You See The Crisis Brewing: Earned Income Is Under Pressure And Labor Is In Structural Decline… Once Their Ability To Service More Debt Vanishes, So Does Demand For Goods And Services

by Charles Hugh-Smith

The crisis of capitalism has not been resolved; it’s simply been papered over.

First, a disclaimer: this is an interpretive discussion of some aspects of Marx’s analysis (which was based on the capitalism he observed in the late 19th century) applied to present-day cartel-state capitalism. It is not a scholarly or academic presentation.

The discussion covers a lot of ground, though, so please refill your beverage container and strap in….

That Marx’s prescription for a socialist/Communist alternative to capitalism failed does not necessarily negate his critique of capitalism. Marx spent hundreds of pages analyzing capital and capitalism and relatively few sketching out a pie-in-the-sky alternative that was not grounded in historical examples or working models.

So it is no surprise that his prescriptive work is an occasionally risible historical curiosity while his critique stands as a systemic analysis.

Marx got a number of things right, one of which appears to be playing out on a global scale. You probably know that Marx expected capitalism to experience a series of ever-larger boom-bust cycles that would eventually precipitate revolution and overthrow of the existing financial-political order.

One driver of these cycles was the interplay of increasing production and declining labor costs. In broad-brush, Marx recognized that industrial capital (as opposed to finance capital) could only increase profits and accumulate more capital by raising production and/or establishing a price-fixing cartel or monopoly.

Mechanization characterized industrial capitalism in the late 19th century, and Marx observed that as mechanization increased productivity, the marginal value of labor decreased on a per unit basis.

Here is a real-world example. When I first visited China in 2000, there was a massive glut of television production: the capacity to manufacture TVs had expanded far beyond China’s domestic demand for TVs. To wring out a profit in a highly competitive industry, manufacturers had to ramp up production while lowering the unit cost of labor and the unit cost of each TV to undercut the competition.

If an assembly line of 100 workers could produce 1,000 TVs a day, the only way to lower the price of the TV is to either lower the wages paid to the workers or invest capital in machinery that enables the same 100 workers to produce 2,000 TVs a day.

At 2,000 TVs a day, the per unit labor cost falls in half. For example, at 1,000 TVs a day, the labor cost per TV might be $40. At 2,000 TVs per day assembled by the same 100 workers, the labor cost per unit drops to $20.

The key point here is that labor’s share of the total production cost declines. If workers had taken home $1 million in pay to make 100,000 TVs at the old production rate of 1,000 TVs/day, they now take home $500,000 to make 100,000 TVs at the new production rate.

In other words, labor’s share of value creation constantly declines as mechanization boosts productivity. Marx described the impact of another factor: oversupply of labor. As rural agricultural workers flooded into cities for jobs that paid cash, there was an abundance of factory labor. Competition for jobs pushes wages lower, so workers faced a double-whammy: their share of production relentlessly declined as productivity rose, and the pressure on wages constantly rose as per unit labor costs declined.

The competition to outproduce industrial rivals with cheaper per-unit production costs and labor’s competition for jobs both generate a structural crisis in capitalism: as production of goods rises, both the cost per unit and the number of workers earning enough to buy the goods declines.

Lowering the cost of the TV no longer sells units if there are not enough workers with jobs to buy them. If you think this is only a 19th century or developing-world phenomenon, please examine this chart:

This chart shows that labor’s share of the economic output is declining sharply.The reasons? The same two Marx identified: a surplus of labor and declining per unit labor cost. In effect, the economy produces more goods and services with less labor. Since the demand for labor is declining while the supply of workers increases, competition drives wages lower.

The crisis Marx foresaw appeared to unfold in the 1930s, but the expansive central state became a Savior State, marshalling its ability borrow huge sums of money to create demand by fiat.

In the postwar boom, the low-productivity service sector expanded as labor shared the bounty of cheap energy and rising industrial productivity.

Increasing cost of energy and marginal returns pushed capitalism back into crisis in the 1970s, but three forces emerged to increase labor’s purchasing power:

1. The discovery of supergiant oil fields in Alaska, the North Sea and Africa.

2. Computerization improved the productivity of the service sector.

3. Financialization of the developed economies artificially boosted the purchasing power of labor and finance capital via highly leveraged debt and declining interest rates.

All those forces have been spent. No new supergiant fields have been discovered in the past 20 years, and while improving technology is extracting more oil from existing fields, that is maintaining global production rather than ramping it up by 25%-50%.

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