Charles Hugh Smith publishes Foreclosure Crisis Weekly, dedicated to documenting the often-amazing foreclosure crisis.


All attempts to reform the Status Quo of advanced finance-based Capitalism will fail, as its historically inevitable crisis is finally at hand.It is self-evident that conventional economics has failed, completely, utterly and totally. The two competing cargo cults of tax cuts/trickle-down and borrow-and-spend stimulus coupled with monetary manipulation have failed to restore advanced Capitalism’s vigor, not just in America, but everywhere.

Conventional econometrics is clueless about the root causes of advanced finance-based Capitalism’s ills. To really understand what’s going on beneath the surface, we must return to “discredited” non-quant models of economics: for example, Marx’s critique of monopoly/cartel, finance-dominated advanced Capitalism. (“Capitalism” is capitalized here to distinguish it from “primitive capitalism.”)

All those fancy equation-based econometrics that supposedly model human behavior have failed because they are fundamentally and purposefully superficial: they are incapable of understanding deeper dynamics that don’t fit the ruling political-economy conventions.

Marx predicted a crisis of advanced Capitalism based on the rising imbalance of capital and labor in finance-dominated Capitalism. The basic Marxist context is history, not morality, and so the Marxist critique is light on blaming the rich for Capitalism’s core ills and heavy on the inevitability of larger historic forces.

In other words, what’s wrong with advanced Capitalism cannot be fixed by taxing the super-wealthy at the same rate we self-employed pay (40% basic Federal rate), though that would certainly be a fair and just step in the right direction. Advanced Capitalism’s ills run much deeper than superficial “class warfare” models in which the “solution” is to redistribute wealth from the top down the pyramid.

This redistributive “socialist” flavor of advanced Capitalism has bought time–the crisis of the 1930s was staved off for 70 years–but now redistribution as a saving strategy has reached its limits.

The other political-economic strategy that has been used to stave off the crisis is consumer credit: as labor’s share of the economy shrank, the middle class workforce was given massive quantities of credit, based on their earnings and on the equity of the family home.

The credit model of boosting consumption has also run its course, though the Keynesian cargo cult is still busily painting radio dials on rocks and hectoring the Economic Gods to unleash their magic “animal spirits.”

The third strategy to stave off advanced Capitalism’s crisis was to greatly expand the workforce to compensate for labor’s dwindling share of the economy. Simply put, Mom, Aunty and Sis entered the workforce en masse in the 1970s, and their earning power boosted household income enough to maintain consumption.

That gambit has run out of steam as the labor force is now shrinking for structural reasons. Though the system is eager to put Grandpa to work as a Wal-Mart greeter and Grandma to work as a retail clerk, the total number of jobs is declining, and so older workers are simply displacing younger workers. The gambit of expanding the workforce to keep finance-based Capitalism going has entered the final end-game. Moving the pawns of tax rates and fiscal stimulus around may be distracting, but neither will fix advanced finance-based Capitalism’s basic ills.

The fourth and final strategy was to exploit speculation’s ability to create phantom wealth. By unleashing the dogs of speculation via a vast expansion of credit, leverage and proxies for actual capital, i.e. derivatives, advanced finance-based Capitalism enabled the expansion of serial speculative bubbles, each of whcih created the illusion of systemically rising wealth, and each of which led to a rise in consumption as the “winners” in the speculative game spent some of their gains.

This strategy has also run its course, as the public at last grasps that bubbles must burst and the aftermath damages everyone, not just those who gambled and lost.

Two other essential conditions have also peaked: cheap energy and globalization, which opened vast new markets for both cheap labor and new consumption. As inflation explodes in China and its speculative credit-based bubbles burst, and as oil exporters increasingly consume their resources domestically, those drivers are now reversing.

Advanced Capitalism is broken for reasons conventional economics cannot dare recognize, because it would spell the end of its intellectual dominance and the end of the entire post-war political-economic paradigm that feeds it.

Let’s look at some charts to see what conventional economists must deny to keep their jobs.

Take a look at this chart. What reality does it reflect? A failure to cut taxes enough? A failure to print enough money or extend enough credit? No. What it reflects is labor’s dwindling share of the economy.

