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The Rise and Fall of
Neoliberal Capitalism
David M. Kotz
Harvard University Press
February, 2015
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The Golden Age of Capitalism
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Homelessness after 1980
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Three Puzzles
1. Why had the previous form of capitalism been
replaced by a harsh new form?
2. Why had long-discredited free-market
economic ideas returned?
3. How could a capitalist economy bring
sustainable economic expansions if wages
stagnate or fall?
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Outline
1. What is the contemporary form of capitalism,
that arose around 1980?
2. Why did it arise?
3. How has it worked?
4. Why did it give rise to a big financial crisis and
Great Recession in 2008?
5. What lies ahead?
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Neoliberalism as Ideas only
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Broader Meaning of
Neoliberalism
Neoliberalism is a coherent, mutually reinforcing
set of economic and political institutions,
together with supporting dominant ideas.
The coherence of the institutions of neoliberalism
is their support for the predominant role of
market relations and market forces in the
regulation of economic activity.
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Neoliberalism: Capital Fully Dominates
Labor
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Location of Neoliberal Institutions
Global economy
State-economy relation
Labor market
Corporate sector
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Examples of Institutions of
Neoliberal Capitalism
Globalization
Deregulation
Weakening of social regulation
Privatization and contracting out of public goods
and services
Cutbacks in social programs
Tax cuts for business and the rich
Marginalization of collective bargaining
Casualization of jobs
Unrestrained competition
Market principles penetrate inside corporations
Financialization
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Neoliberal Capitalism and the
Capital Accumulation Process
Neoliberal capitalism -- and the previous
regulated capitalism -- are institutional
structures that promote and stabilize the
process of capital accumulation.
History shows a sequence of such “social
structures of accumulation” emerging and, after
one or a few decades, eventually is replaced by
a new institutional structure.
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Big Business Representatives Affiliated with the
Committee for Economic Development,1944
Champion Paper
Coca-Cola
Eastman Kodak
Fidelity & Casualty Co
General Foods
Goldman, Sachs & Co
Hormel Foods
J. P. Morgan & Co.
Quaker Oats
R.H. Macy and Company
Scott Paper
Studebaker
Union Pacific Railroad Co.
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Big Business Representatives Affiliated with the
Committee for Economic Development, 1948
Allegheny Ludlum Steel
Anderson, Clayton and Co
Arkansas Power & Light Company
Bankers Trust Company
B. F. Goodrich
Bristol-Myers
Bausch and Lomb Optical
Champion Paper
Chicago, Indianapolis & Louisville Railway
Cincinnati Street Railway Company
Cleveland Electric Illuminating Company
Coca Cola
Colgate-Palmolive
Continental Insurance Co
Corning Glass Works
Crown Zellerbach
Eastman Kodak
Federated Department Stores
Ford Motor
General Electric
General Foods
General Mills
Goldman, Sachs & Co
Hormel Foods
International Harvester
J.P. Stevens
Lehman Brothers
Libbey-Owens-Ford Glass
National Broadcasting Co
New York Life Insurance Co.
Northern Pacific Railway Company
Northwest Bancorporation
Owens-Illinois Glass
Pennsylvania Railroad Company
Philco
Procter & Gamble
Quaker Oats
R. H. Macy
Scott Paper
Shell Union Oil Co
Sinclair Coal Company
Texas Power and Light Company
United Air Lines
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CED on Collective Bargaining
"To compensate for the weakness of their individual
bargaining position, wage earners need the right to
combine into organizations for collective bargaining.“ –
1944
“America cannot afford industrial strife… It would put in
jeopardy not only the attainment of our domestic goals
of high production and employment but the existence of
our free economy as well.” -- 1947
“International peace and prosperity depend, to a large
degree, upon the achievement of industrial peace and
prosperity in this country.” -- 1947
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CED on Keynesian Policy
“Constructive policies respecting taxation and
public expenditure … and enlightened control
over credit and money can greatly retard or
prevent excessive swings of the business
cycle….” and maintain “the flow of buying
power needed to sustain high level of
employment and productivity” – 1946
“…monetary and fiscal policies are essential
functions of government ... [that] encourage or
discourage financial expansion." -- 1948
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CED on Social Programs
The federal government “should continue to
provide…a program of … unemployment
insurance and old-age pensions – for the
benefit of those who are unable to work or …
are for any reason unable to find sufficiently
remunerative employment to protect
themselves against want. Such individual
protection against hazards should be extended
as rapidly as possible.” – 1944
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New View of Trade Unions
Henry Ford II in 1946 stated that the corporation had "no
desire...to turn back the clock...We do not want to
destroy the unions"
Dwight D. Eisenhower in 1952: “I have no use for those -regardless of their political party -- who hold some
foolish dream of spinning the clock back to days when
unorganized labor was a huddled, almost helpless
mass.... Today in America unions have a secure place
in our industrial life. Only a handful of unreconstructed
reactionaries harbor the ugly thought of breaking
unions. Only a fool would try to deprive working men
and women of the right to join the union of their choice.
