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Why Did Global Economic Performance Deteriorate in the 1970s?

Historical Background

Providing a comprehensive answer to the above question has remained a challenging puzzle for economists working over the past several decades. The economic deterioration of the 1970s was unique because, not only did global production decline precipitously, but in countries such the US, UK, Japan, and Australia, double digit inflation also became a regular occurrence. The combination of declining production and rising prices, known as stagflation, confounded many of the leading economists at the time. Keynesianism had become the dominant school of thought in the West after its insights were found to have provided useful solutions to ending the Great Depression. However, Keynesian economists working in the 1970s were left without a theoretical framework through which to make sense of the Great Stagflation. In fact, they had never even envisioned such a crisis because unemployment and inflation, as theorized by Keynes, were supposed to have an inverse relationship. Neoclassical models also struggled to grasp the full depth of the crisis. They were only able to explain the 1973 and 1979 oil shocks in terms of their adverse effects on aggregate supply which, following theoretical expectations, resulted in new equilibria of lower quantity and higher price. However, they failed to explain many of the deeper causes of the crisis, such as why productivity had started to fall as early as 1966. As measured by real output per person, US nonfarm private business productivity was growing at an annual rate of 2.9 percent from 1948-1965, but fell to 1.7 percent during 1966-1972.[1]

Introduction to the Social Structure of Accumulation Approach

The vacuum resulting from the disarray within the Keynesian school and the unsatisfying incompleteness of the neoclassical explanation encouraged enterprising economists working outside the mainstream to advance novel approaches to the stagflation conundrum. One such approach which claimed to explain the root causes of the crisis was the Social Structure of Accumulation (SSA) framework. Developed in the late 1970s by David Gordon — a Harvard-trained economist working within the Marxian tradition of political economy — with further contributions from Michael Reich, Richard Edwards, Thomas Weisskopf, and Samuel Bowles, the SSA approach builds an institutional framework on top of Marx’s stage theory of capitalism to explain (1) how capital accumulation within a capitalist economy works and (2) how contradictions within postwar institutions inevitably lead to the Great Stagflation.

The postwar era was classified by the following institutions: a Fordist model of industrialized mass production and mass consumption, a Keynesian welfare state, and a capital-labor accord.[2] The SSA approach argues that these “Golden Age” institutions were fundamental to the promotion of capital accumulation and, therefore, largely responsible for the rapid economic growth and development seen in the US, Western Europe, Japan, and Australia after World War 2.[3]In this essay, I will use the SSA framework to explore how the decline of the capital-labor accord within the United States can elucidate the unique conditions underlying the global economic deterioration of the 1970s. Specifically, I will investigate the process by which increasing capital accumulation lead to declining productivity and rising costs by way of falling work intensity and amplified corporate bureaucratization.

Formalizing the SSA Framework

The SSA approach recognizes that capitalism is necessarily embedded in and rests upon a broader set of social institutions. A SSA can been seen as the supportive institutional environment required for capital accumulation. The construction of a successful SSA provides sufficient support for profit-making activity and, therefore, establishes relatively stable expectations for return on capital, which makes long-term investment possible.[4] Conversely, the deterioration and eventual collapse of an SSA spells disaster for an economy. Without a supportive institutional environment, capitalists are unable or unwilling to invest due to the heightened difficulty of making investment calculations, given the rapidly fluctuating rate of return. Instead of increasing production and hiring additional workers, capitalists are more likely to use their capital for consumption or to park their assets in low-risk financial vehicles.

Informed by its Marxist tradition, the SSA approach sees capitalism as an inherently contradictory system driven forward by class conflict. As a necessary consequence, the institutions undergirding such a system are also seen as reflective of these endogenous dynamics. This is why the expansion phase of the existing SSA cannot be prolonged indefinitely. Accordingly, the SSA moves linearly along the following path: creation, consolidation, expansion, erosion, and eventually, collapse.[5]T he longer capital accumulation goes on, the more these systemic contradictions are heightened. For instance, in cases where capital is stronger than labor, capitalists will be able to extract more production per hour of labor power purchased, than they would otherwise. As a consequence, as accumulation goes on, profit rates will be driven higher and wages lower, ceteris paribus. Resultantly, the purchasing power of labor will eventually become so limited as to lead to a crisis of under-consumption via inadequate aggregate demand.[6] Conversely, in the case where labor is more powerful than capital, as time goes on, work intensity will decline and lead to slowdowns in production. The declining work intensity of production workers requires capitalists to hire additional supervisory workers, a process which increases cost. The increased bargaining power of labor, therefore results in lower profits and the eventual discouragement of investment. This is known as a supply-side crisis and is a summary of the SSA argument about causes of the Great Stagflation.

