Part I: What is a “deflationary economy?” What is the role of the “non-elite workers” in such a contrarian economy?
In order to have this discussion we need to define what a “deflationary economy” is. What are its features. What it looks like.
Before discussing why the “fixes” to the banking & credit system were wholly inadequate to address the depth of the 2008-2009 financial crisis, it’s important to look at the conditions that create a “deflationary” economic situation, as opposed to the conservatives’ constant bugaboo, “hyperinflation.”
The blogger “Stoneleigh” (Nicole Foss) began a series of Primers on deflation back at the time of the crisis. She explains–
“As we have consistently explained here at The Automatic Earth, inflation is an increase in the supply of money and credit relative to available goods and services, while deflation is the opposite. Deflation, moreover, is aggravated by a collapse in the velocity of money. Price movements are lagging indicators of monetary changes, but are also subject to a number of other drivers, such as scarcity and substitutability (or lack thereof).
“For this reason, price movements alone have no explanatory or predictive value. For instance, we have lived through a highly inflationary credit expansion over the last couple of decades, but prices have not reacted consistently. Some have risen, as one would expect, but others have fallen, due, for instance, to the effects of global wage arbitrage. For prices to fall in nominal terms during inflationary times, they must be going through the floor in real terms.
“Deflation would be associated, at least initially, with prices falling across the board, as the collapse of purchasing power would drastically reduce price support for virtually everything. In a deflation, people sell anything they can, in order to pay down debt, to meet margin calls and to cover the cost of living, once access to credit is cut off and earning an income becomes very much more difficult. This is a recipe for prices falling by perhaps 90% in nominal terms, but for goods and services to become simultaneously much less affordable, as purchasing power would be falling even faster. In other words, in real terms, prices rise (i.e. affordability decreases).”
Full explanation of the deflationary economy by “Stoneleigh” (Nicole Foss) from the depths of the Great Recession period: “The unbearable mightiness of deflation“
In other words, deflation can be seen as a generalized fall in commodity prices “across the board,” and this includes the “price of labour-power,” or wages, as Marx explained:
“Marx believed that the long-run tendency of wages is downward. In the Poverty of Philosophy, he stressed the substitution of cheap, inferior goods for better, more expensive ones in the workers’ consumption. Bread gives way to potatoes, and linen to cotton. In Wages and Wage-Labor and Capital, Marx insisted that while the prevailing minimum wage in different countries varies, the tendency is toward equality at the lowest level. When wages fall after having risen somewhat during the boom, they never again recover their old level.” -Ashmit Sirohi
Marx spoke of the conundrum of workers thus–
“When society is in a state of decline, the worker suffers most severely. The specific severity of his burden he owes to his position as a worker, but the burden as such to the position of society.
“But when society is in a state of progress, the ruin and impoverishment of the worker is the product of his labour and of the wealth produced by him. The misery results, therefore, from the essence of present-day labour itself.
Society in a state of maximum wealth – an ideal, but one which is approximately attained, and which at least is the aim of political economy as of civil society – means for the workers static misery.
“It goes without saying that the proletarian, i.e., the man who, being without capital and rent, lives purely by labour, and by a one-sided, abstract labour, is considered by political economy only as a worker. Political economy can therefore advance the proposition that the proletarian, the same as any horse, must get as much as will enable him to work. It does not consider him when he is not working, as a human being; but leaves such consideration to criminal law, to doctors, to religion, to the statistical tables, to politics and to the poor-house overseer.”
See “Wages of Labour, Economic and Philosophic Manuscripts of 1844”
Insights from Our Finite World: When wages of non-elite workers are inadequate to drive economic growth
Retired actuary Gail Tverberg was a constant contributor to the peak-oil theory blog The Oil Drum, which is now discontinued. But she maintains her own site under the title Our Finite World.
In Gail’s finite world, the wages of the base-level working class, what she calls the “non-elite workers” are also of prime concern when examining the current “growth economy” orthodoxy and its failures.
Tverberg typically begins an essay with a discussion on the energy situation in the economy–whether there is adequate cheap, easy-to-get energy to continue powering growth forward. But then she inevitably turns toward the problem of the wages of the lowest segment of our working class:
“The wages shown on Slide 24 have already been inflation adjusted. Thus, in the period before 1968, wages for both the lower 90% of workers and for the top 10% of workers were rising rapidly, even considering the impact of inflation. Many families were able to afford a car for the first time.
