There was absolutely nothing flawed in former Federal Reserve Chairman Alan Greenspan’s ideology or his understanding of what drives the market. Each corporation operates in accordance with its self-interest in the competition to increase profits no matter what it takes, no matter who gets hurt. The “invisible hand” can be counted on. As political economist Adam Smith assured the world in his seminal work of 1776, Wealth of Nations, each corporation endeavors to employ its capital so as to produce the greatest value. It has no intention of promoting the public interest. Each intends only his own security, his own gain. Each is led by the “INVISIBLE HAND:” supply and demand in the self-regulating competitive free market. (Smith’s capitalization; my paraphrasing of his pronouncement). .” In a profit-driven economy competition leads to just the kind of self-interested behavior Greenspan’s ideology would predict.
The problem is that Greenspan’s ideologically based model of the economic world is extremely limited and has no room for historically predictable, booms and busts, recessions and depressions in the domestic and global economy.
What is much more maddening is the mythology that sustains his free-market ideology, which is so pervasive we take it in unconsciously as innocent toddlers and preach it unquestioningly as adults. This mythology, broadcast several times a day by the mass media, particularly on NPR I notice, teaches us that what drives the economy is the demand of working people for consumer goods!
If this is truly a “consumer driven economy”, i.e., dependent on citizens’ demand for consumer goods, then why is the solution to every significant economic downturn found in layoffs, cutting workers’ wages, real income-reducing inflation, working longer hours for less pay, and “tightening our belts” (consuming less)? And, why is it that those who are “bailed out” are enormous investment institutions and the largest manufacturing companies? Why, asked a caller of an NPR program hostess, why doesn’t the government give the trillion dollar bailout money directly to the individuals who have lost their retirement 401Ks, or seen their stock portfolio drown in toxic debt, or to those who were seduced into believing they could refinance sub-prime mortgages and are now losing their homes. “Then,” the caller continued, “we could all go out and spend that money, increase consumer demand, and get the economy going again!” If our consumption is paramount, why did I get a “stimulus check” for $300, and Bank America got $250 Billion? Collectively, taxpaying consumers supposedly got $100 Billion. The biggest financial institutions divvy up $1 Trillion and counting.
On another NPR program, the host of “On Point,” expressed alarm that so many “big box stores across the nation are closing down. These big retail discount stores and supermarkets where workers purchase much of what they consume will not be getting a federal bailout. Why not, if it is our demand that drives the economy?
If the consumption of working people is the driver of economic growth, why is it that during previous economic downturns, cutting workers’wages and introducing policies that drastically lower real income and consumption, led to economic upswings with even higher rates of productivity and profitability than prior to the recession/depression. If the object of our economic system is our—yours and my—consumption, then how is it that business and industry claim they consume 80% of all energy resources? And, why do responsible ecologist point out that if all of us citizens of the U.S. went completely green (electric cars, solar heat, local organic produce, etc.), we would only eliminate 20 % of the greenhouse gases produced in the U.S. (note the same 20/80 split)?
If our personal consumption is the goal, why has big oil been closing down operations in the U.S. while exporting to European markets since the 1970’s? Why, as Antonio Juhasz reports in her in-depth examination of the oil industry, are US oil companies “stockpiling” and “hoarding” oil? Economists Johnathan Nitzan and Shimshon Bichler, among others, have also pointed out that the UK and USA oil companies promoted the creation of the OPEC cartel precisely to do what would be illegal in their own countries: restrict supply in order to raise prices. Why, if it is our consumer demand that this economic system strives to satisfy?
The simple answer is that Capitalists do operate in their own self-interest in pursuit of profits in order to stay competitive, expand their production and increase their accumulated capital. That is the object of economic activity in our system of production and distribution. Capital accumulation is the goal; profitability the driver; wage-labor the sine qua non. Most workers know this. The bigger question is why does that system fail periodically; and fail on a grander and more global scale each time? Greenspan’s ideology cannot explain these repeated economic crises we experience periodically; and it does not allow for acknowledgement that they are endemic to our economic system.
Numerous investors and economists have noted that the current financial crisis is just the tip-top of the iceberg. That the problems with the underlying “real economy” have been going on for over thirty years. They state that we have to get back to manufacturing real things, not betting on inflated financial paper with no material backing or real value. (Even Dennis Kucinich was heard to exclaim after passage of the bailout bill, “We are going backwards, from an industrial economy to a financial economy!”) Having acknowledged the larger, underlying problem, all critics— whether radical, progressive, leftist or conservative— quickly return to gossiping about the sexy intrigues of bankers, hedge fund manages, and other irresponsible lenders accused of having built the financial house of cards. It really does remind one of the drunk who insists on looking for his car keys under the street light, rather than were he lost them in the dark shadows.
