II. From Keynesian Compromise to Neoliberal Counterrevolution

It is often claimed that neoliberalism is “more an ethos or an ethical ideal[[] than a set of completed or established institutions.” Ostensibly, the central political tenet of neoliberalism is “the negative unity of the disempowerment of government: it disables the state from interfering with the established order of society.” I discern, instead, a “programmatic coherence” in the neoliberal socio-economic transition in the U.S. that can be seen, following Karl Polanyi, as historical alternation of stages of de-socialization, re-socialization and a new de-socialization. In these *10 transitions, the state and the law play a formative role. The ideology of the “free” market notwithstanding, “the market has been the outcome of a conscious and often violent intervention on the part of government which imposed the market organization on society for noneconomic ends.” In order to appreciate the neoliberal transformation of the economy, it is critical to take account of the preceding Keynesian welfare order.

Born amidst the carnage of the Great Depression, Keynesianism rests on the premise that “[c]apitalism is a flawed system [whose] development[,][if] not constrained, [] will lead to periodic deep depressions and the perpetuation of poverty.” The linchpin of Keynesian economic theory is the underemployment equilibrium thesis and systemic failure of aggregate demand in capitalist economies. Consequently, capitalism can be stuck periodically, even permanently, in a condition of slow growth, high unemployment, and excess capacity. The recognition that “the normal state of the monopoly capitalist economy is stagnation” produced *11 the so-called Keynesian compromise between capital and labor, which animated national fiscal and counter-cyclical monetary policies calibrated to promote full employment. With this turn the welfare state was born. The chronic aggregate demand problem of capitalism was to be resolved through full employment, increasing wages with increases in productivity, and the resulting enhanced purchasing power of the working classes. The Keynesian compromise produced an activist state as a countervailing power to the market, with the state using regulations and protections to temper the creative destruction of capitalism. Welfare safety nets related to unemployment, nutrition, health, and retirement provided partial but significant reprieve from the ever-expanding commodification of life by capitalism.

Containment of finance capital was a critical component of this compromise. While Keynes's desire for “euthanasia of the rentier, of the functionless investor” and the policy goal to “driv[e] the usurious money lenders out of the temple of international finance” remained elusive, elaborate national and international regulatory regimes that were set in place to make finance capital subservient to production and national priorities. *12 The result of this macroeconomic policy framework was a prolonged era of growth, rising wages, and a linkage between Fordist mass-production and mass-consumption that is often termed “the golden age” of capitalism.

By the early 1970s, the Keynesian welfare system appeared exhausted. The costs of accelerating demands from below for expanded economic and social rights, imperial wars, and an escalating balance of payment deficits created a crisis for wealth-owning classes. Rates of profit were falling, and the share of income of wealth-owning classes shrank. Predictions of “the death of equities” accompanied “the worst bond bear market not just in memory but in history” and the Bank of International Settlements raised alarms of “a genuine dollar crisis.” The “golden age” of prosperity turned first into a “limping golden age” then into a “leaden age.” Faced with declining rates of profit and shrinking shares of wealth, wealth-owning classes desired a fundamental break with the Keynesian compromise. Breaking the power of the working classes in order to depress wages was an essential step towards this objective. This is when the neoliberal counterrevolution was launched.

*13 Neoliberalism is a strategy of wealth-owning classes to reverse the setbacks to their wealth and privilege and to expand their reach globally under the hegemony of the United States. Neoliberalism did not displace the state as much as it reformulated it, turning the “nation-state” into a “market-state.” Neoliberalism was first road-tested in Chile following Pinochet's coup d'etat, then in New York City's 1975 “coup d'etat by financial institutions against the democratically elected government,” and finally in the United Kingdom by the International Monetary Fund to reverse the course of Keynesian fiscal policies. These trial runs established an enduring principle of neoliberalism: “in the event of a conflict between the integrity of financial institutions and bondholders on the one hand and the well-being of the citizens on the other, the former [should be] given preference.” Finally, a decisive financial “coup”, indeed a “putsch”, was launched in 1979 by way of the so-called “Volcker shock,” which Paul Volcker, then-Chairman of the Federal Reserve, characterized as a “triumph of central banking.” In a radical tightening of monetary policy, interest rates were raised exponentially ostensibly to break the back of inflation, the enemy of finance capital. Note that “monetary policy *14 involves trade-offs between inflation and unemployment. Bond-holders worry about inflation; workers, about jobs.” High interest rates induced an inflow of capital as U.S. government securities became a secure investment and the dollar became the global currency of choice. Highly liquid U.S. Treasury bills expanded secondary markets in bonds and allowed the U.S. to rely on global savings to run up deficits. Henceforth, bondholders were the disciplinarians of U.S. policy makers. The “‘Volcker’ shock thus represented a convergence of imperial and domestic responsibilities.”

To be able to institute a new global capitalist discipline, the U.S. economic policy-makers had to first, in Volcker's words, “discipline ourselves.” The “induced recession” triggered by the Volcker shock was intended to repress wages and emasculate organized labor by raising unemployment to unbearable levels. While the specter of inflation was invoked, what guided the Federal Reserve was “a baseless fear of full employment.” The timing of each of the Fed's interest rate hikes substantiates that it “wanted wages to fall, the faster the better. In crude terms, the Fed was *15 determined to break labor.” Repeatedly, the Fed raised interest rates just before major union contract re-negotiations, forcing employers to squeeze wages. In order to establish its credibility with finance capital, “the Federal Reserve had to demonstrate its willingness to spill blood, lots of blood, other people's blood.” Volcker knew that there would be “blood all over the floor,” and “[t]here was blood indeed.”

