[S12 E32] New
In this week's show, Prof. Wolff defines recession and shows its relation to inflation and stagflation in their respective roles within capitalism's inherent instability. Rooted in the structure of capitalism, recessions represent both costly burdens on employers and employees alike and also strong incentives to question, challenge, and go beyond capitalism. The economics profession has been unable to end recessions despite centuries of trying. The profession often tries to hide the capitalist roots of recession instead. Wolff concludes with how system change might finally "solve" capitalism's intractable instability problem.
Transcript has been edited for clarity
Welcome friends to another edition of “Economic Update,” a weekly program devoted to the economic dimensions of our lives. I am your host, Richard Wolff. Today's program is going to be dedicated to one particular topic: recession. It is what we are in now. It is what the country is fearful about. It is what we have been talking about across the mass media. It is time for some careful analysis of what this is and where it is taking us. Let us begin.
Recession. Here is the simple definition: it is when the economy turns down, usually suddenly, over a very few number of weeks and maybe a few months. Large numbers of people are either unemployed or forced to take part-time work or finding their jobs in danger. Small businesses go out of business. Medium and large businesses find their activities shrinking. They cannot produce as much. They cannot sell as much. Because of all of that, the tax revenues received by local communities and by the country as a whole start shrinking, which means that the government is pinched and cannot do what it normally would like to do and is asked to do by the people. In other words, it is an economic downturn. In fact, the word recession has lots of synonyms: downturn; bust; crash; crisis; depression. I could go on. Why is it that we have so many words? Why is it that I am talking about recession?
Recession is part of the capitalist economic system. It is as old as capitalism itself: three or four hundred years, if you count the beginning of capitalism in 17th and 18th century England. We have an agency here in the United States called the National Bureau of Economic Research, which keeps track of when the recessions occur. Their research shows that they have occurred, on the average, every four to seven years, pretty much wherever capitalism has settled in. Now, of course, that is an average: sometimes it can take longer; sometimes it can take shorter. Moreover, recessions vary. Sometimes, the number of people losing their jobs is relatively small, at least at the beginning. Sometimes, it is catastrophic. For example, the recession in 2020, a mere two and a half years ago, was catastrophic, huge. Tens of millions of Americans lost their jobs in a matter of weeks. Now, that had something to do with the pandemic and COVID, as well as a crash, but that one was a doozy. By comparison, the one we are in now, is at least, so far, less severe. Recessions also vary in how long they last. Some, only a few months; some, years. The Great Depression (no surprise it got called that) lasted from 1929 to about 1940-41. That is 11 years, and gives you an idea of how bad they can get.
The other side of recession in an economic system called capitalism is inflation. Suddenly, it is a kind of crazy time. We are in that now too, in the sense that prices are going up. So, businesses are eager to hire people and invest and produce because whatever the price they can charge now (that is profitable) that is going to be higher two weeks, two months, two years from now, making their profits even bigger. Inflation is a kind of over-speeding of the economy, the flip side of which is a recession. Here is the worst thing about capitalism's instability: it lurches from one to the other. Indeed, we are right now, as I am talking with you, coming to the end of a good year or so of inflation and finding ourselves plunging into a recession. That is very common. The recessions provoke inflations. The inflations provoke recessions. This is an unstable economy. Indeed, you will sometimes see (and that has happened more and more in recent years) simultaneously recession and inflation. We have a word for that: stagflation. It is a mixture of the word stagnation (economy going nowhere) plus prices going nuts. That is pretty much what we have now.
The way to summarize this is to say that capitalism is an extraordinarily unstable system. In the lectures I used to give in the university, I would at this point, lean across the podium and say to my students: ‘If you lived with a roommate as unstable as capitalism is, you would have moved out long ago.’ It is a little harder to move out of an economic system. Recessions have troubled capitalism from the beginning. They trouble both the employer class and the employee class. In a peculiar way, recessions are something nobody wants but that this system imposes on all of us, over and over again, which is a very good reason to question a system that works like this.
