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21 March, 2018

A single graph proves that the birth of neoliberalism coincides with a dramatic loss of power for the working class

The following graph depicts the radical divergence between productivity and compensation of a typical American worker after 1973. It essentially proves that the upper class has been overwhelmingly benefited during the last four decades or so, at the expense of the working class:

As described by the source, the hourly compensation of a typical worker essentially grew in tandem with productivity from 1948 to 1973. After 1973, these series diverge markedly. Between 1973 and 2014 productivity grew 72.2 percent, or 1.33 percent each year, while the typical worker’s compensation was nearly stagnant, growing just 0.22 percent annually, or 9.2 percent over the entire 1973–2014 period. Further, nearly all of the pay growth over this 41-year period occurred during the seven years from 1995 to 2002, when wages were boosted by the very tight labor markets of the late 1990s and early 2000s.

This divergence of pay and productivity has meant that the vast majority of workers were not benefiting much from productivity growth; the economy could afford higher pay but was not providing it.

Costas Lapavitsas, professor in economics at the University of London School of Oriental and African Studies, explains analytically how the working class has lost dramatically with the rise of financial capitalism and the accompanying neoliberal ideology during that period depicted in the graph above:

Finance is a sector of the economy in mature countries which has grown enormously in terms of size relative to the rest of the economy, in terms of penetration into everyday lives of ordinary people, but also small and medium businesses and just about everybody, and in terms of policy influence. Finance clearly influences economic policy on a national level in country after country. The interests of finance are paramount in forming economic policy. So that is clear. Finance has become extraordinarily powerful. And that, in a sense, is the first immediate way in which we can understand financialization. Something has happened there, and modern mature capitalism appears to have financialized.

Financialization is basically a profound historical transformation of modern capitalism that began in the 1970s, and it's now been running for about four decades.

What's happened to big business is very interesting. Two things have happened to it. First, big business has become increasingly capable of financing investment out of retained earnings. It retains its profits, and on a net basis it finances investment pretty much out of that. Of course, it still uses banks, but it doesn't rely on banks on a net basis to finance investment. That gives it a certain degree of independence from banks. In addition to that, big business has made so much in retained profits - currently US big business is sitting on piles of cash - that it can use those funds to play financial games, to engage in financial transactions and financial activities on its own account. So big business has financialized. Large enterprises have acquired some of the character of financial institutions, have become bank-like, and they engage in these transactions, and they change the structure of their own organization as they do that.

Second economic change, and very, very important, too, relates to banks. If big businesses is doing that, banks must do something else to make profit. They lend less to businesses for investment and so on, and they play more games in the financial markets. They become transactors in financial assets, and they make profits increasingly not from lending, but from fees, commissions, and trading. They become traders in financial assets. At the same time, banks have also turn households. Households have become a very profitable activity of banks, a new activity. This is a new phenomenon in the development of capitalism.

The third change has to do with households, workers, ordinary people. And what we see there in the last three to four decades is that ordinary people have been drawn into the financial system like never before. Households have become financialized. Finance has become a fundamental part of household life.

Why is that? Partly because wages have been stagnant. Wages have been absolutely flat in [the US] for decades. Partly because of that, people have turned to debt.

The financialization of everyday life, of households, is a bit of a complex story. What is actually happening is not simply that you borrow in order to consume. That also happens. What is actually happening is people need access to health, education, housing, and a variety of other needs. Every country has systems of provision for these things. These modes of provision have historically, traditionally, incorporated public provision, some methods of public provision. What we've witnessed the last three to four decades is a retreat of public provision. Public provision has retreated, private provision has taken its place. As this is happened, finance has emerged as the facilitator of that. So we turn to private provision to solve our housing needs, our health needs, our education needs, and finance makes profits out of that, basically, without having any skills in doing these things.

At the same time, we've had changes in institutions and in ideology. The changes in institutions are very clear. We've had wave after wave of deregulation. Labor market has become more deregulated, and financial markets have become more deregulated. And in addition to deregulation what we've had is the rise of the ideology of neoliberalism. Deregulation goes hand in hand with neoliberalism, the idea that the market is good, the state is bad. In [the US], this is a very powerfully held idea, more powerfull here than anywhere else. It's extraordinary how powerful this perception is and how a lot of social issues are understood in this way.

What have we got after four decades of this? These changes, seen very clearly in the United States, have created, firstly, a deeply unequal country, a deeply unequal society. Financialization is fundamentally about inequality. We see this inequality in terms of income, where the top 10 percent and the top 1 percent draw an extraordinary proportion of income annually, but we see it in terms of the functional distribution, the distribution of income between capital and labor. Labor has lost dramatically during the last three to four decades in [the US] and in just about every other mature capitalist country that has financialized.

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