The structural reality is that employment is declining:

Meanwhile, after-tax corporate profits have steadily climbed to nearly 10% of the entire national income:

Note the recent rise of finance-based profits:

This chart leaves no doubt that the engines of the past 30 years “growth” and “prosperity” have been credit and credit-fueled speculation:

If we look at disposable income, we find that direct government transfers have masked the systemic erosion of labor’s earnings and employment:

By at least some measures, the top 1% are paying a greater share of total taxes than they were 20 years ago, which suggests that “tax the rich will solve everything” stopgaps have limited purchase on the deeper structural ills of advanced finance-based Capitalism.

Marx identified two critical drivers of advanced Capitalism’s final crisis:

1. Global Capital has the means and incentive to keep labor in surplus and capital scarce, which means that capital has pricing power and labor has none. The inevitable result of this is that wages, as measured in purchasing power, fall while the returns earned on capital rise.

This establishes a self-reinforcing, inevitably destructive dynamic: once labor’s share of the national income falls below a critical threshold, labor can no longer consume enough or borrow enough to keep the economy afloat with its cash and credit-based consumption.

We are at that point, but massive Federal borrowing and transfers are masking that reality for the time being.

2. The dual forces of competition and technology inevitably drive down the labor component of all manufactured goods and technology-based services. Mechanization, robotics and software have lowered the labor component of everything from running shoes to computer chips from $20 per item to $2 per item, and that process cannot be reversed. While the wage paid to the workforce designing and manufacturing the products and providing the services may actually rise, the slice of revenues given over to all labor continues shrinking.

This is what I have constantly referred to (using Jeremy Rifkin’s excellent phrase) as “the end of work.”

Put another way: the return on capital invested in techology greatly exceeds the return on labor. Industries and enterprises which fail to leverage capital invested in technology that lowers the labor component of their good/service eventually undergo rapid and inevitable creative destruction.

We are about to witness this creative destruction in the labor-heavy industries of government, education and healthcare.

Marx’s genius was to recognize the historical inevitability of these internal forces within advanced Capitalism. He also recognized the inevitability of finance-capital’s dominance of industrial capital–something we have witnessed in full flower over the past 30 years.

Finance capital now dominates not just industrial capital but the machinery of governance, rendering real reform impossible. Instead, the Status Quo delivers up simulacrum “reform” which change nothing but the packaging of the Central State/Cartel Capitalism’s exploitation and predation.

Add all this up and you have to conclude the final crisis of finance-based advanced Capitalism is finally at hand. All the “fixes” that extended its run over the past 70 years have run their course. Life will go on, of course, after the Status Quo devolves, and in my view, ridding the globe of financial predation and parasitism will be a positive step forward.

The real solution is to understand advanced finance-based global Capitalism will unravel as a result of the internal dynamics described above, and be replaced with an economic and political Localism that I describe in my new book An Unconventional Guide to Investing in Troubled Times.I don’t claim these ideas are unique to me; many others have described the same dynamics and historical trends.

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “Labor’s Dwindling Share of the Economy and the Crisis of Advanced Capitalism”

  1. keithpiccirillo says:

    So, we will have another revolution.
    Which comes first, an invention that causes an industrial one, or more wars furthered along by a global trade protection riot that will be caused by a breakdown in the whole structure of the model we call capitalism?

  2. longwave says:

    This is the most cogent, well written argument that lays bare all the BS about double dips, sub-prime, budget deficits, et al causes for the the “crisis” we’re in. Smith is 100% correct, the forces at play here are deeply routed in historical trends that have been at work for decades. Economics is intellectually bankrupt. MMT is the the same. Financial services predation is hastening the demise of our way of life. And nobody is focused on fixing the structural problems. That is a recipe for catastrophe.

    I’m curious about his new book on investing.

    The sad thing is people are so polarized and brainwashed about Marx, that mere mention of his work brands you a communist or worse.

    Thanks for the post, it’s one of the best ones EVER on a blog that always scores high marks for the quality of the content. Too bad it’s buried on a Friday night of a holiday weekend. I hope it gets disseminated widely so people start to realize we’ve barely scratched the surface of the pain to come.

  3. crazicanuck says:

    Can this analysis be used for other capitalist countries? It seems to me that the Nordic European countries and Germany would not lead to the same conclusions.

  4. [...] Charles Hugh Smith, who publishes Foreclosure Crisis Weekly, has some apt if discouraging Labor Day reading in a piece titled Labor’s Dwindling Share of the Economy and the Crisis of Advanced Capitalism. [...]

  5. MayorQuimby says:

    While I agree with most of this article’s points I will say that simple deleveraging combined with much stronger nominal growth could prevent an epic shit storm. I am as bearish as they come but really do not want to see things breakdown to the point where USA is rip.