How does it hurt employers? Well, employers can only make profits if they got people working and if they can sell what they produce. Recession is precisely those moments when they cannot employ the people they used to because they cannot sell what they are capable of producing. So, they lay workers off. That is not good for the workers either of course, but it is not good for employers and their profits. Also, it makes a mockery of capitalism's claim to be efficient. You can be very efficient when you are working but all of that is lost and negated if for long periods of time you are not working. Your machines sit idle, and your workers are sitting at home, worried about their future. It does not do anything for your profits either. So, employers do not like recessions.
What about employees? They take the real lion's share of the suffering: they lose their jobs; they lose the security that comes with a job; they lose the income that they get paid for a job; and their lives are disrupted. Think about it, if they happen every four to seven years, your life is disrupted on average, every four to seven years, unless a special arrangement is made, and I will come back to that in a minute. Here is what we know from research: During recessions, alcoholism gets worse in our culture; (should be no surprise) domestic disputes get worse; divorce rises; abuse of family members goes up; and loss of self-esteem happens as workers out of work blame themselves, rather than an unstable system for doing this. People who get repeatedly thrown out of work every four to seven years, lose their whole relationship to the labor process. They become known as an underclass, as the people who do not look for work anymore because they have simply been traumatized by unemployment too many times.
Unemployment is so horrible that in many societies they have arranged things, so a specialized minority is the one that is fired when the economy goes down, then gets rehired if they are lucky, when it turns back up, only to be re-fired again when it turns down. I call them the shock absorbers of capitalism's instability. In the United States, it has worked like this: immigrants, African-Americans, and women have been the ones brought into the labor force when it is booming and thrown out of work the minute the next recession hits. That is why they are marginal to the economic system. Their incomes are lower; their place in the pecking order is lower; and their wealth accumulation is lower. That is right. They are the shock absorbers, thrown back to their country of origin when we do not want them here because we do not have jobs; or thrown back into the household if they are women; or thrown back into the ghettos of African-American communities. In other words, there is a link between the instability of capitalism and the racism, sexism, and anti-immigration surges we keep noticing in our culture. Something as awful for both employers and employees as this built-in instability has had the logical result. Capitalists are afraid because one of the items, I have not mentioned until this moment, that follows from recession is that more and more people question the system. What kind of a system is that, that presents us with this lurching back and forth inflation, recession, recession, inflation? What kind of a system is this?
Maybe the solution is not to go fix this and that little detail. Maybe, it is to change a system, to get one that is not so unstable in the first place. That really frightens the people who like capitalism, who sit at the top, the one percent, the rich folks, the powerful folks, the ones who are never unemployed. They have tried everything to overcome this problem. For 300 years, they have been trying to figure out how to have a capitalism without instability and obviously it is a big fat failure because we are in one right now. Obviously, for the 300 years they did not figure it out. The closest they came was when a very smart economist named John Maynard Keynes, a British economist, in the depths of the Depression of the 1930s, came up with the monetary policy and fiscal policy. The government could implement these policies, not to stop the cycles (obviously we have not learned how to do that), but to make them a little less awful than they might otherwise have been if the government did not intervene. That is why we have a Federal Reserve to come in there and manipulate the money supply. So, if there is a recession, and people are losing their jobs, they quickly bring down the interest rate, so it is cheaper for companies to borrow. Hopefully, they will borrow more, and they will hire workers, and the recession will not be so bad. As we are seeing now, if there is an inflation, they jack up the interest rates to make it harder for businesses and people to borrow (more expensive). They hope that by having less borrowing, there will be less buying, and that will make the sellers of goods less likely to jack up the prices. Wow! All that this is, is late in the day, make the business cycle less awful and horrible than it might otherwise have been. That is not enough many times. That is why President Nixon back in 1971 (when we had another horrible inflation, of course) took a very different step, not raising or lowering interest rates. What he did is, he went on radio and television and said: ‘As of tomorrow morning, nobody raises a price, nobody raises a wage. If you do it, we will arrest you and throw you in the clink.’ Well, let us stop the inflation on a dime because there is no problem solving these problems. It is a political question of whether the system is able to focus and make a decision to deal with these problems. What capitalism has shown us in three or four hundred years of its history is that it lacks the capacity to do that. That is a flaw and failure of the system.
