Understanding Capitalism

COMPETITION, COMMAND, AND CHANGE

FOURTH EDITION

SAMUEL BOWLES
Santa Fe Institute

RICHARD EDWARDS
University of Nebraska - Lincoln

FRANK ROOSEVELT
Sarah Lawrence College (Emeritus)

MEHRENE LARUDEE
Hampshire College

New York Oxford

OXFORD UNIVERSITY PRESS
CONTENTS

PREFACE xix

LIST OF ILLUSTRATIONS xxiii

ACKNOWLEDGMENTS xxix

PART 1 POLITICAL ECONOMY

J Capitalism Shakes the World 1

The Permanent Technological Revolution 3

The Enrichment of Material Life 6
Growing Inequality 11
The Population Explosion and the Growth of Cities 12
The Changing Nature of Work 15
The Transformation of the Family 16
Threats to the Ecosystem 17
The Effects of Climate Change 17
Contamination 21
New Roles for Government 22
Globalization 23
Conclusion 26

H People, Preferences, and Society 29

Constraints, Preferences, and Beliefs 32

"Economic Man" Reconsidered 34
Human Nature and Cultural Differences 36
The Economy Produces People 39

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viii CONTENTS

The Cooperative Speeles 45

Conclusion 46

A Three-Dimensional Approach to Economics 49

Economic Systems and Capitalism 50

Three-Dimensional Economics 51
Competition 51
Command 52
Change 53
Neoclassical Economics 55
Values in Political Economy 57
Efficiency 59
Inputs and Outputs 59
Pareto Efficiency 60
Fairness 60
Democracy 62
Balancing Efficiency, Fairness, and Democracy 63

The Surplus Product: Conflict and Change 67

B
Economic Interdependence, Production, and Reproduction 69
Production 70
Links Between Production and Reproduction 71
A Labor Process Example: Making Pancakes 73
The Surplus Product 74
A Model of Production and Reproduction 78
Who Gets the Surplus? 80
Enlarging the Surplus 80
Application of Model to Labor 83
The Surplus Product and Conflict 84
The Surplus Product and Change 86

Capitalism as an Economic System 89

Class and Class Relationships 91

Classes and Economic Systems 93
Slavery 93
 CONTENTS ix

Feudalism 94
Distinctions Among Economic Systems 94
Capitalism 96
Commodities 97
Privately Owned Capital Goods 102
Wage Labor 108
Capitalism, the Surplus Product, and Profits 108
Conclusion 110

Government and the Economy 113

Rules of the Game: Government and the Capitalist Economy 115

The Emergence of Modern Legal Forms of
Corporate Business 115
Limited Liability 115
Corporate Personhood 116
From Competition to Monopoly 117
From National to Transnational 118
Democratic Government as Collective Provision for the
General Weifare 119
Government and the Distribution of Income, Wealth,
and Weifare in the Nineteenth Century 120
Railroad Financing: Public and Private Gains 121
Other Rules: Winners and Losers 123
Contention Between Capital and Labor over Rules 124
Voter Turnout in the United States and Around the World 126
Democracy in the Twentieth Century 128
Conclusion 130

U.S. Capitalism: Accumulation and Charge 132

Accumulation as a Source of Change 134

The Accumulation Process 135
Competition for Profits 136
Capitalism Comes to the United States 137
Social Structures of Accumulation 141
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Changing Strategies for Profit-Making 142

Consolidation and Decay of an SSA 143
The Stages of Capitalism in the United States 144
Competitive Capitalism (1860s-1898) 144
Corporate Capitalism (1898-1939) 146
Regulated Capitalism (1939-1991) 146
Transnational Capitalism (1991 —) 147
U.S. Capitalism: Labor Organizing and Labor Markets 147
The Rise and Fall of Labor Unions 147
The Deciine of Labor Unions 149
The Rise and Fall of the Labor Accord 151
Segmented Labor Markets 152
The Independent Primary Labor Market 153
The Subordinate Primary Labor Market 154
The Secondary Labor Market 155
U.S. Capitalism Today is Transnational 155
Immigration 157
Shifts in What U.S. Labor Produces 159
Fragmenting Global Production 161
Rules for the Global Economy 162
Tax Motives for TNCs to Go Global 163
The Transnational Capitalism SSA: Deregulation and Financialization 163
Corporate Stock Buybacks and Falling Productive Investment 166
Conclusion 167

