Economic Update: Why Capitalism Demonizes Government

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Updates on UK war on "Unexplained Wealth," why capitalism needs yet attacks government, historical reality of low wages in US, cozy deals between big corporations and credit rating agencies again. 
In the second half of the show, Prof. Wolff talks about capitalism's oscillations between nationalist and internationalist phases (are we now moving backwards to nationalism again?) and once more on the inefficiency and immorality of markets as a mechanism of distribution.

Transcript has been edited for clarity

Welcome friends to another edition of Economic Update. It's a weekly program devoted to the economic dimensions of our lives - jobs, debts, incomes - for ourselves, for our children coming down the road. I'm your host Richard Wolff. I've been a professor of economics all my adult life and I hope that has prepared me well to offer you these economic updates in terms of what's going on all around us in the economy.

I want to talk about the economics of crime to begin this week's program. And I want to talk about a particular kind of crime and how a country, namely the United Kingdom, Britain, deals with it. Partly in order to underscore the importance of it and in order to underscore that nothing comparable to that exists here in the United States, and indeed in many countries. The United Kingdom has an office called the National Crime Agency. It is charged with exploring and investigating “unexplained wealth.” And it does this by issuing unexplained wealth orders when it has reason to believe that corrupt money from abroad was laundered through British enterprises to accumulate wealth inside the United Kingdom. Here's an example of what the National Crime Agency of Britain recently did. It issued an unexplained wealth order against Zamira Hajiyeva, of Azerbaijan. Azerbaijan was a former republic within the Union of Soviet Socialist Republics. It is now an independent country where she and her husband, Jahangir Hajiyev, of Azerbaijan. Her husband was a former bank employee. So, he's an employee of the bank who went on to become the chairman of that bank. Here's what got them into the attention of the National Crime Agency. First, they bought a $15 million dollar home in downtown London. Number two: over a 10-year period, the last decade, she spent nearly $20 million dollars at Harrods department store. That works out to $5,000 per day. She also purchased during that time a $12 million dollar golf club in rural Britain. Goodness! Her husband, Jahangir Hajiyev, was jailed in 2016, in his native Azerbaijan, a sentence of 15 years, for being convicted of a major fraud and embezzlement that saw tens of millions of pounds disappear from the bank. Judges ordered him to repay $39 million dollars. Seven years earlier, as part of the crime and the trial, it turned out a company no one knew about in the British Virgin Islands paid $15 million for another large home, minutes from the Harrods department store, for them in London. This kind of crime, particularly on the part of executives who oversee large quantities of money in banks and other lending institutions, vanishes all the time. It is busily pursued, if and when the authorities find out about it, by them. Rarely, as in this case, is something done about it.

I want you to understand that when you add up all the relatively minor characters like this one, in all of the 195 countries of the world, who sit in the local banks and insurance companies and large corporations, when you add that all up we're talking massive amounts of money. And that money is typically hidden. And one of the ways it's hidden most is move it to another country and in that other country buy homes and housing so that the money disappears and the people who stole the money now are the owners of housing and golf clubs and other things in other countries. It's a kind of money laundering. The British are determined to get at it. Here in the United States there's no comparable agency and no comparable effort.

I live in New York City and often I walk down places like Madison Avenue, Fifth Avenue, Park Avenue. And I do so with my wife in the evening when it's dark. And one of the sports of New York City is to notice on a weekday that the vast majority of windows are dark. They're dark at 6:00, they're dark at 9:00, and they're dark at 11:00. And if you talk to the doorman in many of these buildings he'll tell you very quickly that yes these apartments are money being stored in the form of an apartment by somebody who lives thousands of miles away. Somebody who got that money - Lord knows how - and brought it over here to buy an apartment that’s simply a storage locker for their ill-gotten gains. Of course, a government that really wanted to do the people's work of getting that money back, so it is in the hands of the people from whom it ultimately was stolen, would be busy on the case. Ours isn't.

