to increase productivity and profits is to replace a highly skilled, expensive laborer – a process known as mechanization and deskilling. •  “Deskilling means the incessant breakdown of labor processes into simplified operations taught to workers as tasks. The more machinery that has been developed as an aid to labor, the more labor becomes a servant of machinery.” (Braverman 1974) •  Productivity increases, but workers are often left with mind-numbing jobs and low wages, or no jobs at all. •  In Braverman’s view, the drive for greater productivity in monopoly capitalism demands a complete disregard for human beings, the environment, and macroeconomic well-being. From Labor and Monopoly Capital, by Harry Braverman Monopoly Capital
  21. 21. 22 Fat and Mean: The Stick •  David Gordon demonstrates that U.S. firms are also over managed and more bureaucratic than firms in other developed countries. •  In the early 1970s, U.S. corporations adopted a “stick” strategy to control workers. They broke unions and drove down wages to increase profits. They moved manufacturing operations overseas, outsourced production to low-cost manufacturers, sped up work, and cut wages in their U.S. operations. •  In order to keep laborers working hard under these conditions, employers added numerous supervisors to monitor employees. From Fat and Mean: The Corporate Squeeze of Working Americans and the Myth of Managerial ‘Downsizing’ Fat and Mean: The Stick
  22. 22. 23 Fat and Mean: The Carrot •  Germany, Japan, and Sweden employ the “carrot” method to increase productivity: workers are given job security, wage incentives, strong union representation, and a role in making important decisions. •  Those economies with more cooperative systems of labor relations also have more rapid productivity growth rates. And with more rapid productivity growth, there is room for financing more productive investments, for affording more rapid wage growth, and for maintaining a competitive edge in the global economy. (Gordon 1996) •  Today, U.S. companies have more than three times as many supervisors per production worker as Germany and Japan, and five times as many as Sweden. •  The U.S. system is efficient at generating profits, but it lags behind other developed countries in terms of other goals, such as productivity and creating a humane workplace. Alternative systems: Germany, Japan and Sweden Fat and Mean: The Stick
  23. 23. 24 Conclusions •  The US economy is dominated by huge MNCs, which do everything in their power to stifle competition. •  Stifling competition involves rigging markets through collusion, mergers, and buying protection from the government. •  The drive to accumulate capital is inherent in the system, as past profits require investment opportunities to generate the highest possible return. •  But the very expansion caused by investment and capital accumulation contains within it the seeds of regular recessions as investment opportunities dry up and aggregate demand proves insufficient. •  The U.S. government willingly participates in the system, shoring up firms with billions of dollars in corporate welfare and defense contracts. •  Firms work to expand markets as much as possible, wasting hundreds of billions of dollars annually on dishonest attempts to manipulate consumers. •  U.S. corporations relentlessly lower costs via mechanization and attacks on labor, but the cost savings are not generally passed on to consumers. Baran and Sweezy’s update of Marx’s theories focused on modern monopoly, mechanization and ‘deskilling’, and the alienation of labor Conclusion
  24. 24. 25 Questions Questions for discussion… Question 1 Question 2 Question 3 Question 4 Are these arguments believable? And, if they are, do they describe an economic system that is fundamentally irrational? Has reading this made you wonder if there might be a better way to shape and develop the economy? One that is less unequal – politically and in every other way? One that doesn’t systematically destroy its habitat?