We have come to the end of the first part of today's show about recessions. Before we move on, I want to remind everyone that “Economic Update” is produced by Democracy at Work, a small donor-funded, non-profit media organization, celebrating ten years of
creating system challenging content. For example, my book called Understanding Socialism, which tackles the taboos of socialism while revealing the often-hidden histories of socialism. It offers a way forward by establishing real democracy in the workplace. It is available with all the other things we produce at our website Democracy at Work.info. If you have not already, be sure to follow us on social media, join our
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Welcome back friends to the second half of today's “Economic Update” devoted to the topic of recessions and what they mean.
Before the break, I was ending up a segment of this program, talking about how, where, and when governments have had to go far beyond Keynesian monetary and fiscal policy to intervene more actively because the system was lurching too far into the either/or of inflation and recession. I gave the example of President Nixon's intervention in 1971.
Here is another intervention that has happened from time to time, most recently, and most dramatically, under the presidency of Franklin Roosevelt in the 1930s. The recession then was so bad that it got an even worse name to signal how bad it was: depression. A recession, one jokester once said, is when your neighbor gets unemployed; a depression is what you do. That was what happened in the 1930s. The president stepped in and did something remarkable. He did not wait to raise or lower interest rates. He did that, but he knew that was not enough. He did not move around with taxes, and he did not do that so much either. I mean, he did it, but he did not rely on it. He took a massive step. He observed that the private capitalist sector was in a recession so bad that millions of our citizens could not get a job. At the same time, we did not have enough food, clothing, and shelter for our people, which means we had the people who could produce it; we had the raw materials and factories that could allow it to be made; and we had the need for the output. We had a capitalist system that could not put these things together: the people who want the work; the machinery; and raw materials that are available to meet the needs we know we have. So, he decided ‘I am going to step in and do it myself as president.’ Between 1933 and 1941, somewhere in the neighborhood of 12 to 15 million Americans were hired by the federal government to do useful things; not to make a profit but to do useful things because those two things are not the same.
The failure of capitalism to solve recessions, to prevent them from happening has led all kinds of economists to come up with a truly impressive list of excuses, of diversions, of ways of hiding the failure of this system to fix its own horrible instability. I am going to give you a sample. About a hundred years ago, my fellow economists, that is a profession that I have been in all my life, came up with a series of sunspot theories. I kid you not, mature men. There were not any women in those days in our profession. Smart men began to show that there was a correlation between strange behavior of the gases that comprise the sun and our business cycles, wanting to make us believe that the business cycle is somehow, get ready, natural. It is just the way it is. It is nothing that anybody can fix. We should not be angry at capitalism because it is just part of nature. We make about as much sense as being angry at capitalism because it rained on the day you had set aside for your picnic. If that was not odd enough, here comes another one. Moon! Well, if the sun is workable, why not make a career for yourself as an economist by coming up with a theory that says the shape of the moon, the intensity of light from the moon, the different shapes of the moon during the seasons, all of these things shape economics or they shape maybe farming and the farming cycle then shapes the economy. Notice, these are theories of the business cycle: this lurching from inflation to recession and back again that exempts capitalism as a system, and the whole employer-employee way of organizing production from any criticism at all.
Here is another way: you give a name to each economic recession. Give it its own name and hope that nobody notices that while the names change every four to seven years we have one of these things. For example, in the 21st century, the first crash recession we had in the spring of 2000, got the name dot-com crash, as if it was the peculiar result of something happening to dot-com corporations in the stock market. A mere eight years later, when we had the next horrible recession, it was called the sub-prime mortgage recession, as if it was something about mortgages. Then, two years ago, we were told we were in a COVID recession. Oh goodness! Give it a separate name and maybe people will think each time it has something to do with the stock market or with mortgages or with diseases; just not an economic system that works this way. The latest ones, I do not want to leave anybody out, all the people who actually believe that the economic troubles of this country, fundamentally its instability, can be blamed on immigrants, as if somehow in some magic no one specifies they are the ones at fault. The latest one of course, the war in Ukraine and Russia. Why not!