The “shock therapy” of tight monetary policy, a canonical opening salvo of neoliberal structural adjustment, paved the road to jettison welfare safety nets and severed the Keynesian linkage between increasing productivity and increasing worker's wages. Sustained assault on wages and workers ensured that the distribution of gain and pain under neoliberalism would comply with the objectives of the wealth-owning classes. The downward trajectory of the rate of profit was reversed and incomes and wealth of the wealthy increased while those of the rest stagnated and declined. *16 Concurrently, neoliberalism scored “a critical victory” by “[c]hanging public expectations about citizenship entitlements, the collective provision of social needs, and the efficacy of the welfare state.”

Along with the assault on wages and workers through tight monetary policy, the power of organized labor was crushed by direct coercion. This was inaugurated by the smashing of the Air Traffic Controllers' strike in 1981 by President Reagan. Paul Volcker characterized this as “the most important single action of the administration in helping the anti-inflation fight,” and Alan Greenspan designated it “a paradigm shift” and a “political turning point.” In its demonstration effect on corporate behavior, this state action “recast the crimes of union busting as acts of patriotism.” It triggered “a *17 capitalist offensive that involved both political mobilization and relentless hostility to unions.” Henceforth, investment and relocation decisions were guided by an informal rule that “no plant which is unionized will be expanded onsite.” As neoliberal ideology of market fundamentalism took hold, unions weakened. Even labor leaders acknowledged that unions were “sliding towards irrelevance and oblivion,” and were on the road to a complete collapse.

Another prong of the neoliberal attack on wages and workers was to mobilize global labor surpluses through offshoring. As neoliberal globalization, a “disciplinary force over the powers of labor,” unfolded, union power weakened further. Liberalization of international trade and capital movements induced investments to flow to regions where prevailing political and social conditions allowed higher returns on investments. *18 Wage pressure from countries with low labor costs was transmitted to the United States. Fragmentation and global dispersal of labor markets necessitated that workers compete against one another across national boundaries. Labor movements weakened in areas of capital emigration and strengthened in areas of capital in-migration. Capital's unbridled mobility impeded states' ability to manage national economies, and with workers in different parts of the world in direct competition, labor's efforts at international solidarity fragmented. The global labor market erased territorial boundaries for the highly skilled while reinforcing borders for the unskilled. All this combined to add downward wage pressure on vulnerable jobs and, indirectly, throughout the economy.

The combined effect of these developments on organized labor was devastating. Both union membership and union efficacy sank to historic lows. Given the nature and size of union wage premium, wages were *19 directly impacted by the decline of unions. Those in lower-paid jobs and racial minorities were hit particularly hard. Decline in the value of the legally mandated minimum wage added to the burdens of the most vulnerable sections of the working classes. Anemic growth, high systemic unemployment, and a decrease in the rate of investment despite a rise in profits-all enduring features of the neoliberal era-exerted added pressure on the working classes. The Keynesian era linkage of productivity growth with wage growth went by the wayside, resulting in *20 further wage-compression and inequality. Workers, in particular married women with children, were constrained to work longer hours. In the end, the average household worked more hours for lesser wages and retiring at age 65 became an increasingly elusive goal.

Structural changes in the organization of capital added to the woes of the working classes. The paradigm of shareholder value maximization became the “zeitgeist” of corporate governance. The emphasis on shareholder *21 value necessitated squeezing out other stakeholders; job cuts, lower wages, and fewer benefits were a natural corollary. Besides reducing the wage bill, capital expenditures were reduced by cutting back investment. Capital accumulation was sacrificed in favor of income distribution benefitting the upper classes. As dividends and stock buybacks increased, reinvestment decreased, with a negative impact on productive capacity and employment. Furthermore, increased debt levels of corporations unavoidably tended to “discipline the employment relationship” as firms with higher debt reduced their employment more often, used more part time and seasonal employees, paid lower wages, and funded pension plans less generously.

*22 Financialization, another defining feature of the neoliberal era, engendered “a prolonged split between the divergent real and financial economies.” Whereas up until the 1970s “the old structure of the economy[] consist[ed] of a production system served by modest financial adjuncts,” with the neoliberal turn this gave way to “a new structure in which a greatly expanded financial sector had achieved a high degree of independence and sat on top of the underlying production system.” Far beyond its classic role of credit provision, finance was now positioned “directly at the heart of the accumulation process, essentially introducing a new sector that straddled credit and production.” The result was “exhaustion of the progressive force of capital” and reinforcement of its “increasingly parasitical character.” The pursuit of neoliberal class objectives resulted in a “divorce” between the upper classes and the United States domestic economy.

In sum, the radical use of monetary policy to attack wages and smash the power of organized labor inaugurated the neoliberal era. This was complemented by coercion of unions, globalization, focus on shareholder value, and a divorce between finance and the productive economy. These systemic changes decisively transformed the grounds of aggregate demand from full employment to consumer debt. Two mechanisms combined to create the requisite domestic demand: (1) increased consumption by wealth owning classes whose incomes now saw a steady rise, and (2) increased indebtedness of the working classes. Financialization of the economy, facilitated by public laws and policies, operationalized this historic shift.