Closing the Exit for Capital

by Devaka Gunawardena


Since the financial crisis of 2008, capitalism has faced greater scrutiny. There’s growing consensus, even among mainstream economists, that neoclassical models that ignore the inherent irrationality of the financial system are flawed. In addition, austerity has directly undermined most people’s livelihoods, while making the rich even richer. There is much more space after the financial crisis of 2008 to critique financial speculation and the drastic reduction in public spending. Still, it remains unclear how to work toward socialism. Rhetoric opposing austerity doesn’t necessarily imply overcoming capitalism.

The choice becomes clear from a historical perspective: moderate demands are inhibited by the ever-present threat of capital strike. Capitalists can withhold investment to avoid increased taxation and public regulation of industries. As a result, debate focuses on whether reforms must be incorporated into the long-term goal of overcoming capitalism, to defy elite counter-attacks. In contrast, the paradox of the post-crisis US economy is that capital’s rate of investment in the real economy has been declining despite the decades-long retreat of workers’ movements. Given these dynamics, we must take a step back from the debate about the capital strike and ask: why is capital exiting the real economy?

Capital Strike Versus Capital’s Exit

In the past, the capital strike was a threat to social democratic efforts to change the structure of the economy through incremental reforms passed by democratic legislatures. As Adam Przeworski, Fred Block, and other political economists note, the capital strike undermined social democratic projects, such as Salvador Allende’s administration in Chile in the 1970s. In the case of the latter, capital strike engendered economic crisis and, eventually, military intervention that enabled Augusto Pinochet’s brutal right-wing authoritarian government to take power. More recently, Joseph Schwartz and Bhaskar Sunkara call for confronting capitalism in response to the shadow of this threat.

The curious fact about the post-crisis economy, however, is that capital is withdrawing from investment even when it doesn’t face organized working-class opposition. We are far from the moment of crisis engendered by social democratic reform and the choice it forces radicals to make. For example, various metrics of productivity have grown at a lower average rate over the past ten years than the preceding period, contributing to the long-term trend of decelerating economic growth. The primary reason is the fact that, as the Bureau of Labor Statistics points out, employers have not been forced to invest heavily in automation in response to higher wages. In addition, the shareholder revolution has meant that capitalists focus on cutting costs to improve margins, and boost share prices, rather than invest in production.

As a result, stock market capitalization as a proportion of the US’s GDP has increased dramatically, and now represents nearly 150%. Because capital has retreated into the sphere of financial speculation, it continues to appropriate a tremendous amount of wealth, despite the weak macroeconomic recovery after the financial crisis of 2008. Financialization creates the conditions for more, and worse, bubbles. As the most recent crisis showed, however, the government bails out capitalists, socializing private investors’ losses. Those who suffer the most are ordinary indebted Americans. Workers cannot afford to buy what they need because wages fail to keep pace with the cost of living, so they borrow more and are stripped of their assets in moments of crisis.

Making Capital Invest

How should we respond to such vast inequality? If the financial crisis has demonstrated anything, it’s the intellectual bankruptcy of neoliberal economics, embodied in the austerity response that shifts the burden onto people suffering the most. Capital, however, no longer needs to go on strike to defeat workers’ movements. Its extended retreat from investment in the real economy is evidenced by the economy’s weak recovery and the corresponding intensification of inequality, despite the massive infusion of liquidity thanks to central banks’ bond-buying programs.

Instead, a post-crisis program of the Left must make capital invest again. The state must prosecute what Robert Brenner calls “politically constituted rip-off,” making it riskier for bankers and investors to speculate without facing the consequences of market manipulation. In addition, we must dismantle systematic barriers of entry to markets that create new forms of monopoly power, such as big tech and big pharma’s ability to hide behind intellectual property law. By increasing the costs of, or outright prohibiting, speculation and rent-seeking, capital is forced to invest in the real economy and thus employ people.

To transform the rigged system, the Left must systematically identify and destroy those incentives that enable capital to profit without producing. The more capital becomes embedded in the real economy, the easier it is to counteract the threat of a capital strike in response to a revived workers’ movement that can expropriate its investments. This process includes socializing enterprises and expanding workers’ co-operatives, which depend on the strength and organization of the working class. For now, however, the economic challenge facing the Left isn’t the threat of capital strike per se—and the implied choice it entails between social democracy and socialism—but closing the exit for capital.

The author is a member of the Los Angeles Chapter of the Democratic Socialists of America.

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