  6. wally says:

    This is a very thought-provoking piece. In particular, the description of the four ‘strategies’ to continue the system is quite interesting.

  7. VennData says:

    Wow, this guy should start a hedge fund. Instead of AUM, everyone donates sweat equity.

    If you’re breaking your back lugging coal to a communal steam room, would that labor qualify for “Carried interest?” like it does for the capitalist running dogs?

  8. KJMClark says:

    Our situation today isn’t that much different from the 1930s. And we didn’t need a revolution to solve the problem then. What worked was much higher taxes on the wealthy (top marginal rate around 90%), and politicians with the guts to put the taxes in place. Unfortunately, it took those high tax rates *and* a world war to bring back full employment.

    I don’t see where the war starts this time – but I’d bet it’s over oil if one does break out – so right now, it looks more like the British riots come back and expand. Until people get tired of not getting paid, and some demagogue riles them up, things will just simmer.

    Besides, I don’t see communism ever working here in the US. Fascism seems much more likely. There you go, the US becomes fascist and goes to war to end “illegal” Chinese long-term oil contracts.

  9. [...] read the rest and see some nice chart porn, go here. $(function() { $( “#content-pagination-prev a” ).button({ icons: { primary: [...]

  10. baldski says:

    I have read Mr. Smith’s pieces on unemployment and how he would get 20 million people back to work in the U.S. I am not an economist but I know jobs are created because of demand. 20 million people x $30,000/year = $600 billion/year is missing from the American economy. Mr. Smith never explains how he would get this missing chunk of money back into the economy to create demand. He has some good ideas, but he never touches on this problem. I can’t wait to see how our politicos handle this problem.

  11. Marc P says:

    Thought provoking, and I would like to hear more. The best line was “This establishes a self-reinforcing, inevitably destructive dynamic: once labor’s share of the national income falls below a critical threshold, labor can no longer consume enough or borrow enough to keep the economy afloat with its cash and credit-based consumption.”

    Certainly we have learned that floating an economy on a balloon of ever-increasing debt is bound for failure. What cannot increase forever, won’t.

    However, there has been a chorus of punditry lately about the shrinkage of labor’s share of national income. What these writers don’t discuss is that is the very definition of economic progress. In an agrarian society without machines labor has nearly a 100% share of output. The industrial revolution changes that, and labor’s share decreases. It’s called productivity. To lament that labor’s share has gone down is to say what, exactly? Is this author advocating that America get rid of machines?

    What these writers seem to ignore is that with productivity comes greater production, which means greater sales, which means wages can increase. As they have over the past 150 years.

    Also, what counts is not labor’s share of GDP, as GDP is just a measure of activity, not wealth or profit. What counts is labor’s actual earnings and concomitant standard of living. Economists seem to ignore this. GDP is in the press constantly. Aggregate income, nearly never. Can anyone reading this state (without looking) the amount of aggregate U.S. personal income in 2010? 2000?

    It’s true that personal incomes are flat, and personal wealth isn’t going up. This has little to do with labor’s share of GDP, as I see it. It has much to do with people taking on debt to purchase consumables (i.e. personal wealth goes down) and U.S. labor’s insistence that with a high-school education an individual should make $80,000 per year and retire after 30 years. Along with this, a government, union leaders and industry that has spent a generation encouraging this myth.

    There are two distinct lines of thought in this article. Credit expansion as a make-up for standard of living is a good one. Labor’s share of GDP, not so much.

    Last, I am reminded of that saying “capitalism is a terrible form of economics, except for all the rest.” What does the author advocate?

  12. JerseyCynic says:

    why is this post on the right side of the blog- under recent posts — instead of on the main blog’s thread?
    just curious… maybe it’s just my computer — or just me — I never look on the right side of blogs that advertise.

    [BR: Its in the ThinkTank, our “salon” of different ideas]

    are any of you involved in your local communities? This is KEY here, folks.

    from one of his readers:

    “In short, current policies are anti-community and pro-sociopathic.

    Note to economists and social engineers: there is no algorithm that can express or replicate the heartfelt warmth and the bonds that are created and strengthened when a community voluntarily reaches out to help each other during difficult times.

