The horizon is not so far as we can see, but as far as we can imagine

Why We Need to End Banks and Shadow Banks

Banks and various other financial companies have one important privilege: They can create money. When a bank lends you money, they don’t take it from another account and apply it to yours, they just put a number into a ledger, and voila, the money exists, created as debt.

Now, there are those who argue that creating all money as debt is stupid, but let’s move on from that and emphasize the important point:

Banks and other financial companies create money out of thin air.

Now, there are various caveats, and the amount they can create isn’t unlimited (though for practical purposes it’s close), but this is the bottom line.

They then get paid back by the people they loaned money to on money they created out of thin air.

It takes a special sort of genius to run a business which can actually create money, yet still lose money.

This chart gives an idea of how much genius:

I mean, you create the money out of nothing, and then you charge 17 percent returns (which underestimates the real rate of return, because of all the charges), and you still manage to cause a financial crisis because your liabilities wind up higher than your assets?

Wonderment aside, let’s circle back to the ability to create money.

Let’s say you’re Joe, guy who wants to start a business or buy a house. You go to a bank, and the bank decides whether you can do that.

Banks have the ability to create money in exchange for doing something: They decide who should get to do things. They give permission.

If a bank lends you 5o million, that’s the right to command 5o million dollars worth of other people’s labor: To hire them, or to buy the goods created by them. You get to choose what those people do.

Resources, especially people, aren’t infinite. Banks choose who gets to use them. The deal, spelled out is, “Give us the right to create money, and we’ll choose the people who do the most good with society’s resources to control those resources.”

And the banks have failed–over and over again they’ve failed. They don’t even actually make their returns (see 2007/8), let alone actually make good choices about how we should use our resources–with labour or other limited resources. I trust I don’t need to spell all of this out: Look at ecological collapse, climate change, and so on.

So banks, in their current form, shouldn’t have this incredible privilege, because they’ve repeatedly used it badly. This isn’t the first time, or even the second, or the tenth. Among others was the collapse of 1929 and the Great Depression, which effectively caused WWII. We thought we’d fixed the banking sector after that, and we were wrong, because rich people bought out government and undid all the fixes put in by FDR and the New Dealers.

So banks can’t be fixed, they do near apocalyptic damage, plus they suck at their actual job.

We need to find another way to give people permission to use scarce resources, including other people’s labor.

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    I couldn’t agree more, and let’s not forget those who own the banks and their Praetorian Guard managers who, collectively, have come to be known as Wall Street. Pull it by the roots.

  2. Keith in Modesto

    “…because rich people bought government…”

    I say this regularly on Twitter to explain why taxes for the wealthy should be very very high. My formulation: the very wealthy use their wealth to buy the governement and use it to further dominate society (or some variation).

  3. Joan

    I absolutely agree. Also with 450 “pull it by the roots” and what Keith said about higher taxes for the rich. There should be a cap that the richest person in a society can only be twenty times richer than the poorest person. Maybe even 20x is too high.

  4. Paul

    Trouble is, the rich have already bought the mechanism by which we can control/tax them. What can we do now besides moan about it?
    We can vote for the others who promise to do something about it, but never do.
    Or we can protest and fight for our share. Historically, this is the only way the poor have achieved any gains.
    Or we can ignore it and play video games or play their divide and conquer party politics.
    It’s up to us really.

  5. nihil obstet

    As long as we have a money economy, there will be moneylenders. I’d limit private, for-profit moneylenders, which includes banks, to lending out money that they have. That is, they would not be able to create money.

    I’d end advertising for moneylenders. (Actually, I’d end advertising for most things, but the subject is banks.) The notion that going into debt is good creates a lot of anguish. I am convinced that many people who took out home equity loans in the 80s and 90s didn’t understand that they were taking out loans because of all the advertising that you should “put the equity in your house to work for you.” For people who don’t know much about finance, sounded like what rich people do, getting money from their money.