The notion that capitalism has in it mechanisms that make it crash every four to seven years is what is being avoided here. We are not going to avoid it. We are going to jump right into it. Why? What capitalism does can be explained by my telling you a little metaphorical story, if you permit me. You are walking down the street and to take a shortcut you go through a dark alley. Part of you knows it probably is not a good idea but you are in a rush, so you go. True enough, halfway down the dark alley, an unpleasant person jumps out at you and says to you: ‘Okay, you can either die at the end of my gun or die at the end of my knife, but it is your choice.’ Now, you know and I know that if you sit there agonizing or you stand there trying to figure out which way to go, you have made a big mistake because what you need and want is not to face that choice. Capitalism says: ‘Well, you can choose inflation or recession.’ Literally, as I am talking to you, the leaders of our economy in Washington and the corporate headquarters are debating that question: Which is worse? Letting the inflation keep going with all the consequences of that or plunging the economy into a recession by jacking up interest rates with all the bad things that flow from that? We are being asked to choose between two options, neither of which we want and neither of which we have to suffer. The mechanism in capitalism that causes this is not complicated. When things are going well, companies are growing and hiring workers, they buy stuff from other companies who feel all good: ‘My economy is going well, I can sell what I produce.’ So, they hire people. Everybody gets in on it. Every individual capitalist cashes in but of course if they all do this and they all hire and they all produce more it is really only a matter of time until the exploding output exceeds what is able to be sold. Then suddenly companies are stuck with unsaleable inventory and they cut back and they lay off workers. Of course, when they lay off workers, those workers have no income and they can not go to the store and buy the way they did. Somebody else who expected to sell to them will not be able to. It is a snowball effect down. It was a snowball effect up, it was a snowball down. That is how the system works. That is why it is like that. The way to stop it is to change the system. I am modest. All I would ask is that in our national conversation, we don't just talk about the knife or the gun, and we don't just talk about monetary policy and fiscal policy. Why don't we also talk about changing the system and what would that mean?
Well, let me end with that today by talking about how we could set up a system that does not behave this way. First, we need a system that puts a priority not on the profit of the individual enterprise, but on the well-being of the economy as a whole. Capitalism is a system that puts into power a tiny group of people, the one percent, who run the businesses and who run them, as they tell us, for the profitability (that is the portion of the revenue of the company that they get). They don't run the business for the workers. They would laugh at the idea but the workers are the majority of the country. If you want the economic system to work for the majority, you can not put it in the hands of a tiny minority. This is not rocket science.
The problem with capitalism is the profit-driven behavior of the one percent who own and run the enterprises. It is a competitive system. They all rush to produce when the economy is good. They over produce. They cannot sell it. Boom! It goes down. Each of them is desperately trying to survive and they cut their employees as fast as they hire them when the wind changes. We are all left with an economic system lurching from pillar to post, from inflation to recession, and trying to make a life in between these things. We put the women and the African-Americans and the immigrants in a special place. We make the instability hit them the hardest so that it hits the rest of us less hard but that is nothing to be proud of. You have a better solution. Change the system so it is not so unstable. The way you do that: make full employment a priority. Make keeping your job a priority. If there is not a demand for whatever it is you help to produce in whatever enterprise you work, then the system trains you. It helps pay for moving you to something else that is useful in our community. That does not hurt you personally, and that does not create the ultimate absurdity of a recession when masses of people are thrown out of work so that they cannot produce (even though the machines and raw materials are sitting there) the output that the society needs. We know what our needs are. We know how to produce, and the people want to work. A system that can not put that together, that every four to seven years throws people out and then tries to fob us off on the crazy idea that sunspots or moon spots or Ukraine or something else is to blame, is a desperate system that does not want to and is not able to look at itself. We need a political movement that puts capitalism up there as the problem. That C is in an economic system that puts people in charge right at the beginning: worker co-ops. That is why we advocate for them because that takes the majority in each and every enterprise, every factory, every office, every store, and says: ‘You are going to run this and you are going to run it together with others whose job it is to give us all a job, to give us all a secure income, move us around as needed. Don't tell us we have to accept inflations, recessions, and stagflations. It is unnecessary and it should have been put aside long ago.’
Thank you all for your attention. I think this topic of recession deserves the consideration we have tried to provide and as always, I look forward to speaking with you again next week.
Transcript by Asma Siddiqi
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“Marxism always was the critical shadow of capitalism. Their interactions changed them both. Now Marxism is once again stepping into the light as capitalism shakes from its own excesses and confronts decline.”
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