But these critics cannot be blamed for avoiding a discussion of problems for which they have no explanation, any more than Greenspan can be blamed for the limitations of his ideology. There never has been, in accepted economic theory, a valid explanation of why historically worsening recessions and depressions occur routinely in our system of production. Nor is there an answer to why, after each “bust” and cut in wages and consumption, the next “boom” takes off at an even higher rate of growth than before the down cycle. That is why spreading the mythology of the all-powerful consumer is crucial. The consumer, imperial driver of the system, is always to blame for problems with the underlying “real economy:” either we consume too much, or not enough; or save too much, or not enough. In the early 1960s, economist Wesley Clair Mitchell subjected the “consumer-driven crisis theories” based on shortage of consumer demand to thorough statistical tests of the historical data. He concluded that the theory that depressions were caused by lack of consumer demand did not hold up; and that depressions in our economic system are not deviations from normality. He found that each major slow down in the economy began with a fall in the price of “producers’ goods,”— a drop in demand for industrial plant, material and machinery—not in consumer goods. The same is true today. A perusal of the Wall Street Journal for the past thirty years will reveal many articles confirming that a cut in demand for production of industrial manufacturer’s goods precedes lay-offs and the subsequent drop in “consumer demand.”
John Maynard Keynes, the revered godfather of liberal economics, much loved for his theory that government can supply the necessary demand to overcome depressions, is often resurrected in times of economic crises. In the 1930s, he even envisioned a stage of capital “abundance” so great that government intervention would no longer be necessary, and consumption would become the sole objective of economic production. That was a dream for the way-off future, for Keynes knew, as does every economist and corporate CEO, that our economic system depends on capital accumulation in its real material form, which includes industrial infrastructure, transport and technology systems, factory equipment, machinery, enormous manufacturing and administrative fortifications and materials (things you and I could never consume personally). The words of General Motors Chairman Gernstenberg, back in the 1970’s, reflect the ideological beliefs of Greenspan and the economics profession then and now: “Not one of our grand national goals—not one—can be accomplished unless business prospers. Profits from which come all wages, taxes, and dividends, fuel the growth of our nation, and future depends on the profitability of free enterprise.”
Today’s economic apologists convince us that the system of “toxic assets,” “credit-default swaps,” “naked short trading,” bundled securities,” “derivatives,” “Ninja loans,” “illiquid assets,” and all the many other fabricated financial "products" are much too complicated for us to understand. They insist that what is good for Wall Street is good for Main Street. Yet they have little to say about the real crisis in economic production that preceded and underlies all the financial frenzy.
As the industrial economy began slowing in the 1970s, economists started referring to non-manufacturing corporations as “industries:” the “financial industry,” the "banking industry,” “the insurance industry,” etc. Later, they turned to the field of psychology for concepts and terminology: “Consumer confidence,” “market preferences,” “stock market sensitivities,” or “sentiments of financial traders” became the focus. A new economic vocabulary can not cover up the facts on the ground: Over the past several decades, the industrial economy has become increasingly troubled as government interventions, monetary and financial manipulations have failed to overcome the underlying, real economic crisis. The belief now is that the $1 Trillion injection of taxpayers’ money into the financial sector will jump-start the real manufacturing economy that has been struggling since the early 1970s. So far, the banks have refused to loan this money because, they say, there are no profitable industrial projects to invest in.
Economic theory has had little influence on government attempts to prop up a failing economic system. During the Great Depression, President Roosevelt commented that he had to invoke policies very similar to those used in Communist Russia and Nazi Germany. FDR claimed not to have understood a thing Keynes tried to explain to him about how the economy works. It took World War II and government direction of production for military purposes to get us out of the Great Depression—not economic theory.
Today we are nearing the end of the old ideological road. Our political and economic system is undergoing radical change. The ideological “autobahn” under construction is being built for us by a government representing the needs of the largest industrial corporations and financial institutions. We can continue to suffer the consequences of letting them chart the way of change, or we can plan a new path forward, grounded in everyday material reality and values, designed to benefit the entire people. Seeing through the myths of “consumerism,” and the ideology of “this most perfect of all economic systems” is a necessary first step.
MARY LYNN CRAMER has dedicated twenty-five years to low paying "applied economics," working as a bilingual social worker with families and children. She has degrees in economic history, economic theory and social work. She can be reached at email@example.com.