    The conservative legislative response to the rip-off of the average person is to mandate “financial literacy courses” in the high schools. That has the double advantage of keeping the legal responsibility on the customer rather than the provider and of reducing the time available for more important studies. I’d instead have the legislators or regulators develop a short formal description of the transaction, along the lines of “This is a debt obligation of amt. filled in by lender. If paid at the agreed interest rate of interest rate filled in in term filled in, debtor will have repaid total amt.”

    And of course, we need to bring back good bankruptcy laws to put the responsibility for making decent financial decisions on the people who describe themselves as knowledgeable professionals.

  6. SteveInNC

    I agree with you Ian, though I would add one more point: because each loan must be paid back with interest, it sucks more money out of the productive economy than it puts in, necessitating yet more loans to keep the economy going, making matters worse, ad infinitum. There was some good stuff on this not too long ago over at Naked Capitalism, I think by Michael Hudson.

    This of course also makes the case for redistribution, taxing money away from the unproductive rich, and spending it into the real economy on socially valuable matters like infrastructure, education, non-military R&D, job guarantee, etc.

  7. Willy

    There are Seven Deadly Sins. And Ten Commandments. Maybe someday kids will have to memorize Twelve Ways That Rich Power Will Screw You.

    Number one might be: Like crack whores, the pathologically rich will do anything they can to extract money from you.

  8. Mike Barry

    No, you can’t have a significant business sector without banks. Bring back Glass–Steagall and all will be well. Or at least better than it is now.

  9. johnm33

    Fairest option would be to allow all citizens credit at a subsistence level say $2000 a month, no interest but a 2.5% transaction tax on every transaction to begin to recover the debt. Any debt still standing at year end gets a rollover fee equal to inflation. Once two years credit is owed transaction tax increases by 2.5%, same for every additional year. The tax always pays down the oldest debt, there’s no restriction on working, but if you accept the credit you have to get your pay payed into the account. Once the system was up and running providing the citizen has established their credit-worthyness they’d be allowed to borrow up to the limit of the number of years of their participation, or allowed to draw down an income based on equity in an asset. With an additional .5% transaction tax on all transactions all other taxs would be redundent. Given the present situation where almost 40% of every transaction goes in upstream interest charges this alternative of interest free Gov. issued debt would merely put citizens on the same playing field as bankers.

  10. Hugh

    When a bank loans you money for say you to buy a house, it does create the money it lends you out of thin air. But at the end of the day, it has to go looking for the money to cover its loan. It can go to its deposits, or other banks. Ultimately it goes to the Fed, more specifically its regional Fed. It is the regional Feds that actually do day to day money creation in the Fed system. (And the Fed, not the federal government, is the entity which does 95%+ of the money creation.) What most people don’t get is that these regional Feds are cartels made up of private banks of which your bank is one.

    Banks make their money on the spread between the interest they have to pay out to secure the money they have to borrow to lend to you and the interest rate they charge you.

    In terms of a bank’s balance sheet, the loans it makes are assets (because it makes money off the interest it gets on them and can repossess them if you the debtor defaults) while customer deposits are liabilities (because they have to pay interest on them and have to pay them back when you withdraw money or close your account). It’s a series of offsets. They get the use of your money and can pay you less in interest than they would have to pay the Fed, a plus. But they have to run branches so you can have access to your money, a minus. But they can minimize these costs by charging exorbitant and often hidden fees on pretty much anything you do with them, going electronic which is cheaper for them, and requiring minimum balances, all pluses for them. And FDIC insurance means they can be fairly sloppy with your money.

    As we have seen in the run up to the housing bubble bust in 2007 and the Great Financial Crisis, they can invest in housing even when housing is in a huge bubble and they can invest in derivatives even when those derivatives multiply their risks. As I said, banks are primarily interested in the interest spread because that’s where they make its profit. For the rest, as in the size of the loan or investment, all they need is a rationale, and this rationale is often just an acceptable fiction. Most of the time, it will work out or appear to, and if they really screw up and everything goes south, the government will bail them out and at worse if the bank is closed, the management will go into genteel retirement.

    I think money creation should go back to the Federal government and that those in government should be held accountable that that power be used for socially useful purposes and not as now simply to maximize profits, i.e. profits for the rich. I also favor creation of a post office or public bank for regular plain vanilla transactions with minimal fees.