After 1980, the wages of the top 10% rose much more quickly than the wages of the bottom 90%.”
Tverberg offers a different way of defining “what is an economy?” or what is an economic system, in her piece “The world’s weird self-organizing economy” (click link for the whole piece):
The economy is one of many self-organized systems that grow. All are governed by the laws of physics. All use energy in their operation.
“Gail the Actuary” offers this introduction–
I am not an economist; I am a retired actuary. I have spent years making forecasts within the insurance industry. These forecasts were financial in nature, so I have had hands-on experience with how various parts of the financial system work. I was one of the people who correctly forecast the Great Recession. I also wrote the frequently cited academic article, Oil Supply Limits and the Continuing Financial Crisis, which points out the connection between the Great Recession and oil limits.
Today’s indications seem to suggest that an even more major recession than the Great Recession may strike in the not too distant future. Why should this be the case? Am I imagining problems where none exist?
In constructing this multi-part alternative-economics blog series, we thought it best to seek out the ideas of those who are specifically not orthodox economists, or not economists at all, but rather, astute observers of the real goings-on in the real world we inhabit.
Further on in the “Weird Self-Organizing Economy” post we find that Gail the Actuary has acquired a deeper understanding of the problem of inequality of income and wealth, than you might expect to find from someone who has worked for large property-and-casualty insurance companies. She writes:.
 Part of the world’s energy problem is a distribution problem; the world becomes divided into haves and have-nots in many ways. It is this distribution problem that tends to push the world economy toward collapse.
There are many parts to this distribution problem. One is the distribution of goods and services (created using energy) by country. Over time, this tends to change, especially as commodity prices change. Oil exporters are favored when oil prices are high; oil importers are favored when oil prices are low. The relative values of currencies can change quickly, as commodity prices change.
Another part of this distribution problem is growing wage and wealth disparity, as more technology is added. If there is too much wage disparity, low-paid workers often cannot afford adequate food, homes, and transportation for their families. Their lack of demand for goods made with energy products (because of their low wages) tends to work through the system as low commodity prices. This happens because (a) there are so many of these workers and (b) these workers tend to purchase a disproportionate share of goods and services that are highly energy-dependent.
Gail Tverberg further shows what young folks would call a more “woke” awareness of the impact of income and wealth inequality upon not only the economy, but the whole society as the prospect of “collapse” is introduced. Gail:
When I talk about non-elite workers, I am talking about workers who are in the bottom 90% of the wage distribution. Elite workers will always have enough income for the necessities of life. There are so many non-elite workers in the world that they, indeed, do make a difference.
Also, the forces that adversely affect non-elite workers tend to have several effects:
- They tend to send a larger share of wages to elite workers, as the economy becomes more complex and more specialized.
- They tend to send more unearned income to elite workers, through capital appreciation, because elite workers can afford to buy shares of stock and expensive homes.
- The wealthy spend their income differently from non-elite workers. Non-elite workers tend to spend the bulk of their discretionary income on devices made using commodities, such as cell phones and automobiles. The wealthy are likely to spend their discretionary income in less energy intensive ways, such as investing in shares of stock and buying services such as private college education for their children.
History shows that economies tend to collapse when wage and wealth disparity becomes too great. Collapse can take various forms, including revolutions by the disgruntled underclass, increased susceptibility to epidemics, or the financial collapse of governments. Wars become more likely, as one country tries to aid its citizens at the expense of citizens of other countries.
What is the foundation of the deflationary cycle of our economy? It’s the destruction of the wage-labor system itself. Fighting for Jobs Jobs Jobs! will be useless if the jobs don’t pay enough to support the workers. And if increasing numbers are displaced and left out of the Jobs Jobs Jobs picture–by the Automaton, a full complete system of “the machine” described by Karl Marx in his notebooks entitled “Grundrisse.”
To venture further into non-orthodox political economy, let’s close this post with a Marxist view, offered by the League of Revolutionaries for New America.
“Capitalism came to dominance during this leap from agriculture to industry as a stage in the development of private property. Now, like all the other stages before it, capitalism is facing its own demise. The capitalist system first developed upon, and in compatibility with, the new industrial means of production. With the introduction of the qualitatively new means of production – the new laborless technology – into the industrial system, a new leap has begun.
“The intricate network of all the various means of buying and selling is being disrupted as wage-labor, the source of all wealth, falls in value and price.”LRNA, “Revolution and the Tasks of Revolutionaries”
May/June 2018 Vol28.Ed3
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