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Why Big Business Supported
Regulated Capitalism
1) Big business had been unable to crush
organized labor and decided to strike a deal
2) Fear that the great depression would return
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Fear that Depression Would Return
“This generation, after the worst depression … in our
history, knows that our economy can have great
fluctuations of production, employment and prices.”
“We also know what the costs of extreme swings in
business conditions are: …
● the resulting deep sense of injustice and frustration;
● the growing receptivity to futile or dangerous ideas that
appear to promise relief from all ills…” (emphasis
added) – 1948 CED document.
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Why Big Business Supported
Regulated Capitalism
3) Strength of Socialist and Communist parties in
the Developed capitalist countries.
4) Emergence of a large bloc of Communist Party
ruled states.
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Selected Business Roundtable Members, 1972 and 1979
Allied Chemical Corporation*+
Aluminum Company of America*
American Can Company*+
American Electric Power Company*
AT&T+
Atlantic Richfield Company*+
B.F. Goodrich+
Bank of America+
Bethlehem Steel Corporation*+
Burlington Industries, Inc.*+
Burlington Northern, Inc.*+
Campbell Soup Company*+
Champion International Corp.*+
Chase Manhattan Bank*+
Chrysler Corporation*+
Citibank*+
Coca Cola+
Consolidated Edison*
Corning Glass Works*+
Crown Zellerbach Corp.*+
Dow Chemical Company*+
E.I. du Pont de Nemours & Company*+
Eastern Air Lines*+
Eastman Kodak Company*+
Exxon Corporation*+
Federated Department Stores, Inc.*+
* Member in 1972
+ Member in 1979
Firestone Tire & Rubber Co.*+
Ford Motor Company*+
General Dynamics Corporation*+
General Electric Company*+
General Foods Corp.*+
General Mills, Inc.*+
General Motors Corporation*+
Gulf Oil Corp.*+
International Harvester Company*+
International Nickel Co.*+
International Paper Co.*+
J.C. Penney Co., Inc.*+
J.P. Stevens+
Kennecott Copper Corporation*+
Mobil Oil Corporation*+
Morgan Guaranty Trust Co. of N.Y.+
Morgan Stanley & Co., Inc.+
Procter and Gamble+
R.H. Macy & Co., Inc.*+
Scott Paper Company*+
Sears, Roebuck and Co.*+
Shell Oil Company*+
Texas Power & Light Co.*
United Aircraft Corp.*
United States Steel Corporation*+
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Business Roundtable Reports late 1970s
1977 report called for tax cuts for business to
spur investment.
1979 report called for cuts in social security
benefit levels with more reliance on private
savings for retirement income.
1979 report criticized cost to business of social
regulations.
1979 report proposed that the finding of an
“adverse health effect” from bad air quality
should be limited to conditions resulting in
“permanent damage or incapacitating illness.”
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Business Roundtable Reports 1981
“The business community feels strongly that all
four parts of the economic recovery plan
[Reagan Administration’s plan for cuts in social
spending, tax cuts, regulatory reduction, and
tight monetary policy] are essential,
interrelated, and must be acted upon...”
“An economic crisis confronts the American
people and requires far-reaching changes in
economic policy.”
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Right Wing Think Tanks
Expenditures in Million of Dollars
1970
1980
American Enterprise Institute
0.9
9.7
Hoover Institution
1.9
5.7
Heritage Foundation
NA
5.3
2.5
20.7
5.5
9.2
Total
Brookings Institution
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Political Donations
1964: More big business donations go to Lyndon
Johnson than to Barry Goldwater.
Johnson won an overwhelming victory over
Goldwater in the 1964 presidential election.
1980: Big business donations go overwhelmingly
to Ronald Reagan.
Reagan defeated the incumbent President
Jimmy Carter.
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Figure 3.4. Rate of Profit in the U.S. Nonfinancial Corporate Business Sector
18%
16%
14%
12%
10%
8%
6%
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1) Effect of Declining Rate of Profit
Business Roundtable slide show 1973:
“After-tax profits peaked in 1966 ... but declined
sharply in the ensuing period of cost-squeeze”
“Starting in 1966 ... unit labor costs accelerated
sharply, and the aftermath was excessive
inflation and a severe profit squeeze.”
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2) Expansion of Social Regulation
Starting in late 1960s government social
regulation expanded greatly:
1) Environmental regulation
2) Occupational safety and health regulation
3) Consumer product safety regulation
This was not part of the original bargain.
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More Reasons Why Big Business Supported
Neoliberal Restructuring by the late 1970s
3) Intensifying international competition put
pressure on big business to cut wages, taxes,
and costs of complying with government
regulation.