    Note to big box corporations: I, and probably many more Americans miss the local bakery, butcher, clothier, grocer, etc. It was never just about stuff. It was more about stopping in and shooting the breeze over coffee, your kids playing on the same teams, it was and is about genuine mutual interest, the emotional context. They not only knew your name but knew you and you knew them. It’s about the personal relationship. It’s about community.

    A group of people without the ingredients of community is known as a mob.

    THE STATUS QUO HAS TO GO. Stop looking at ways to hedge, speculate, make quick money, etc.

    He touches on some solutions here:

    Libertarian Socialism anyone??? I know the L word is not received well in our two party oligarchy these days — I WONDER WHY??? Social Anarchy is probably considered a swear word too. COME .ON.PEOPLE.

    I’ll let Noam Chomsky explain:

    and here’s a few more interpretations —

    AND – one more from Sam Harris

    Sorry If I offended anyone — one too many Irish Coffee’s this evening

  13. CitizenWhy says:

    Capitalism is not having a crisis. Labor and the poor are having a crisis.

    Capitalism is not in crisis. It is in a state of consolidation, becoming more willing/conscious that the best way to govern (for capitalism) is to give up on the concept of democracy and rule as a meritocratic, oligarchic republic in which the rich, the professional class, the upper middle class and certain sectors of skilled labor benefit from industry and government and from the neglect of the poor and the needs of those below them. In this meritocracy the cream will rise up from the lower classes and those left behind will, well, be left behind. The US will come to resemble Brazil and India rather than China, but all those countries provide prosperity for enough people and govern stably enough without worrying about those left behind.

  14. JerseyCynic says:

    “The true measure of an individual is how he treats a person who can do him absolutely no good.” – Ann Landers

  15. ricecake says:

    What do they need the expensive manufacture for when they can get all the slave workers around the world?

    They want to go back to feudal system. All they need are, besides their earthly goods their gated mansions castles, they only need people who want to be their good servants. Servants in doing their healthcare, cooking, chauffeuring, tailoring, book keeping account managing, security policing, fixing things like roof, toilet, keeping things for them like gardening, house cleaning, etc etc. They also need lawyers and judges to help to justify their worthiness and their rights of being the lords of the society. And they also need people who can entertain them too.

    But all these serves jobs are also can be exported or imported too. They would rather find people who are cheap and good to serve them instead of people who demand a lot but doing much less then they got pay for. And surely they will find the cheap and good because there are too many people around the world want the jobs.

  16. Greg0658 says:

    CitizenWhy posts “Capitalism is not having a crisis. Labor and the poor are having a crisis.”

    I really think it goes beyond laborers & poor (in the sense of your sentence) … labor of all realms is in exercise mode* .. even our editor here @TBP .. sure work to resolve these gyrations is usually rewarded with cash but not always ..

    that ‘ism is a word law we animals live & die by in this human jungle .. but your right on capitalism .. it is our law of gravity (currently) .. and I expect our “wash rinse repeat” to go on and on till the planet killer asteroid hits

    * pointing out (again) paper pushers in law & accounting & trading
    * and manufacturers hitting quarterly numbers (or suffer the wrath of above)

  17. cyaker says:

    Has he written about how this will all work out?

  18. cyaker says:

    Everybody defines the problem.

    How is this different from Galbraith’s predator nation?

    But it does seem that we as a society maybe a species has decided to fail

    We have a lot of people telling us what’s wrong but there is no shining knight on a white horse capable of leading us out of this disfunctional state or more likely we haven’t hit bottom yet. President Bachman,Perry or Palin may accomplish that while waiting for the second coming.

  19. blackjaquekerouac says:

    The basic’s of capitalism are so simple we miss the point here. “My gain is your loss” is in the end all the “zero sum game” is about. We’re full on “male-factoring” institutional wealth at this point–and it won’t stop until it is stopped or it decides to stop itself. Move along. There is no “crisis of capitalism.” What there is and what makes Tom Keene such critical listening to is an inability to support “the largesse” the massive Federal edifice has created given “labor’s dwindling pool.” Without even job creation (as opposed to job growth which is really a product of the business cycle and of which no one has any control over) then the basic’s of the state are indeed at risk. How the government will deal with this crisis is the crisis of our age. We have witnessed Greece–and seen what nothing being done means. We are doing nothing here in the USA as well–which in many ways is a good thing since we haven’t done anything yet to make it worse…but this crisis is coming. The current outflows from “Uncle Salami” are clearly in the crosshairs. Hard choices must always be made. If the basic reality of economics is “doing more with less” then how this reality vis a vis our Federal Government will unfold will have economic significance indeed. My personal view is that the media and in particular the financial media has no concept of how massively “public monies” will flow to “effectiveness” irregardless of political imperatives. Since we are at war and I have been for 10 years now I have no doubt not only where the money is already flowing but where that flow could very easily turn into a flood. To watch Wall Street which has been downsized massively of it’s own incompetence complain of “inertia” from the Federal Government is rich indeed. I am looking forward to seeing some “pro-activism” on that score as well.

