Capitalist confidence and electability from Lang to Rudd and Obama

The recent debate about the Resources Super Profits Tax revives an old argument about whether or not capitalists have a veto power over governments due to the alleged linkage between business investment, economic activity and the likelihood of re-election. Critics of capitalism once favoured this argument (and conservatives opposed it) but now with the demise of socialism conservatives in both Australia and the United States are happy to use it also. Voters might agree but is it the case? I considered this question in my book:

In some later descriptions the fall of the Lang government appears as the archetypal result of a ‘capital strike’. Many authors have proposed a structural model of the dependence of the ‘state’ on ‘capital’; that as capitalists make the decisions to invest and employ it is in the interest of voters to support pro-business policies. Critics of social democracy from both the left and right can agree on this, with pragmatists supporting an accommodation with business and radicals supporting a socialisation of investment to break capitalist veto power. There is a left-wing folklore that attributes demonic power to an omnipresent and personalised ‘capital’. Certainly the separation between politics and the workplace that underpins capitalist democracy was challenged in 1932. Employers threatened workers with dismissal if Lang won June election. Langite unionists harassed UAP supporters at work.

A closer examination of politics and economics in 1930-32 calls this model into doubt. Capitalists are in business to make a profit; it would take an extraordinary degree of collective mobilisation for capitalists to consciously forego business opportunities as part of a political strategy. Most employers in NSW were small businesses; they were not major corporations that could shift investment funds from state to state. For what it is worth a consistent Marxist would reject this model as attributing economic recessions to capitalist malice, or subjective capitalist sentiment, rather than inherent contradictions of capitalism. Another problem is that even if capitalists did reduce investment for political motives the state could always counter this by increasing public investment and expenditure. The ‘investment strike’ hypothesis also forgets that consumer demand is as much as driver of economic activity as business investment.

The evidence for a distinctive downturn in NSW is limited. Lang’s opponents and some historians cite the flow of bank deposits to Victoria and the inverse relation between stock prices and Labor’s political fortunes. The economic significance of these statistics, at a time when most firms financed themselves by accumulated profits, is minimal. The political rhetoric of capitalists can be quite different from economic actions: Chifley’s nationalisation of the banks had little impact on the share market due to the government’s compensation offer.

The managers of Broken Hill South told shareholders in 1931 that restoration of ‘confidence’ was crucial to economic recovery, but their justification for investment decisions gave no attention to confidence and was a response to the availability of funds accumulated in the 1920s. Moods of panic struck individual businessmen but they did not necessarily guide investment decisions. Snooks’ analysis of Hume Enterprises, which had plants across Australia, found little relation between profit levels and investment, which seemed to reflect long-run corporate strategies, in a largely uncompetitive environment.

Critics of the investment strike hypothesis argue there is little evidence that the political environment has much impact on investment levels. The available evidence on the NSW economy supports their case.

With hindsight we can see that claims of a ‘capital strike’ seem unfounded, but workers lack the resources of capitalists. Confronted with a threat by their employer to close his factory they would be likely to play safe. It might be economically irrational for capitalists to implement a threat to close a factory, but the threat is costless. An American study in the 1980s found that although few firms actually implemented threats to close if their staff unionised, this threat discouraged unionisation.

The real issuse is the extent to which government policies facilitate efficent exchange and the coordination of production see David North and Oliver Williamson working on this currently.

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