The next topic has to do with a fundamental contradiction of capitalist systems. On the one hand, government is constantly brought in to perform absolutely crucial services. Let me give you just a random list here. In the United States, the Louisiana Purchase. Half of what is now the United States, was bought by the government to enlarge the United States, way back at the beginning of the 19th century. Killing off huge numbers of Native Americans was a governmental activity. Funding the Lewis and Clark exhibition, which added another quarter of what is now the United States, was a government operation. Managing the money supply of the United States was, and is, a government operation. Bailing out banks and corporations, including all of the biggest ones, was and is, a function of the government. Operating tariffs wars against other countries was, and is, a government function. These have been crucial. And the list could go on. So how do you explain, at the same time, that the leaders of capitalism, who call in the government to do all these things, are constantly denouncing the government as wasteful, as inefficient, as a burden that should get off the back of the private enterprise, to unleash…. What's going on here? You denounce it and you turn to it. You need it and you reject it. All at the same time. This is a contradiction. How do you explain it? Here's the explanation. Private capitalists have always feared the government and the reason is simple. Government in modern society, like the United States or Britain or any other major country or any country, virtually, has universal suffrage. That means everybody gets a vote. The vast majority of people in every capitalist country are not capitalists. They don't have the money. They don't have the social position. They don't have the connections. They don't have the pedigree. They don't have the education. You get the picture. So, the majority of people, who are the majority voting, are not the capitalists. Meanwhile the capital has drawn into their hands the bulk of the wealth and the economic power. This is an unstable situation. The mass of people don't have wealth. The mass of people don't have much power, but they have that vote. So, the temptation will be, sooner or later, and all corporate executives know this, the temptation will be for the majority to use what they have - the vote - to undo the results of the economy. If economic wealth is distributed very unequally the vote can change that. By passing a law taxing wealth, wealthy property, wealthy income, there are a hundred other ways. So, you denounce the government, keep it weak, keep it small, lest the people with their vote use it against you. But at the same time your system has so many problems. For example, the crash of 1929, or the crash of 2008, that you need the government to come in and rescue you. You're torn. So what you try to do is control the government to prevent it from ever being the agent of the people's needs, while it is still big and strong enough to save you from capitalism's many failures, its instability, etc. It's a contradiction that can flop either way under the pressure of circumstance. It's not an efficient or an effective system.


My next update is a response to your questions. What is the final story, you want to know, about the minimum wage? Well, the first thing to tell you about the minimum wage is that at the federal level, that covers the whole country, the federal government has set a minimum wage. It is $7.25 per hour, if you are not a tipped worker. If you're a waitress or bartend, and you get a tip, the minimum wage in this country is $2.13. I really want to let that sink in: $2.13 for a tipped worker, $7.25. In most parts of the United States, you cannot live on that amount of money. It is a minimum wage that doesn't give you a minimum standard of living. It's so bad that there are 39 states, out of 50, that have a higher minimum wage for their state than the federal one. Right now, [as of 11/26/2018] the highest minimum wage in the country for non-tipped workers is $11.50 in the state of Washington. It's $11 in California and Massachusetts and then on down. In 21 states the wage is the same $7.25. Okay. Here's the situation. Over the last 40 years we have seen the following, if we divide up low wages, middle level wages, and high wages. Low wages, adjusted for prices, are lower today than they were in 1980. Middle level wages are about the same, slightly above, what they were in 1980. People with high wages are getting 40% more, when you adjust for prices compared to what they got before. In other words, the majority of people have not been made better off over the last 40 years. We have a very low minimum wage and we have treated the wage earners of this capitalist system horribly. There's no other way to say it. This is a capitalism that fails to deliver a decent minimum standard of living to the majority of the working class of this country, which helps explain many things that are going on in this society and is something that ought to be addressed even though from the president and the Republicans and the Democrats too, the conversation is about many topics but not about the wage, the minimum wage or the level of wages. No big campaign. No big media exposure. Next to nothing.

My last update is also about Britain. It's boring to have to tell you this but there's a big struggle in Britain about the collapse of a huge construction company called Carillion. And here's why it's getting attention. The big four accounting firms in the world in the world - Deloitte, Ernst & Young, KPMG and Price, Waterhouse, Coopers - they are the ones who said everything was ok with that company. And now it's revealed that there's something wrong with having a company pay a fee to another company to say what good their credit is, because you can't rely on it. We learned that in 2008 but like all the other lessons no one's paying attention. We've come to the end of the first half of, Economic Update. I want to ask you again to become subscribers on our YouTube channel and follow us on Facebook, Twitter and Instagram. Please make use of our website democracyatwork.info where you can find many ways to interact with us. And of course, thank you to our Patreon community whose support is vital and enormously appreciated. Please stay with us. We'll be right back.


