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Services • Reform • Fordism

Saving capitalism with a new Fordism

Michael Lind - 23 April 2013

The Great Recession has discredited neoliberalism. In advanced economies, recovery has to come from a new Fordism, so that workers can afford the services they provide

The Great Recession has discredited neoliberalism, which combined conservative optimism about deregulated markets with progressive support for education and the safety net.  The present crisis arose from the toxic interaction of mercantilism among the rising economies, particularly in China and other export-oriented East Asian countries, with post-Fordism in the advanced developed economies, particularly the US. Developing economies need a transition to traditional Fordism, so that their workers can afford the goods they make.  In the advanced economies, the transition has to be from post-Fordism to a new Fordism in the service sector, so that their workers can afford the services they provide.

The following briefly explains how we arrived at the current juncture before looking at what needs to be done to save capitalism.  

1. The problem of bubble and glut
Before World War II, unreformed industrial capitalism suffered from a “bubble and glut economy” characterised by asset bubbles and trade wars.  Because the rich are less likely to spend additional income on goods and services than on speculation, excessive concentrations of income and wealth exacerbated asset bubbles in real estate and the stock market.  Mercantilism – the policy of subsidising high-value-added exports while importing chiefly raw materials – led to trade wars among industrial countries.  Mercantilism also encouraged colonialism, because conquered countries could be coerced into buying the mercantilist nation’s manufactured goods while supplying it with raw materials and low-value-added products.

After World War II, the architects of the liberal capitalist order sought to eliminate the bubble-and-glut economy by combining international rules against mercantilist trade strategies with domestic “Fordism”, named after the American automobile manufacturer Henry Ford who paid his workers enough to allow them to purchase the cars they made. At the national level, Fordism took the form of a high-wage, high-demand economy. Pre-war proletarians were turned into post-war middle classes, by a combination of universal institutions (social insurance and, in some cases, minimum wages) and sectoral institutions (industrial worker unions and family farm subsidies). At the global level, the equivalent of Fordism was the expectation that industrial nations would both export and import high-value-added goods and services. The Bretton Woods financial system of fixed exchange rates discouraged the mercantilist strategy of competitive devaluations.  The General Agreement on Tariffs and Trade (GATT) discouraged another mercantilist strategy, protective tariffs.

2. The rise of post-Fordism
In the late twentieth century, Fordism gave way to post-Fordism in the developed nations and pre-Fordism in industrialising countries. In advanced economies, post-Fordism has been characterised by increasing inequality of income and wealth. Thanks to technology-driven productivity growth, agriculture and manufacturing have shed labour to the growing non-traded domestic service sector, generally lower-paid and less unionised.  In some countries, including the US, post-Fordism was worsened by policy changes, including a government-business assault on labour unions, a declining minimum wage, deindustrialisation caused by outsourcing rather than productivity growth, and large-scale, low-wage immigration.

At the global level, the old pre-1945 bubble and glut economy has been resurrected in a new form.  In the more liberal economies like the US and UK, rentiers in the overgrown financial sector captured many of the gains from growth and used their windfalls to speculate  in stocks and real estate assets.  In more mercantilist economies like China, Japan and Germany, government policy directly or indirectly steered capital toward over-investment in infrastructure and industries, resulting in gluts, dumping and retaliation by their trading partners. The system, dependent on private consumer debt, collapsed following the financial panic of 2008.

4. Saving capitalism with a new Fordism
What is needed now is a shift from post-Fordism to service sector Fordism in developed countries, and a shift to old-fashioned Fordism in developing countries. The new Fordism must focus on service sector workers. Thanks to automation, factory workers will soon account for as small a percentage of the workforce in advanced economies as farmers already do.  While the old Fordism focused on production workers in factory and farm, the next Fordism must focus on service sector workers.  Health aides and hospitality workers, for example, should have access to the services they provide, through the market or tax-supported public services. Many service sector jobs being created in advanced economies pay poorly and require only limited education and on-the-job training. Creating service sector Fordism at the national level will require direct labor market interventions, not just the investments in education that were over-emphasised by yesterday’s neoliberals.  

The repertory of labour market interventions from which policymakers can choose, in order to boost most service sector workers into a new middle class, includes greater service sector unionisation, reformed wages and hours laws, minimum wages, wage subsidies, tax cuts for low-and middle-income workers, and the direct or indirect socialisation of necessities like health care, education and housing. Taxes, including those that support social insurance, could be shifted to some degree from payroll taxes on labor to taxes on high incomes, property, consumption and financial and resource rents.

5. Old-fashioned production sector Fordism is still a strategy for developing nations
While the developed economies need to adopt service sector Fordism, the developing nations should adopt old-fashioned production sector Fordism, raising wages for their industrial workers and farmers and expanding their undeveloped service sectors, including public social insurance and welfare.

6. At the global level, new rules are needed to protect a liberal trading order from new forms of mercantilism
Unlike the old mercantilism, which used protective tariffs and sought to corner world markets in finished goods, the new mercantilism seeks to use currency manipulation, subsidies and other techniques other than tariffs to capture high-value-added parts of global supply chains rather than to capture entire industries. The rules of world trade need to penalise countries that practice the new mercantilism, while permitting all major economies and regions to maintain minimal shares in high-value-added parts of global supply chains.

In the twentieth century, Fordism in the production sector rescued capitalism from the bubble and glut economy created by inequality and mercantilism. In the twenty-first century, a new service sector Fordism in the developed economies along with old-fashioned Fordism in the developing economies is needed to rescue capitalism once again.

Michael Lind is co-founder of the New America Foundation, policy director of its Economic Growth Program, and author of “Land of Promise:  An Economic History of the United States”

This article forms part of a series of 30 'Memos to the Left' entitled 'Progressive Governance: The Politics of Growth, Stability and Reform'.

Tags: Copenhagen , Denmark , Progressive Governance: Towards Growth and Shared Prosperity , Progressive Governance , Growth , Social stability , Living standards , Policy Network , Global Progress , Opinion , Michael Lind , Capitalism , Fordism , post-Fordism , New Fordism , Henry Ford , Great Recession , China , U.S. , United States , Neo-liberalism , Neoliberalism , Welfare , Welfare State , General Agreement on Tariffs and Trade , GATT , Inequality , Financial Crisis , Banking Crisis , Finance , Banking , Market , Tax , Public Service , Education , Trade unionisation , Labour Unionisation , Trade Union , Labour Union , Wages , Minimum wage , Living wage , Healthcare , Health care , Housing , Services

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