    Finally, re credit cards, they are part of a credit economy. Essentially, the power to create money is extended to you when you swipe your card. If you carry a balance, this effectively becomes a loan, and just as for any other loan the bank goes looking for the money. The difference is that the interest spread is far, far higher, so vastly more profitable. I would note also that in addition to the interest rates in Ian’s graph, we need to remember that credit card companies also charge vendors about 2% on ALL their credit card transactions.

  11. Right, and wrong.
    An economy is like a massive clockwork, with parts constantly being changed. Every gear needs the right amount of grease- no grease and the gears seize up, too much grease and the gears slip instead of turning. Grease needs to be shipped to new parts of the machine, before it is needed. It needs to be removed from places that are built down, after it stops being needed.

    The grease is money. The job of emitting the right amount of money into the economy was (I hate this word) “crowdsourced” to a bunch of banking families, on the condition that if they do it poorly they go bankrupt and lose their license. The US economy absorbed 3% more money and 3% more energy every year for several decades. This concept worked very very well, until the banks learned how to fail without being punished.

    This is how the fractional reserve system works, and it can be made to work really well.

  12. Tom

    @Jack Parsons

    This is why the Treasury Department should run the Federal Reserve and be on top of all its actions.

    Banks should be treated as Public Goods and managed as such.

  13. DMC

    I’m with MB. Bring back Glass-Steagal! Also a public banking option, through the post office, so most ordinary folks wouldn’t even need to get mixed up with Commercial banking.

  14. Creigh Gordon

    The Federal Government’s role in the private banking system is often misconstrued as a money-creating “privilege” granted by the government to the private banking system. What the private banking system does is extend credit. It could, would, and historically has done that without any government involvement at all. The US banking system exists today as a public-private partnership because a public interest lies in making sure that a supply of credit is available when needed to keep commerce moving smoothly. The Fed ensures this by supplying unlimited liquidity to the banking system at its target interest rate. In return for backstopping the banking system, the Government naturally imposes restrictions and regulations on credit creation, to ensure the stability and integrity of the system.

    The private banking system also is supposed to perform another essential function; evaluating and pricing risk of default at the retail level. Not that the private banking system always does this well; in the early 2000s it willfully failed to evaluate mortgage risks properly. But if the private banking system was eliminated in favor of direct lending by the Federal Reserve, that function would have to be taken over by the Government. And that’s something the Government probably wouldn’t do well and shouldn’t try doing. For one thing, if the Government extended a loan to one person and denied it to another, it would immediately be accused of favoritism.

    The answer is to let the private banking system do what it does well (with appropriate oversight and regulation — things like making banks hold their own loans; there is no public purpose in allowing a secondary market in mortgages and it just leads to laxness and risk) and have a robust public finance sector to do things that the for-profit system will not do.

  15. Charlie

    I have a different system in mind that involves a dual monetary system. Workers are paid in stock, and all workers get to vote democratically on who runs the company, officers, etc. No one entity can own more than 30% of said stock and the proportions are voted upon by workers and management.

    The government runs the stock market using various data from different departments (BLS, SEC, FCC, etc.) and prices the stock in accordance with business fundamentals AND externalities. In other words, if your business model tends to make others pay for things such as pollution (think oil companies), species extinction, toxic cleanup, etc., then the price of stock takes a hit.

    Workers and management can cash in their stock holdings at any time through the stock exchange (or post office bank) in currency with the stock price times the number of shares exchanged. This money can then be spent in the general economy.

    Corporations themselves could also be set up in a more democratic fashion (worker reps on the board, for instance), but that’s another, much longer post.

  16. Stirling S Newberry

    This isn’t an argument for banks, it is an argument for killing the people who run them. And the people who lather themselves up with the profits which they do not deserve. Think Trump.

    The reason that investing is the key to banking is it is the test of making money, and since the Great Recession, the have played the dubious plan of raiding homes for money. The reason this is dubious is that you are stacking 1 party to money, but not the other and tearing down houses if the seller loses (if the seller is a company.) Time in the future turn into money buy labor and capital property, and giving to much to property is rigging the game.