4) The Great Depression came to appear as a
historical accident, and perhaps a result of
government mistakes rather than any problem
of the capitalist economy.
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Role of Free-Market Ideas
Free-market theory claimed deregulation of
business and markets, privatization, and tax
cuts for business and rich “investors” would
benefit everyone.
These measures would unleash saving and
investment, creating jobs and leading to faster
growth.
Everyone would benefit.
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A Rising Tide Lifts All Boats (large and small)
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Average Annual GDP Growth Rate, U.S.
4.5%
4.0%
4.0%
3.5%
3.0%
3.0%
3.0%
1973 - 1979
1979 - 2007
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1948 - 1973
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Personal Saving as a Percentage of Disposable
Personal Income
12%
10%
8%
6%
4%
2%
0%
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Investment in Two Periods
10%
9.0%
9%
8%
7.3%
7%
6%
5%
4%
3.6%
3.0%
3%
2%
1%
0%
1948-73
Average Rate of Capital Accumulation
1979-2007
Net Private Investment as a Percentage of Net Domestic Product
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Consumer Spending as a Percentage of GDP
72%
70%
68%
66%
64%
62%
60%
58%
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Three Developments in Neoliberal
Capitalism
1) Increasing inequality
2) Asset bubbles
3） Financial institutions’ risky behavior
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Annual Growth Rates of Wages and Salaries and
Corporate Profit
6%
5.3%
5%
4.5%
4.2%
4%
3.3%
3.0%
3%
2%
1.7%
1%
0.4%
0.1%
0%
1948-1966
1966-1979
1979-2007
2000-2007
Wages and Salaries
Corporate Profits
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Percentage Increase in Average Real Family
Income for Quintiles and the Top 5%
140%
131.4%
120%
103.0%
112.6%
108.6%
99.6%
100%
86.7%
80%
74.0%
60%
51.7%
40%
28.2%
18.0%
20%
0%
11.0%
0.6%
Lowest fifth
Second fifth
Third
fifth
Fourth
fifth
Highest fifth
1948 to 1973
Top 5 percent
1979 to 2007
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Income Shares of the Richest 1% and Richest
0.1% as a Percentage of Total Income, 1920-2007
30%
25%
20%
15%
10%
5%
0%
Top 1%
Top 0.1%
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The Rising Tide Lifted only Some Boats
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House Price Index Relative to
Homeowners’ Equivalent Rent
160
150
140
130
120
110
100
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Three Unsustainable Trends
Three developments  three trends unsustainable
over the long run
1) Rising levels of household and financial sector
debt
2) Toxic financial assets spread throughout the
financial system.
3) Growing excess productive capacity
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Debt of Sectors of the U.S. Economy
as a Percentage of GDP, 1948-2007
140%
120%
100%
80%
60%
40%
20%
0%
Financial Sector Debt
Nonfinancial Corporate Sector Debt
Household Sector Debt
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Outstanding Value of CDOs in the Global
Economy, Billions of US Dollars
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
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Capacity Utilization in Manufacturing for Business
Cycle Peak Years
90%
87.7%
88%
86.6%
86%
84%
81.7%
82%
80.1%
79.7%
80%
78.6%
78%
76%
74%
72%
1960
1969
1973
1990
2000
2007
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Explaining the Crisis of 2008
Three
Developments
Structural
Crisis
Three Trends
Rising
Inequality
Rising Household
and Financial
Sector Debt
Falling
Consumption
Great
Recession
Neoliberal
Institutions
Asset
Bubbles
Financial
Institutions’
Risky
Behavior
Spread of Toxic
Financial Assets
Excess Productive
Capacity
Real Estate
Bubble Deflates
Falling
Investment
Financial
Crisis
Financial
Institution
Insolvency
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What Lies Ahead?
The U.S. economy and much of the global
economy are stuck in a structural crisis.
Austerity policy represents an attempt to double
down on neoliberalism – but it cannot work as it
did before 2008.
History suggests that stagnation will continue
unless and until there is major institutional
restructuring.
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Three Possible Directions of Restructuring
1) Statist, nationalist
form of capitalism
2) Regulated capitalism
based on capital-labor
compromise
3) Transition to an alternative
socialist system
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The Rise of a Strong Popular Movement?
If strong a strong popular movement arises, the
capitalists might be pushed to compromise,
leading to another period of regulated
capitalism.
However, either statist or regulated capitalism
would bring another long period of relatively
rapid GDP growth.
This would likely destroy civilization due to global
climate change.
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Socialism
If a strong popular movement arises, this will
open the possibility of transition beyond
capitalism.
A socialist system can bring rapid output growth
but it need not do so.
A planned economy in developed countries could
bring increasing economic welfare with
declining production of goods.
Socialism would mean an economy that exists for
working people rather than the other way
around.
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