PART 2 MICROECONOMICS

H Supply and Demand: How Markets Work 169

The Nature of Markets 170

Demand and Supply 171
Demand 171
Supply 173
Marginal Cost 174
Average Cost 175
Demand and Supply Interacting 175
 CONTENTS xi

Shifts in Demand or Supply 178

Conclusion 180

Competition and Coordination: The Invisible Hand 181

Adam Smith and Laissez-Faire Economics 182

Coordination 183
Coordination by Rules and by Command 184
The Limits of Coordination by Command 185
The Invisible Hand 187
The Invisible Hand in Action 188
Problems with the Invisible Hand . 191
Market Failure 192
Negative Externalities as Market Failures 193
Positive Externalities as Market Failures 194
Monopoly as a Market Failure 196
Economies of Scale as a Market Failure 196
Coordination Failure 200
The Prisoner's Dilemma and the Benefits of Cooperation 200
The Prisoner's Dilemma and Global Warming 202
The Tragedy of the Commons 203

Capitalist Production and Profits 207

What Are Profits? 208

Profits from a Production Process 209
Calculating Profit and Other Property Incomes in the Whole Economy 211
Profit in a Grain-Growing Capitalist Economy 213
Calculating the Rate of Profit 213
The Corporate Profit Rate in the United States 215
Corporations and Other Businesses: Who Gets the Profit or Bears the Loss? 216
Corporations 217
Limited Liability 217
Financing by Issuing Bonds or Stock 218
Management Separated from Ownership 219
Determinants of Total Profit and the Profit Rate 220
xii CONTENTS

Example: The Good Cod Fishing Company 223

Profit per Unit of Output 224
Conflict Over the Profit Rate 225
Intermediate Inputs per Unit of Output as Profit Rate Determinants 226
Unit Labor Cost as a Profit Rate Determinant 227
Work Effort and the Efficiency of Labor 228
Understanding the Profit Rate 229
Conclusion 232

Competition and Concentration 233

Competition for Profits 235

The Forms of Competition 237
Price Competition 238
Price as a Markup over Cost 241
Economies of Scale and Price Competition 243
Other Advantages of Large Size 247
Capacity Utilization 248
Breakthroughs 250
Monopoly Power 252
Investing to Compete 254
The Dynamics of Competition 258
Toward Equal Profit Rates? 259
Toward Economic Concentration? 261
Large Size and Monopoly Power 262
Collusion 262
Exploiting Breakthroughs 262
Government Subsidies and Contracts 263
Trends in Concentration 264
Antitrust Enforcement 267
Conclusion 268
Appendix to Chapter 11 270

Wages and Work 271

Work, Sloth, and Social Organization 273

The Capitalist Firm as a Command Economy 275
 CONTENTS xiii

The Conflict between Workers and Employers 276

Labor Discipline: Carrots and Sticks 282
The Labor Market, the Wage, and the Intensity of Labor 285
Cost of Job Loss 286
Avoiding the Cost of Job Loss 288
Additional Implications of the Labor Extraction Curve 295

^3 Technology, Control, and Conflict in the Workplace 299

The Social Organization of the Workplace 301

Simple Control 304
Technical Control 304
Bureaucratic Control 305
Technology and the Labor Process 307
Conflict in the Workplace 309
Technical Change and Workplace Conflict 309
Raising the Efficiency of Labor 309
Speedup 310
Deskilling 312
Unions 314
Recent Trends in Union Membership 314
Union Activities 315
Managing the Threat of Replacement 315
Promoting Social Changes to Benefit Workers 317
Discrimination in the Workplace 317
Profitability Versus Efficiency 319
Markets and Hierarchies 321
Democratic Firms 322

PART 3 MACROECONOMICS

The Mosaic of Inequality 325

Well-Being and Inequality 328

Influences on Well-Being and the Economy 328
Measuring Living Standards and Inequality 329
xiv CONTENTS

Growing Inequality 331

Wealth Inequality 334
Unequal Chances 338
Race and Inequality 341
Discrimination in Hiring 342
Problem of Differential Ray 342
Women's Work, Women's Wages 346
Conclusion 350

Progress and Poverty on a World Scale 352

Poverty and Progress 355

Productivity and Income 359
Vicious Circles of Low Productivity 359
Economies of Scale 361
Technology Gap 363
Intellectual Property Rights 364
Other Government Interventions to Promote Development 366
Requisites for Economic Development 366
Eight Essential Elements 366
Stability and Peace 367
Financing 367
A Well-Functioning Government 368
Skills and Education 368
Infrastructure 369
Public Health 369
Access to Foreign Markets 369
Other Factors in Development 369
Variations in Rate of Growth of Productivity 371
Foreign Investment and Development 373
Investment Decisions by Transnational Corporations 375
Transnational Investment and Tax Hävens 377
Conclusion 381
 CONTENTS XV