Work Intensity and the Deterioration of the Capital-Labor Accord

Both of the above crises hinge on the concept of “work intensity.” This concept is foreign to many mainstream accounts of productivity growth. In the eyes of orthodox economists, output is seen as the mechanical combination of labor (often split into skilled and unskilled), available capital, and existing technical knowledge.[7] However, the SSA framework also includes a social determinant of productivity growth: work intensity. This additional factor is derived from Marx’s abstruse concept of “labor power,” but should be readily familiar to anyone who has ever held a job. Although a firm pays workers for an hour of their labor, the actual amount of production that gets done is highly variable and depends on a complex array of motivational factors.[8] Work intensity can be seen as reflective of power dynamics in the workplace, in that the critical determinant of work intensity is the degree of employer control over employees. Work intensity, therefore, hinges on two factors related to such control: the cost of job loss and the intensity of supervision.

The core Golden Age institution providing the bedrock for postwar economic growth from the 1950s to the mid-1960s was the capital-labor accord. In a compromise with capital, unions agreed to submit to capitalist control of production decisions and matters of workplace organization, contingent upon wage increases being tied to productivity growth.[9] Essentially, labor agreed to maintain an orderly workforce in exchange for higher pay and greater job security. As a result, the proportion of total work time spent idle as a result of strike activity (a measure of work intensity), fell from an average of 0.54 percent during 1946-48 to a historic low of 0.22 percent from 1948-66.[10] However, this balance between capital and labor would ultimately collapse, being a prisoner of its own success. As a consequence of capital accumulation and resultant economic growth, the unemployment rate would fall from an average of 6 percent in the late 1950s to below 3.8 percent in 1966. A tight labor market meant that the power of labor had increased relative to that of capital and, resultantly, that workers were less fearful of losing their jobs. These fears were further lessened by Keynesian welfare programs, such as unemployment insurance, Medicaid, and food stamps, many of which originated during this period. As a result, cost of job loss plummeted. Technically, cost of job loss is defined as the average annual percentage of an employee’s living standard that a worker could expect to lose if fired.[11] When the cost of job loss is lower, workers have less incentive to conform to their employee’s intentions. Shirked responsibility, heightened absenteeism, and lower productivity are all predicted symptoms. This metric fell from 31 percent during 1948-1965 to 21 percent from 1966-1972. In line with theoretical expectations, labor during this period appears to have responded by becoming increasingly assertive, taking advantage of its heightened independence. The incidence of part-time absenteeism increased by 32 percent from 1959-66 to 1966-73. Additionally, the average annual percentage of work time lost to strikes increased by 115 percent from 1959-66 to 1966-71.[12] In an attempt to counter these developments, capitalists began to employ more supervisory workers. The intensity of supervision, a ratio of supervisory workers to production workers, rose from 0.20 in 1965 to 0.24, by the end of the crisis in 1982. Ultimately this approach was counterproductive due to the added cost of employing more workers not directly engaged in production.

Conclusion and Resolution

The SSA’s answer to the mystery of stagflation is, therefore, a supply-side crisis as caused by the erosion of corporate power during 1966-1973, specifically with respect to the weakening of control over the intensity of work. While both capital and labor initially benefitted immensely from their accord, the systemic contradictions embedded within capitalism ultimately unraveled this mutually beneficial relationship. As labor’s independence grew, capital responded with increasing costly measures designed to discipline their behavior. This reaction, to supervise and bureaucratize the workplace, was ultimately counterproductive in that it increased the cost of goods while decreasing productivity. These conditions became the underlying basis for the Great Stagflation. The SSA model is also useful in explaining the resolution of the crisis. The rise of neoliberalism in the 1980s represented the formation a completely new SSA, one which reflected the dominance of capital over labor. It was with the creation of this new SSA, that the US was able to escape from the Great Stagflation. However, as has been readily apparent to almost all in recent years, such a resolution was certainly more of a curse than a blessing. This is because, as a result of new developments in globalization, the neoliberal SSA has been insulated from natural feedback mechanisms. Under the SSA framework, when capital is stronger than labor, it increasingly extracts more production per hour of labor power purchased. As a consequence, as accumulation goes on, profit rates will be driven higher and wages lower. We see these phenomena with each passing day under the hegemonic neoliberal order. Traditionally this process would continue until the purchasing power of labor became so desiccated that it would lead to a crisis of under-consumption via inadequate aggregate demand. However, capital now untethered from the nation-state through new developments in globalization, is free to amass unprecedented power. Capitalists no longer need to worry about their workers having enough money to buy their products. They can just sell them to untapped foreign markets. And they no longer need to worry about a worker revolt, for they can simply offshore the jobs to countries where workers will happy to work for a dollar a day.