Welcome friends to the second half of today's edition of Economic Update. In today's edition of the second half, we're going to be talking about two major topics. The first one has to do with a kind of oscillation, of swinging back and forth between nationalism and internationalism. This has been going on with capitalism for a long time. We're in the middle right now of what may be a shift again and so it's the right time to talk about it. I'm going to begin with the 19th and 20th centuries. Capitalism in those years was mostly, not all together, but mostly, nationalist. That is, countries where capitalism was developing would be protective, tried to be protective of their developing industries. They often call them infant industries because they were just getting going as employer-employee organizations of production. There was one country that was ahead of everybody else, the place where capitalism got going first as the dominant economy, and that was Britain. And Britain had a global Empire, as I think most of you know, running from India in Asia to South Africa to the United States, before we became an independent country, etc, etc. The British, because they were so powerful and so much more developed, were kind of in favor of free trade and they maintained the control of the world to be the one to get the most out of free trade. But it made countries that were trying to come up, Britain's competitors if you like, mostly the United States and Germany, but other countries too, but particularly the United States and Germany, it made them wary of dealing in a world of free trade because Britain had all the advantages. So one of the things that Germany and the United States did through much of the 19th and 20th centuries, particularly the earlier part of the 20th century, was to use tariffs to protect themselves, to make it hard for the British to come in, to create all kinds of barriers so that they were in a sense reserved the economy of their country for their own capitalists, reserve the American market for American capital, the German market for Germany, the French market for French capitalists, the Russian market for Russian capitalists.

And so, the other countries could grow, even though the British remained dominant, until finally the United States and , and others, were strong enough to begin to push and to contest for power. At that point the British withdrew from their internationalism, began to close a wall around their empire trying to reserve everything from Australia to South Africa to India for themselves and keep the Germans and the Americans out. And the Americans and Germans reacted by grabbing parts of Africa, the United States grabbed Cuba, Philippines, things like that. And it would have continued, this nationalism, of countries protecting each other, had it not been for something that happened as a result of this struggle and the competition among national capitalisms. That result was WWI, followed a few years later by WWII. These were world wars that literally inflamed the whole world, the numbers of people killed, the destruction of property, was like nothing the world had ever seen. It turned out that competing national capitalisms was a route to war. And if you add the cost of war, then this was a system that people were very skeptical about. In response to WWI an effort was made to create a League of Nations, it was called, that would work out the problems other than by war. That fell apart when the nationalism rose again, this time, in the German and Italian and Japanese cases. They were going to develop their own economy, free then of the power of the new dominant player, which wasn't so much England which was shrinking, but the United States which was emerging. It didn't work and we had WWII. Here, as destructive as WWI, followed not by the League of Nations, but by the United Nations, trying to put more teeth in the notion, we have to figure out a way to run the economy that doesn't produce cataclysmic world wars. That led to a switch.

After WWII, that is, after 1945, the United States became the dominant world power. It effectively replaced Britain as the controller of the whole thing. And therefore, the United States was in favor of free trade because its capitalists were in a better position to profit from free trade than were anybody else's. But the dominance of the whole United States was so total that we had a period, half a century roughly from the end of WWII to now, when we had internationalism, when everybody at least gave glib lip service to the fact that our economy is now global. That we shouldn't have trade barriers. We shouldn't have tariffs. We developed institutions like the General Agreement on Tariffs and Trade, the GATT, which functioned to get rid of tariffs around the world, to get rid of barriers. We were told about globalization as the new wave of the future. That globalization would secure peace. That globalization would allow us to become wealthy by making the world more efficient, creat[ing] a big middle class, to bring prosperity. My profession - the economics profession - became almost poetic in the promises of what a globalized economy would do for us all. But along the way, globalization was used by capitalists just as nationalism had been used by them before. And what we saw was more and more inequality emerging in countries as a result of globalization. When corporations left Western Europe, North America and Japan, and moved over the last 30 years to China, India and Brazil, they moved to take advantage of low wages. That made their profits higher but drove down the wages in North America, Western Europe and Japan. We all are living through that. That led to a revulsion of the mass of people around the world, feeling they had been betrayed by the broken promises of internationalism. Leading where? Leading to a reversion back to nationalism. Mr. Trump's wars on the rest of the world, Canada, Mexico, China, Europe, the turning inward of Italy, the turning inward of Britain as it votes to separate from Europe. This is the return of nationalism. But it's important that you all understand this is going backwards historically. And it's going backwards to something we left behind for a very good reason. The United States is hunkering down in a world of competing nationalisms. The last time we saw that the end result was war.