Aggregate Demand, Employment, and Unemployment 383

Counting the Unemployed 386

What Determines Employment and Output? 388
Aggregate Supply and Aggregate Demand 389
Measuring Total Output 391
Terms for Measuring the Macroeconomy 391
Analyzing Aggregate Supply and Aggregate Demand 392
A Basic Macroeconomic Model 395
Unemployment and Government Fiscal Policy 400
Effects of Deficit Spending on Employment 401
Multiplier Effect of Deficit Spending 404
The Business Cycle and the Built-in Stabilizers 407
Conscious Policy Changes 409
Automatic or Built-in Stabilizers 409
Investment, Aggregate Demand, and Monetary Policy 410
Wages, Aggregate Demand, and Unemployment 417
When is an Employment Situation Wage-Led? 419
Implications for Economic Policy 420
Conclusion 421

The Dilemmas of Macroeconomic Policy 422

The High-Employment Profit Squeeze 426

The High-Employment Wage Push 426
The Materials Cost Push 430
Rising Costs Squeeze Profits 431
Exports, Imports, and Aggregate Demand 435
The Demand for Exports and Imports 436
The Foreign Exchange Rate 437
International Trade and Macroeconomic Policy 439
Promoting Net Exports 439
Competing in Global Markets 441
Monetary and Fiscal Policy at Odds 442
xvi CONTENTS

What Determines the Interest Rate? 443

Borrowing and the Exchange Rate 446
The Conflict between Monetary and Fiscal Policy 447
Institutions for Achieving Füll Employment 447
Institutional Obstacles to Füll Employment 448
The Handshake: Ways to Reach Füll Employment 449
Conclusion 452

Financial and Economic Crisis 454

The Great Recession and the Subprime Crisis 456

Understanding the Great Recession 458
Why to Buy a Home 458
Home Prices Start to Rise 459
How to Buy a Home 462
Securitization of Mortgages 462
Credit Rating Agencies 462
Prime and Subprime Mortgages 463
Refinancing 463
Deregulation 465
Idars' Loans 467
Collateral Damage 470
Derivatives of Other Kinds 471
Bailouts and Buyouts 473
Unemployrment and Poverty 473
Lessons from the History of Economic Crises 474
Nonfinancial Causes of Crisis: Overinvestment, Underconsumption 476
Underconsumption as a Cause of Stagnation or Crisis 476
Asset Markets Differ from Goods Markets 477
Why Are Asset Markets Prone to Price Bubbles? 478
Feedback Loops 479
Reflexivity 480
Misinformation 481
Deregulation and Financial Fragility 482
Large Firms Exacerbate the Problem 483
Weakening the Social Safety Net 485
 CONTENTS xvii

Regulation in a Capitalist Economy 486

Regulating the Financial Sector 486
The Dodd-Frank Act 488
Inequality, Concentration and Crisis 488

Government and the Economy in Transnational

Capitalism 491

More Spending, Less Health 494

Government in the United States: Too Big? 496
Government Spending: Comparing the United States with
Other Countries 496
Old-Age Pensions 498
Influencing the Rules 500
Taxation 502
Tax Rates and Tax Payments to the Federal Government 503
Tax Rules and Enforcement 504
Weakening Enforcement 504
Rules that Affect Business Costs and Profits 506
Contracting Out Government Services 506
Government Contracting: Profits and the Public Interest 507
Decline in Competitive Bidding for Government Contracts 508
Government Contracting for Private Prison Services 508
Laws and Norms on Sentencing 509
Rethinking Private Prisons and Mass Incarceration 511
Selling to Government, Maximizing Profit 512
Medical Services in Private Prisons 514
Changing the Rules 515
Rules Written into Contracts 515
Taxing Transnational Corporations: Who Is In Control? 516
Democracy and Inequality 517
Feedback Loops Between Inequality and Power 519
Supranational Rule Changes 519
TNC Power over Foreign Government Decisions 520
Conflict over Rules 521
Proposais for Alternative Rules 522
xviii CONTENTS

Capitalism and Inequality 524

Democracy and Inequality 525
Conclusion 526

LIST OF VARIABLES 529

SOURCESOF ECONOMIC INFORMATION 532
GLOSSARY 535
INDEX 544