Class conflict is back at the core of economics

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Capitalism updates

“Pay them more”. With these three words, President Joe Biden summed up the most surprising outcome of the pandemic: workers seem to have the upper hand against employers thanks to widespread labour shortages. While this sense is strongest in the US, reports of businesses struggling to find staff are heard across much of Europe as well.

We should not get ahead of ourselves. Millions of people are still unemployed or on government-funded furlough schemes. Anecdotes of pay pressures do not amount to systematic and sustained high rates of wage growth. Sectoral spikes in prices are related to supply chain bottlenecks, not salary costs.

So the current perception of labour shortages may be just that. But if evidence builds up that workers are systematically making greater demands of their employers than before, the importance of the shift will be profound.

The fact that nobody predicted it is itself significant. We are still scrambling to understand what is going on. Reports of labour shortages coincide with reports of hardship, especially among low-paid workers. Even within single sectors — such as some UK hospitality sectors — many employers have kept employees on furlough when others are desperate for more hands.

It is possible these mismatches are the transition pains of a great restructuring of the economy, with remote working settling in to stay. Yet workers seem to be less victims than agents of this transition. This contrasts with the past 40 years of labour market restructuring, which has largely been inflicted on workers, not pushed by them.

During the pandemic, stories have abounded of workers determined to say no to work they would previously have resigned themselves to and to hold out for something better. It is not just anecdotal, either. A new study finds that more than one-fifth of US workers — and 30 per cent of under-40s — have seriously considered a career change since the pandemic began.

What this looks like is the return of something that was exiled from centrist policy debate and mainstream economic analysis for decades: class conflict and its economic consequences. To be precise, we may be witnessing the manifestation of two outmoded ideas: that the relative power of economic classes alters macroeconomic outcomes; and that macroeconomic policy tilts that relative power.

A third and novel idea is also being put to the test: that strengthening “employees’ bargaining chip[s]”, as Biden put it, can encourage employers to increase both labour productivity and output if they expect demand growth to be strong.

Conventional economic thinking has little room for these possibilities. In standard models, the supply and demand for labour match when workers are paid exactly their marginal contribution to production. If they demand more and better — or governments do so on their behalf — the result will be unemployment and inefficiency as businesses prefer to curtail production.

Can a fully employed economy, contrary to those models, be compatible with a whole range of salary bargains between business owners and employees, depending on their relative power? Can companies’ productivity respond to high demand pressure? If so, can a “big push” from government increase wages, employment and productivity growth at the same time, with higher but contained inflation? The great experiment of Bidenomics may give us answers to these questions.

If the answers are Yes, they will overturn a series of not just economic assumptions but political ones. They will be deeply contested.

Every downturn rekindles interest in John Maynard Keynes. This one should call attention to Michal Kalecki, Keynes’s contemporary. In his 1943 article “Political aspects of full employment”, the Polish economist not only set out a succinct argument for fiscal stimulus but also discussed why business interests may oppose full-employment policy, including entrepreneurs who paradoxically stand to make greater profits in a regime of high demand growth.

Kalecki offered three reasons. Business owners may dislike government activism as such, because “once the government learns the trick of increasing employment by its own purchases, this powerful controlling device [of making employment depend on business confidence] loses its effectiveness”. They may dislike public investment for fear it leaves less space for private profitmaking. Even if they accept the need to end a downturn, they may oppose policy to maintain maximum employment because it would change the balance of power in the workplace.

One does not have to be a Marxian economist to see the risk of politically motivated reasoning. If Bidenomics succeeds, fiscal activism to improve workers’ bargaining power will enjoy strong support to be kept in place through good times too. Kalecki warned: “In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound.” That should sound familiar.

A better aspiration is what Kalecki called “full employment capitalism”. This will depend on promoting an enlightened view of capital owners’ self-interest: far from class conflict being a zero-sum game, productivity incentives from greater worker power can boost profits as well.

martin.sandbu@ft.com

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