    It ends badly. Very badly.

  17. Hugh

    We have a credit not fractional reserve banking system.

    ” in the early 2000s it [the private banking system] willfully failed to evaluate mortgage risks properly”

    No, what resulted in the housing bubble, its going splat in 2007, and the subsequent Great Financial Crisis of 2008 were the largest interconnected frauds in human history. The damage ran into the tens of trillions. They were pervasive and systemic. They did not occur at any one or few points but at every step from the mortgage origination companies at one end, through the banks, MERS and all the trading back and forth they did via MERS, from there to the trusts illegally formed from these tainted mortgages, through the CDOs and the repackaged subpar tranches sold as A grade, and from there to the CDO squared and cubed, CDS, and synthetics written on them.

    Rather than seizing the banks and putting them through bankruptcy and prosecuting their executives and sending them to jail, the political class as represented by Congress, the two Presidents Bush and Obama, the two Treasury Secretaries Paulson and Geithner, and Fed chair Bernanke did everything in their power to bail out the perpetrators and not their victims.

    The courts also played a wildly illegal role acting as agents of the banks. They ignored 350 years of black letter property law. Yes, that’s a hundred years before the American Revolution. They established rocket dockets to jam through foreclosures. Thing was except for the residual mortgages the banks still held they had no standing, even in non-recourse states. This was because mortgages were separated into titles (held by the trusts although whether the trust actually held a valid title was often doubtful) and promissory notes (spun off into CDOs). The parties injured were the CDO holders, not the banks. So the banks had no standing even though the courts acted like they did. At the same time, the CDO holders had a portion on a promissory note on a tranche. So how much of a call they had on any particular homeowner would have been nearly impossible. On top of this, they had no call on the title, i.e. foreclosure because the whole point of the CDO was to create a pure financial instrument divorced from, as in they did not have to bother with, the underlying asset, and the CDO holders knew this going in.

    It was all illegal from top to bottom and covered up and bailed out by all three branches of government plus the Fed.

  18. Obama was going to “tax the rich,” that is to say, “make them pay their fair share,” and raised the marginal rate on them from 29% to 33%. Democrats are big on symbolism, or as it has been more properly described, “sounding brass, filled with noise and fury, signifying nothing.” Today’s “tax the rich” Democrats are not offering anything of much more significance.

  19. Dan

    Ian has a gift for cutting through the bullshit with a pithy shot of concentrated clarity. This is simple, clear, and wise. I wish it had a prayer of gaining political leverage.

  20. S Brennan

    From 1932-1978 society ran much better than it does today. Perfect ? No, but, we addressed problems created by our predecessors with alacrity and vigor.

    When congressional Republicans insisted that IKE turn away from the system that had managed to crush Japan’s Imperial Armed forces who had colonized all of SE Asian and Nazi Germany who had conquered all of Continental Europe, Eisenhower showed them the door. IKE saw the immense power gained from a hybrid capitalist system with STRONG SOCIAL RESTRAINTS and fair worker remuneration.

    Many Republicans decried IKE’s insistence in continuing FDR policy and not returning to the gilded-age policies that had left the USA broken before the rising tide of fascism. At first this radical uppermost sliver of society turned to John-Birch Society types to sell the gilded-age policies with no luck, the nation still had a strong memory of the 30’s and WWII and knew that the “gilded-age” was a shop of horrors. So the radical uppermost sliver of society looked to a new group of charlatans/economists to spend the next twenty years indoctrinating the portion of society that knew nothing of WWII and the depression…and that worked.

    Here we are. With a perfectly good template to follow, we argue over untried ideas and utopian prescriptions that will require decades of indoctrination to implement instead of aguing for the return what was shown to work.

    And hey, no the US, in spite of Milton Friedman’s argument wasn’t the producer tot he world after WWII, most of US “exports” were produced in the country they were sold to. That shit argument wasn’t the cause for the US/Canada’s wealth, what we did do, was create a domestic economy that demanded products. And that was done through the continuation of FDR’s policy.

  21. bruce wilder

    From 1932-1978 society ran much better than it does today.

