A historical perspective on the economic stagnation afflicting the United States and the other advanced capitalist economies requires that we go back to the severe downturn of 1974–1975, which marked the end of the post-Second World War prosperity. The dominant interpretation of the mid–1970s recession was that the full employment of the earlier Keynesian era had laid the basis for the crisis by strengthening labor in relation to capital. As a number of prominent left economists, whose outlook did not differ from the mainstream in this respect, put it, the problem was a capitalist class that was “too weak” and a working class that was “too strong.”Empirically, the slump was commonly attributed to a rise in the wage share of income, squeezing profits. This has come to be known as the “profit-squeeze” theory of crisis.
Monthly Review played a key role in introducing a radical variant of the “full-employment profit squeeze” perspective in the United States by publishing, as its Review of the Month in October 1974, Raford Boddy and James Crotty’s seminal article “Class Conflict, Keynesian Policies, and the Business Cycle.” This article highlighted the well-known fact that wages and unit labor costs normally rise near the peak of the business cycle, signaling the collapse of the boom. The authors went on, however, to suggest that the increase in the wage share at full employment accounted to a considerable extent for the major economic decline then occurring. “Capitalists,” they wrote, “have more than their class instinct to tell them that sustained full employment is manifestly unsound…. [T]he maximization of profits makes it necessary to avoid sustained full employment.” In doing so they contrasted their views to those of the great Polish Marxian economist Michał Kalecki, along with Josef Steindl and Howard Sherman.
For Kalecki, the power of labor to increase money wages—although present to a minor extent in the normal business upswing—was not a significant economic threat to capital even at full employment due primarily to the pricing power of firms. Hence, if the system neglected consistently to promote full-employment through the stimulation of government spending this was not to be attributed to economic reasons per se, but rather to the political threat that permanent full employment would represent to the capitalist class. With “the sack” no longer available, the overall social power of the capitalist class would be diminished. The “rise in wage rates resulting from the stronger bargaining power of the workers,” he observed, “is less likely to reduce profits than to increase prices and thus affects adversely only the rentier interests. But ‘discipline in the factories’ and ‘political stability’ are more appreciated by the business leaders than are profits. Their class instinct tells them that lasting full employment is unsound from their point of view.” It was in this context that he introduced his famous notion of the “political business cycle,” whereby the capitalist state would alternate between promoting full employment and balanced-budget austerity, generating a “controlled under-employment.”
In sharp contrast to this argument of Kalecki’s, Boddy and Crotty claimed that as the economy approached full employment a rising wage share was generated, sharply threatening capitalist profits themselves, and leading to structural economic crisis. The “economic effects of the business cycle,” they contended, then serve to “reinforce the socio-political aspects stressed by Kalecki.” For these authors, as for most economic analysts, the principal cause of the mid–1970s slump was a wage-induced profit squeeze. The notion of a profit squeeze arising as the economy approached full employment was therefore turned into a more general theory of economic crisis and even stagnation.
The late 1970s and ‘80s saw the triumph of monetarism, supply-side economics, and other forms of free-market conservatism or neoliberalism. Establishment economics reverted to pre-Keynesian austerity views, resurrecting Say’s fallacious Law of Markets that supply creates its own demand—previously discredited by Keynes (and before that refuted by Marx). From a Say’s Law perspective, the capital-accumulation process could not falter of itself but only as a result of external trade union or government interference.
All of this meant the restoration of the fundamental economic ideology of the capitalist class. As early as 1732 Sir William Pulteney had declared in the British House of Commons: “It is now a universal complaint in the Country that high Wages given to Workmen is the chief Cause of the Decay of our Trade and Manufacturers; our Business then is, to take all the Measures we can think of, to enable our Workmen to work for less Wages than they do at present.” So deeply ingrained are such views in the world of business and finance that one influential financial strategist, Eric Green, global head of research for rates and foreign exchange at TD Securities, went so far as to contend in 2012—in the midst of the current period of high unemployment, slow recovery, and increasing income disparity—that U.S. corporations were being threatened by a “labor-cost squeeze on their profit margins,” which “could slow future job gains.”