  20. theexpertisin says:

    How we soon forget that agressive military societies with economic clout eventually tear up the competition (until they become corrupt and decline).

    China, on the way to unmatched military and global economic dominance, makes this post moot.

  21. csainvestor says:

    Love this blog, love it.

    Some random thoughts on gold, inflation, and the minimum wage.

    The minimum wage was introduced in 1955. From 1955 to 1970 a worker earning the minimum could purchase between 40 to 100 gold bars depending on the year.

    In 2011, a current minimum wage earner spending their entire gross paycheck- could purchase only 7 gold bars.

    I posit that an increase in minimum wage coupled with low inflation is the magic formula to maintain a healthy wealth distribution.

    Year Minimum wage converted to gold

    1955 44 gold bars

    1970 92 gold bars

    1980 10 gold bars

    1990 20 gold bars

    2000 40 gold bars

    2011 7 Gold bars

    Take note of the 1970’s boom to the bust of the 1980’s. Notice the perceptions drop a minimum wage worker could purchase in gold.

    It took the economic boom of the 1990’s to finally see an increase in the purchasing power of minimum wage workers on a par to the 1955 /1970 era.

    So many things amount to noise and distraction; I like to look at a few prices to prove my point.
    Simply put, the price of gas has doubled since 2000, salaries have not kept us. Official CPI masks the true damage inflation has inflicted upon the populace.

    While corporate profits are up for many reasons, two of them are: they pay workers less in inflation adjusted dollars than ever before, and they are able to pass thru inflation costs to consumers who are paid less than the rate of inflation would dictate.

    Consumers have had to use the credit card to purchase food, fuel and tires.
    Of course some consumers were reckless with credit, but most used credit to pay for the basic necessities.
    For the poor and middle class to live off a weak dollar they have had to leverage themselves up to the hilt.

    GOP / tea party / conservative and right leaning blogs abhor the minimum wage and will not honestly discuss it in any way- except to say that it is an evil government regulation inflicted upon the “job creators”.

    While you paint a bleak picture and you have the data to back it up- I still think we can get out of this hole.

  22. Greenspan screwed us says:


    I can’t believe how poorly you researched Mr. Smith.

    You said: < < > >

    He does no such thing. He posted a Parody last October using that name, but it was just that, a PARODY! I figured you realized that when you actually posted it to your on Oct 29, 2010

    What he does do is BLOG, almost daily. His blog is called “OF TWO MINDS”.

    He is a guy you should actually read every day – as he’s absolutely brilliant.

  23. Greenspan screwed us says:

    Good lord, it cut out the quote of yours above:

    You said:

    *Charles Hugh Smith publishes Foreclosure Crisis Weekly, dedicated to documenting the often-amazing foreclosure crisis.

  24. Permabear says:

    Mr. Smith argues that our current crisis has been 70 years coming, going all the way back to the 1930s. I separate the post 1930s FDR economic system from the post 1980s Ronald Reagan “supply side” economic system. The U.S. did fine in the post FDR years. Debt as a percentage of GDP declined to around 30 percent. Reagan reversed these gains with his massive tax cuts and military buildup. He also started the deregulation trends which contributed to the financial excesses Charles Smith gripes about. I don’t think that capitalism per se is necessarily doomed to failure. I think it’s more the failure of our leaders to make our capitalism system work that is more the problem. The other factor that is missing from the analysis is the effect of globalization. Globalization has transferred jobs from developed nations to developing nations and is contributing to a downsizing of incomes. There are solutions to these problems. Germany and Sweden show how developed nations can continue to maintain strong exports and a decent standard of living, while the U.S., Britain and the PIIGS are showing how failed policies can lead to a decline that coincides with Charles Smith’s predictions. Because we created the mess with backward policies, these failed policies can be reversed again. The 2012 election may prove to be an important inflection point as to whether the U.S. wants to get back on track or double down on the failed Reagan policies that have dug us into this mess in the first place.