    Of course, you know what the answer would be from the well-rehearsed voices of identity politics: “better for whom?”

    The polity was more democratic in the sense of responsive to voters’ economic interests and the political culture over that period became gradually more genuinely committed to its ideal political values of genuine due process and equality before the law, while significant resources were channelled into the provision of social insurance and public goods, including infrastructure and public education. The polity was also more decentralized though it became more centralized over that period as a result of reforms; the political culture became more homogenous as well, as a by-product of the decline of social affiliation as well as the increasing scale of economic organization generally.

    Somehow, the capacity of the People to govern was lost in the great political realignment, 1978-82.

    The detailed and shifting ideological content of left-neoliberalism matter less than the unwillinglessness of those representing the left side of the political spectrum as pundits and politicians to continue to fight the fight against the rich, against the bosses. I suppose without personally knowing the details that this was partially engineered by Money, as the resources for institutions that served as bases of support for the Liberal Class of perennial critics and reformers in the charitable foundations, labor unions, academia, mainline churches, membership civic organizations, et cetera were diverted and withdrawn or those institutions subverted.

    The capacity to govern democratically from and for the bottom or even from the middle for more or less everyone is gone. The banks govern us because we lack the political will or capacity to govern the banks.

    Of course, we are ill-used by the banks. All power corrupts and they have all the power in this political arrangement.

    Saying, we “need to end banks” could be construed as a pithy way to say we need to restore our democratic capacity to govern and use that restored capacity to restructure money and finance to serve the public good. Or it could be construed as a despairing cry for revolutionary destruction of “the system” in the forlorn hope of something completely and better rising spontaneously from the ashes. Honestly, if I myself had written the OP, I could not distinguish my intent from those two poles.

  22. StewartM

    Good article, Ian. As a general rule, it should not be allowed for people to make money by manipulating money; wealth should all about the construction of real things or the delivery of real (i.e, desirable) services, all in a competitive market to keep profits and prices in line, and not about charging rent or inserting oneself as an otherwise-useless middleman in any economic activity.


    Here we are. With a perfectly good template to follow, we argue over untried ideas and utopian prescriptions that will require decades of indoctrination to implement instead of aguing for the return what was shown to work.

    The FDR economy, as successful as it was, did not survive more than two generations as you yourself admit. It did not survive because it did not vanquish those who would undo it (i.e, the capitalist class) to powerlessness. That is reason enough to say it was a failure and we should do something better.

    I don’t claim to have all the answers, but it’s clear unless you’re willing to take away power from the investor class, and give decision making-power to those who actually create (i.e, the workers), and also those who have a long-term interest in the success and continuation of individual firms (again, the workers, more so than any capitalist) then any patches you put on the current system will not last. Most of our problems are due to the fact that “pure” capitalism–control by the investor class over the decision-making of an economy–has zero, zilch, nada long term focus. Investors have proven again and again they will do stupid things not only regarding externalities like the long-term future of the planet; they even do stupid things regarding just the future profitability and continuation of their firms. The loss of US preeminence in industries from autos to electronics and more is a tale of firms being forced by Wall Street to sacrifice the future for the next quarterly profit report.

    As someone who works in a Fortune 500 firm, I can tell you that while we workers want higher pay and better benefits in the short term too, we have far, far, far more of an interest in making sure the place is still in business 30 years from now, for our retirements and too keep the place open for any of our children to work there. And we’re willing to sacrifice pay and benefits now for things such as reinvestment in capital infrastructure and R&D, plus measures to enhance safety and the welfare of the local environment (because we live and work there) to a greater degree than any Wall Street hedge fund manager. I don’t claim that worker control over firms fixes everything, but it does fix a lot.

    FDR and his allies did not realize that at the time; they can be forgiven, but we now know better.

  23. Hugh

    Epstein’s demise reminds me of the Stalin era story of the famous poet who committed suicide. Someone asked did he have any final message. Yes, came the reply, “Comrades, don’t shoot!”

  24. bruce wilder

    all in a competitive market to keep profits and prices in line, and not about charging rent

    So, you have not yet grokked that the neoliberal sales pitch (which you just quoted here) was a lie?