Joseph Matten is pursuing a Masters in International Relations at The Australian National University. He has a B.A. in Economics from Stanford University.

Works Cited

Boushey, Heather and Steven Pressma. “The Economic Contributions of David M. Gordon.” Review of Political Economy9, no.2 (1997): 225-245, doi: 10.1080/09538259700000035.

Bowles, Samuel, David M. Gordon and Thomas E. Weisskopf. “A Social Model for U.S. Productivity Growth.” Challenge27, no.1 (1984).

Diebolt, Claude. “Towards a New Social Structure of Accumulation?.” Historical Social Research27, 2 (2002): 85-99.

Gordon David M. “Who Bosses Whom? The Intensity of Supervision and the Discipline of Labor.” The American Economic Review80, no.2 (1990): 28-32.

Lippit, Victor D. “The Reconstruction of a Social Structure of Accumulation in the United States.” Review of Radical Political Economics29, no.3 (1997): 11-21.

O’Hara, Phillip Anthony. Growth and Development in the Global Political Economy: Modes of Regulation and Social Structures of Accumulation. New York: Routledge, 2006.

Terrence McDonough, “Social Structures of Accumulation: A ‘Punctuated’ View of Embeddedness,” The American Journal of Economics and Sociology70, no.5 (2011): 1234-1247.

U.S. Bureau of Labor Statistics. Nonfarm Business Sector: Real Output Per Person [PRS85006162]. (Federal Reserve Bank of St. Louis: FRED, 2018), 1.

Weisskopf, Thomas E., Samuel Bowles, David M. Gordon, Martin Neil Baily and, Albert Rees. “Hearts and Minds: A Social Model of U.S. Productivity Growth.”Brookings Papers on Economic Activity1983, no.2 (1983): 381-450.

[1] U.S. Bureau of Labor Statistics, Nonfarm Business Sector: Real Output Per Person [PRS85006162] (Federal Reserve Bank of St. Louis: FRED, 2018), 1.

[2]Phillip Anthony O’Hara, Growth and Development in the Global Political Economy: Modes of Regulation and Social Structures of Accumulation(New York: Routledge, 2006), 6.

[3] Ibid., 11.

[4] Terrence McDonough, “Social Structures of Accumulation: A ‘Punctuated’ View of Embeddedness,” The American Journal of Economics and Sociology70, no.5 (2011): 1237.

[5] Claude Diebolt, “Towards a New Social Structure of Accumulation?,” Historical Social Research27, 2 (2002): 88, .

[6] Victor D. Lippit, “The Reconstruction of a Social Structure of Accumulation in the United States, ”Review of Radical Political Economics29, no.3 (1997): 13.

[7] David M. Gordon, “Who Bosses Whom? The Intensity of Supervision and the Discipline of Labor,” The American Economic Review 80, no.2 (1990): 30.

[8] Samuel Bowles, David M. Gordon, and Thomas E. Weisskopf, “A Social Model for U.S. Productivity Growth,” Challenge27, no.1 (1984): 42.

[9] Heather Boushey and Steven Pressman, “The Economic Contributions of David M. Gordon,” Review of Political Economy9, no.2 (1997): 234, doi: 10.1080/09538259700000035.

[10] Thomas E. Weisskopf et al., “Hearts and Minds: A Social Model of U.S. Productivity Growth,” Brookings Papers on Economic Activity1983, no.2 (1983): 384.

[11] Ibid., 387.

[12] Ibid., 385.

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