But if adherence to a profit-squeeze perspective is naturally to be expected on the right, the same is hardly true for the left. Nonetheless, a number of notable radical theorists insisted in the mid–1980s that the “possibility” that the neoliberal strategy of wage repression might prove successful in reviving long-term accumulation could not “be ruled out altogether.” More recently, in an attempt to explain the historical-economic roots of the Great Recession, a 2009 article in Dollars and Sense argued that it was sheer economic necessity that drove capital in the Reagan period to overturn the “full employment profit squeeze…. Like the New Deal of the 1930s, the Reagan era laid the groundwork of a new set of relatively stable framework institutions. The so-called neoliberal social structure of accumulation, monstrous though it was, functioned as a framework for capital accumulation and economic growth for nearly three decades.”
Some economic analysts on the left, however, rejected the profit-squeeze view from the start. Although they had given prominence to this perspective by publishing Boddy and Crotty’s article, Monthly Review editors Harry Magdoff and Paul Sweezy belonged to the same broad Marxian theoretical tradition as Kalecki and Steindl. For these thinkers the main economic contradiction of monopoly-capitalist accumulation in the post-Second World War period was seen as lying on the demand side rather than the supply side, reflected in a tendency to underutilization of productive capacity associated with problems of surplus absorption endemic to the system. In this view the vast actual and potential economic surplus (surplus value) generated within production under the regime of monopoly capital exceeded the outlets for capitalist consumption and investment. The result was a tendency to economic stagnation manifested in slow growth, high unemployment, and excess capacity. Here the problem was the opposite of profit-squeeze theory: capital was too strong, labor too weak.
In this perspective, the prosperity that marked the post-Second World War years was seen as a temporary, historical departure from the normal state of stagnation that characterized accumulation under monopoly capitalism. The so-called golden age of the 1950s and ‘60s could be attributed to a number of special historical factors, including: (1) the huge consumer liquidity built up during the war; (2) the rebuilding of the war-devastated European and Japanese economies; (3) Cold War military expenditures (which included two regional wars in Asia); (4) a second wave of automobilization of the U.S. economy; and (5) a vast expansion of the sales effort. By the late 1960s, however, most of these historical stimuli had waned. Without new epoch-making innovations on the scale of the steam engine, railroad, and the automobile, and without new props to private accumulation, the economy would increasingly be mired in a condition of long-term slow growth.
If the monopoly-capitalist economy managed nevertheless to avoid a deep stagnation in the 1980s and ‘90s, it was not because of the advent of a new stable “framework for capitalist accumulation” in the Reagan period, but because of a financial explosion that had begun in earnest by this time, drawing upon the enormous economic surplus in the hands of capital. What Sweezy was to call “the financialization of the capital accumulation process” thus operated as a countervailing influence that lifted the economy—which was also boosted by increased military spending. But the debt overhang resulting from financialization, Magdoff and Sweezy observed, would eventually be so great that it would overwhelm the state’s ability to intervene effectively as a lender of last resort. The bubble would burst, and a deep stagnation would arise.
These two perspectives, the profit squeeze theory and the theory of “overaccumulation” and stagnation, represented very different assessments of the 1974–1975 crisis and of the likely long-run trajectory of the U.S. economy. As it turned out, empirical trends were not kind to the profit-squeeze approach. Not only has the deepening economic stagnation of the last four decades been accompanied by a declining, not a rising, share of labor in income, but also there are reasons to doubt the significance of an increasing labor share even in the context of the years immediately leading up to the 1974–1975 crisis. Rather the small, but perceptible, rise in labor’s share of income in the late 1960s and early ‘70s has been shown to be nothing more than the result of a brief expansion of the share of government employment in the economy. There was no significant wage squeeze on profits in the private sector in these years. What was thought to be a mountain turned out to be a molehill—or less.
These empirical weaknesses of the profit-squeeze theory are to be viewed against the larger background of its general incompatibility with the Marxian theory of accumulation. This can be seen in the critiques of the profit-squeeze perspective developed by Marx and Kalecki and the more straightforward socialist strategic outlooks they were able to promote as a result. The main thrust of Marxian crisis theory has always been opposed to the profit-squeeze view, which tends to dampen the aspirations of the working class. In this regard what Marx called “the political economy of the working class” is far superior to the political economy of the capitalist class.
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