    Neoliberals had a spiel about the cure-all of “competitive markets” and the horrors of “rent-seeking” and then went about pursuing “competitive markets” in ways that created an economy dominated by rentiers disinvesting for fun and profit.

    And, after forty years of this, people can still praise “competitive markets” as a policy ideal and decry “rent-seeking” as the root of all evil without any awareness that they are all wet: fish swimming in the sea of ideas created by neoliberalism and with no notion that the water is wet.

    This was not the economics of the New Deal for the most part, which was all about carefully managing the balance of forces in the economy between capital and labor, consumers and business. The financial sector created by New Deal legislation was diverse, with numerous firms of various types, created by restricting “market competition” and assigning small economic rents in order to make the competitive position of firms defensible — savings and loans, for example, were given the privilege of paying a slightly better rate of return of on deposit accounts than commercial banks were allowed to pay.

    As a matter of conventional economic theory, “competitive markets” understood as markets where price equilibrates supply and demand is simply not possible in the exchange of most produced goods and services for money. The production of most goods and services is dominated by social and technological organization to control waste and error, organization that involves large commitments to sunk-cost investment and “overhead”, commitments that result in a cost structure that make market equilibrium in price impossible and the result is typically administrative arrangements to manage price schedules of various kinds, in which price discrimination figures as a means to recover a return on investment. Those administrative arrangements are founded ultimately on property rights claims and other customary and legal privileges that enable . . . (wait for it) . . . rent seeking. Any return at all on a sunk-cost investment is an economic rent (technically, where the stock of invested capital has to be renewed, a “quasi-rent”). In real life, firms are not “profit-maximizers” because in a world of pervasive uncertainty, it is simply impossible to have any definite idea of what it would mean to “maximize profit”. In real life, firms are “rent-seeking”, meaning that they are engaged in trying to strategically manipulate the structure of the business ecology in which they live in order to have the political power to earn an economic rent on a sunk-cost investment. They can be “rent-seekers” in an uncertain world, because “rent-seeking” can orient itself around the facts created by sunk-cost investments and property rights: in other words, firms can construct a business model that identifies a stream of income achievable by successful command-and-control and technological structures given favorable privilege from the state.

    The New Deal did not have all this worked out, I suppose, but they were not lost in Milton Friedman’s Wonderland of consumer sovereignty in a naturally emergent competitive market economy that only needed to be freed of government interference in order to thrive either. Where public investment in infrastructure and education created economic rents for owners of real property and business, the New Deal state taxed those economic rents pretty heavily. Property taxes funded schools and local government.. (yeah, yeah MMT — taxes do not fund spending — except for local governments which do not issue dollars, so yeah they do.) Corporate income taxes of 50% or higher were structured to hit business corporations that were successful in securing significant economic rents. High marginal income tax rates discouraged powerful individuals from extracting very high incomes from occupying seats of corporate power. Public utilities with “natural monopolies” were subject to rate-of-return regulation of their price schedules. Industries which earned very high economic rents had to contend with active labor unions, which got their share.

    The [FDR economy] did not survive because it did not vanquish those who would undo it (i.e, the capitalist class) to powerlessness.

    The Soviet Union did that and voila! Ditto, for Mao’s China.

    It is not clear to me that workers want to manage the firms they work for or always want to participate in their governance, assuming such a thing can even be organized. And, it isn’t always clear to me that even when they do, they are not inclined to be excessively conservative. Encyclopedia salesmen pretty much did in most encyclopedias (as business firms), when CDs and the internet came along, because they opposed adaptation that would do away with their jobs.

    When people had it good in the 1960’s and 1970’s, they seemed to lose interest in governing the state. Maybe they had some help in their developing their disinterest. Maybe it was just the poison of television occupying their time and intelligence.

  25. Charlie

    “The [FDR economy] did not survive because it did not vanquish those who would undo it (i.e, the capitalist class) to powerlessness.”

    The Soviet Union did that and voila! Ditto, for Mao’s China.

