In a provocatively titled article posted on, Austerity is Bad for Us and No Fun, James Livingston, a professor of history at Rutgers University, argues that what is needed is more consumption and less investment if economic performance is to improve.  He’s sort of right; here’s an excerpt:

Robust, balanced growth requires a more equitable distribution of income that favors consumers over investors, with all that implies for public policy, social theory, and, yes, moral philosophy. But to see this last requirement clearly, we have to rid ourselves of the conventional wisdom on the heedless extravagance of consumer culture.

He makes an impassioned plea that the only way out of the dilemma in which the American economy finds itself is more consumption, which will spur more demand, which, in a virtuous cycle, will spur higher wages and employment and more consumption, etc.  It all makes perfect sense, except:  The American economy is not a closed economic system.  Because it is not a closed economic system, expanding American domestic consumption is exactly the wrong thing to do to improve overall economic performance.

It is not the American consumer that needs to consume more.  It is his Chinese, Vietnamese, Malaysian, etc., counterpart.  An increase in American consumerism would simply accrue to the benefit of Chinese, Vietnamese, Malaysian, et al, capitalists that are exploiting historically low living standards and a surfeit of willing workers in these countries to pay what amounts to slave wages.  Capitalism relentlessly seeks its lowest cost inputs.  If America saw a resurgence of consumerism about now, it would do nothing at all to relieve the structural problems of high domestic unemployment and massive trade deficits (which are inextricably linked) because the real source of the problem—exploitation of workers overseas—would persist.  What really needs to happen is a world-wide labor revolt, where the 99%, as Occupy Wall Street puts it, refuses to allow, in any corner of the world, exploitation by the 1%–the capitalists and the cabal of governments, including our own, supporting them.    

If the OWS malcontents really wanted to change the world, they would quit buying consumer goods that are produced by workers earning slave wages overseas.  Every iPhone an American buys supports the exploitation of workers overseas, while at the same time driving down wages and employment in America.  That’s what it means to run trade deficits with countries that allow the exploitation of their workers by capitalists.  Shaving a few dollars off the retail price of an iPhone hardly seems a bargain when the knock-on effects are considered.

The unsustainability of the whole enterprise—of importing products created by workers toiling in sweat shops overseas that are bought by American workers who must finance their purchases because their wages have been stagnating or falling to meet the sweat shop labor rates—came to a head in the Great Recession.  Forget all the nonsense about housing causing the financial crisis.  Housing was a symptom, not the cause.  The true cause was that the massive profits generated by worker exploitation overseas had nowhere to profitably go.

The overseas workers were paid barely enough to survive, so couldn’t afford to buy what they were creating for export.   American wages were depressed because of the slave wages paid to their overseas competitors, so they couldn’t afford to buy without financing.  The ever-expanding pile of profits accruing to our trading partners were then employed to finance American consumption (there is never a trade deficit without a corresponding financial surplus)—everything from McMansions in the suburbs, to the granite countertops required in them, to the hulking SUV’s parked in their driveways.  The Federal Reserve aided and abetted the unsustainable international situation by continually ratcheting down the domestic price of money, ironically, in a bid to spur expansion in domestic employment.

Keynes coined the phrase “animal spirits” to describe the capitalist urge to relentlessly pursue profits, which he, and most every economist since him, has considered a good thing, assuming that these animal spirits provide the impetus for the capitalist to invest and hire workers, etc.  This is not true.  Animal spirits provide the impetus for the capitalist to acquire ever-increasing piles of capital via producing as cheaply and selling as expensively as he can get away with.   But “producing as cheaply” basically means viewing labor as a dehumanized input to be exploited if possible.  Exploiting workers may work for one or two capitalists in an economic system, but when the whole system attempts to do it, capitalism fails of its essential purpose, just as Marx predicted it would, even as he pinned the blame on the inherent inequity in the system.  Either way, capitalism fails.  The exploited workers are the ones that capitalists rely upon to make a market for their production, but the workers can’t afford to buy what they produce, so demand collapses.  This—overproduction yielding to collapsed demand–is what caused the Great Depression; this also, in a modified international version, is what caused the Great Recession:  American capitalists and the Chinese government conspired to exploit Chinese laborers to sell to the American market, but American demand collapsed under the weight of stagnating domestic wages (due to competition with Chinese slave wages) and ballooning debt.   