The solution to capitalism's oscillation from nationalism, to internationalism after WWII, and now back to nationalism is to recognize that the problem isn't nationalism or internationalism. The problem is a capitalism that uses both of those phases to do things that it oughtn't to be allowed to do. There are two ways to go now. Back to nationalism, with all the dangers it represents, or to go to a new and different economic system. The one that doesn't lock employers into employees, with employers trying always to find ways to cheapen the wages, to pay less, to make more profits. That's the problem. That system. And we would be better to move forward by changing systems than backward to a nationalism that we left for very good reasons after WWII.


The next topic is the market. I don't know how many times I have gone over this but your questions and your communications obviously mean I need to do this more, not less. The market. Is the market an efficient distributor of goods and services? For me the answer is an unequivocal – no! The market isn't particularly efficient. And the reasons for that are very simple.

First of all, and most basic, a market is not a place where we count the costs and benefits of things and decide to do those where the benefits are greater than the costs and to not do those where the costs are greater than the benefits. That's the fairy tale told to students. That's never true. Why not? Because many of the costs of doing business are not costs that the business has to pay. And therefore, they're not counted by the business. And therefore, the decisions the business made don't take into account all the costs. The simplest example comes from ecology. It may be very profitable for a laundry to exist in a community where the money they charge to clean our clothes is greater than the cost to clean our clothes. What nobody counts, not you, not me and not that business, is the smokestack above the laundry that emits into the air all kinds of particulate matter from burning whatever they burn: oil, gas. Those little pieces, they have all kinds of effects in the community but they're not the problem of a capitalist business. Let me give you some lists. People breathe them in and they get emphysema. They get lung disease. They have to go to the doctor more often. But those particulates, those pieces, they also interact with the tire in your car. So you have to replace the tire more often. They also interact with the paint on your house. So you have to paint it more often. I could go on and on. Who pays for all of that? You do. I do. Medical bills, tire costs, paint costs. But the company that causes the problem doesn't have to. If we added all the costs that that laundry really costs the economy we live in, we wouldn't put the laundry there. Because the costs, if you really add them up, are greater than the profits. And, the costs are borne by all of us. The profits are only in the hands of whoever owns the company. That's undemocratic. That's unfair. But it's inefficient because an efficiency calculus, if we could actually do it, would say not to put that laundry there.

So, markets don't get you efficiency. Well, what do markets do? They distribute things in a very particular way.

If things are scarce, if there's not enough ice cream cones for all of us to get one, I'm going to go to the guy who's selling the ice cream cones, and I'm going to say: you're charging how much? $3, he says. Good, he said I'll give you $4 because I've got one and I know they're scarce. But the guy standing next to me, he understands the game. He offers $5. And the woman next to him offers $6. You see where this is going. The price of cones will go up until it's so high that lots of people who wanted the cones can't afford them anymore. Or to say the same thing simply. Markets allocate scarce goods and services to those with the most money. That's what they do. That isn't efficient. That isn't moral. That isn't ethical. I ask all of you to take whatever morals or ethics you have and ask yourself the question - is distributing scarce goods to the people with the most money the best moral way to do it? If there isn't enough milk to go around, should an older person who doesn't need it but has the money get it, while a child who needs it to grow, is denied it? You really want to do that? You really want to endorse that? No, markets are not efficient. Markets are a way to make sure the economy serves, first and foremost, those who are the richest within it. And believe me, they'll use the market first and foremost to STAY the richest. So that the market serves what THEY want the market to do. Don't be fooled! The market is not a neutral efficiency mechanism. It is a highly partisan, biased, service to the rich.

Transcript by Alyssa Bonilla

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