    I think this has to be done from time to time for any way society is set up because we seem to want to be more like our grandfathers than our fathers. (Jefferson?: The tree of liberty needs to be refreshed from every so often with the blood of tyrants. Or something like that. )

  26. Eric Anderson

    “We need to find another way to give people permission to use scarce resources, including other people’s labor.”

    Here’s another way:

    And if every state had one, the combined states could effectively form a 50 state fed reserve to replace the bs system in place today.

    But no. That system works perfectly well for the privileged few.

  27. Eric Anderson

    Oh yes,

    Almost forgot about empowering the workers:

    Couple these two approaches and you have an economy decoupled from the need for plutocrats.
    Not rocket science. As Ian keeps saying, we know how to do these things.
    But, as I keep saying, people won’t stop giving fealty to propaganda box that keeps them hacking at branches of the problem, instead of cutting off the head, so to speak.

  28. StewartM

    Bruce Wilder

    The Soviet Union did that and voila! Ditto, for Mao’s China

    The Soviet Union and Maoist China most definitely did *NOT* do this; rather than putting the workers of firms in control, it was more akin to a system of state capitalism. That was the great Leninist deception–Lenin ‘campaigned’ on “All power to the Soviets” which *was* all about giving workers direct control over the workplace, but gave them something else entirely. This was a big reason behind the Kronstadt revolt of 1921.

    It is not clear to me that workers want to manage the firms they work for or always want to participate in their governance, assuming such a thing can even be organized. And, it isn’t always clear to me that even when they do, they are not inclined to be excessively conservative

    One, it can be done, and IS done–worker cooperatives do exist. The leadership of a firm is elected by a one-man, one vote; just the way of say, a civic organization or a church. Are you saying that these organizations don’t or can’t maintain themselves?

    You can and do have investors in such a firm, but as bondholders, not as stockholders; they cannot buy, take over, split up, or directly threaten the firm. What this does is to make all investors equal (as small stockholders have no option but to sell their stock; only the big boys can threaten the CEO or buy out the firm). The reason why this is important is that the salient feature of capitalism today is that every decision of today’s CEOs (at least those in charge of companies that aren’t in gamed markets) is to stave off a buyout or a breakup, to do anything to keep the investor class satisfied.

    Most layoffs and job loss that occur today is not because the firm is in any dire need, it’s because profits have dropped slightly (or even just threaten to drop) and the firm axes workers to keep profits up (to keep the investors happy and their moola coming in)–even though this comes at a high cost of productivity, cost of hiring and retraining, and knowledge. Firms sacrifice the future for the short-term present. Giving power to the workers would result in what would be the correct result–investors just get less. After all, it’s the investors, not the workers, who are supposed to be bearing the burden of risk.

    For example, at my company, when I hired in many years ago, it was a bragging point of the company that “we don’t have layoffs” and also we had a real profit-sharing program. What happened during real downturns (not just market blips and hiccups) was that we cut labor costs by having people take a day off work periodically without pay (like unpaid vacation). It might be one day, two days, or three days a month. That way, everyone kept their jobs; most could afford the loss of a few days of pay a month, and you didn’t have to lose knowledge or spend money to re-hire or replace people sacrificed. The fact that you had a profit-sharing plan too was that though in bad years you might not get any or much, in decent or good years ordinary workers could get enough to buy a new, inexpensive, automobile ($2000-4000 back then; would be like $12000-15000 now).

    The result of this was a company workforce that WAS willing to make sacrifices. I know, because under the neoliberal “Jack Belch Welch” corporate management we had our first layoff ever in the late 1990s—due to financial problems caused by rather boneheaded decision-making by the corporate leadership. Yet workers, even those in “safe” jobs which were not under consideration to be axed, wrote the CEO and board asking “why can’t we handle this the way we always have?”–workers offering a drop in their own pay, in essence, for the benefit of others and the firm as whole.

    Geez, Bruce, have you EVER heard any Wall Street hedge fund manager saying that?

    I submit to you the alienation that you speak of was more to due to the loss of control, and much of that happened later. I see it here too, now that my company is ‘managed’ as badly as most other US firms.

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