Capitalism was not meant to operate like this.  Adam Smith’s virtuous capitalist, producing for his own selfish purposes but ultimately benefiting all of society through his efforts, has perhaps been realized, if only partially, in the two or three decades after the Second World War, and then only in the West and Japan.  But as soon as workers in the post-war domestic economies began receiving wages commensurate with the value they added to the goods and services produced, capitalists fled elsewhere to again exploit laborers on foreign shores.   Global capitalism today isn’t the imperialistic capitalism of the eighteenth and nineteenth centuries where Europeans and Americans exploited laborers from India and China, and enslaved Africans solely for their benefit—the oligarchies of these lands now keep much of the spoils for themselves–but it is every bit as nefarious, and every bit as unstable, both domestically and abroad.

But what’s the answer?  Is it wholesale socialism, where the state effectively owns all the factors, including labor, of production?  It must be observed that the state already effectively owns the factors of production.  If no entity exists that is more powerful than the state, and even global capitalists like General Electric can’t claim power exceeding that of the governments of the countries in which they operates, then global capitalists exist at the pleasure of the state.  If by socialism it is meant that some central bureaucracy should allocate resources and set prices, we already have that in the US Federal Reserve and, at least for the time being, with the European Central Bank. 

What of increasing taxes on the rich, an infatuation of the Democrats in America?  A punitive tax on profits generated overseas by global capitalists based in America might seem to get at the heart of the problem, but in truth, would only force companies to locate elsewhere, or find ways around repatriating profits for shareholders.  It’s hard to see how punitively taxing domestic income at some upper level would get at the problem. 

But it’s easy to see how banks and bankers that are beholden to taxpayers for implicit and explicit indemnification of losses could be forced to adopt a pay scale commensurate with government agency workers (not Fannie and Freddie’s to be sure).   Put Bank of America and Goldman Sachs, et al, on a GS salary scale if they wish to be considered for government indemnification in the event of catastrophe.  While you’re at it, tax their profits about 75% or so.  They are quasi-government entities, and the taxpayers supporting them should get the lion’s share of the returns they generate.  If they don’t agree, then they’re on their own.  It shouldn’t be too hard, especially with commercial banks that have their deposits insured by the FDIC, but it wouldn’t solve the bigger problem.

In truth, the only remedy for exploitative capitalism is just as Marx described—a revolution of the proletariat, but not in the West and Japan, instead in the developing countries, helpfully aided by the 99% in the West and Japan.  A vast labor movement, such as that experienced in the West before and during the Great Depression, except transcending national borders and focusing on the developing world, seems ultimately inevitable, especially considering that world demographic realities mean the pool of exploitable labor will cease growing and begin declining in the next thirty to forty years, if current trends continue.  Without new humans to exploit, where then will the capitalists go?

An economic system necessarily exists for the benefits of the human beings comprising it—not just a few of them, but all of them.  All the protestations of philosophers and psychologists to the contrary, man is not an inherently social creature.  He engages in the society of an economic system because he believes that by doing so he might better secure the necessaries of life.  He accepts that he must abandon a good measure of his selfish impulses in order to enjoy the benefits of economic engagement. 

Exploitative capitalism is a pox on the social contract with which a civilized economy depends.  Capitalists abandon all restraint, and selfishly exploit their fellows for their own gain, letting their animal spirits run riot. Governments aid and abet their exploitative tendencies, salivating at the taxes thrown off by the massive profits generated when treating human beings as little more than pack animals.  Instability inheres, both because of inequity in distribution, and because of the occasional failure of the system (due to worker exploitation) to deliver the necessaries of life that prompted economic engagement in the first place.  There are a great many more workers than capitalists.  All that is required to return the economic system to the purposes for which it was originally intended is for enough of the workers to become disenchanted enough that they are willing to coalesce and exert their numerical superiority. 

America’s 99% don’t need to consume more to fix the American economy.  They need to aid their counterparts overseas to consume more by demanding the governments and capitalists that are exploiting them share more of the wealth they help create.