Sunday, October 8, 2017

Capitalism Ends with an Overdose of Itself

What we now call economics was once referred to as political economy.  This latter term recognized the fact that the activities we associate with economics today should be considered
in the context of the overall performance of society.  It was assumed that healthy economies, in terms of production and trade, should be coupled with cultural, legal, and national constraints to produce a healthy society.  Political economy then becomes a domain consisting of social scientists as well as those devoted to studying the flow of money and product.  Over time, the discipline of economics has grown apart from this coupling with sociology.  In fact, the neoliberal uprising in the latter half of the twentieth century has resulted in the near elimination of social issues except to the extent that they support neoliberal capitalistic models.

Wolfgang Streeck seems a throwback to an earlier time in that his primary background is in sociology, and he views economic antics in the context of their interaction with society in general.  This perspective produces a rather jaundiced view of the path down which neoliberal capitalism is taking us.  His views are summarized in a collection of essays in his book How Will Capitalism End?: Essays on a Failing System

Streeck is the director of the Max Planck Institute for Social Research in Cologne and Professor of Sociology at the University of Cologne.  He is an Honorary Fellow of the Society for the Advancement of Socio-Economics and a member of the Berlin Brandenburg Academy of Sciences as well as the Academia Europaea.  Although Europe is his home base, his view is relevant to all.  His reference to capitalism as a failing system refers to all advanced Western economies.  The United States, as the biggest and most powerful economy, is also the baddest of the bad actors.

Streeck sees capitalism as a highly unstable construct that is incapable of self-regulation and must be continually forced to remodel itself as society and stakeholders, such as its needed workers, constrain its behaviors.

“Capitalism has always been an improbable social formation, full of conflicts and contradictions, therefore permanently unstable and in flux, and highly conditional on historically contingent and precarious supportive as well as constraining events and institutions.”

“In fact, the history of modern capitalism can be written as a succession of crises that capitalism survived only at the price of deep transformations of its economic and social institutions, saving it from bankruptcy in unforeseeable and unintended ways.”

Early capitalism savaged itself and society with wild periods of boom and bust as it was unable to live with unmanaged competition.  It moved on to forming monopolies to control competitors and stabilize (maximize) profits.  Society had to move in and apply constraints.  It struggled for decades with labor movements which eventually forced it to change its mode of operation and cede more of its autonomy to social forces.  In the early twentieth century it was essentially ruled by government decree as it was used to support two world wars.  In the period between the wars, capitalism failed to lead to stable societies in many countries and succumbed to either fascism or communism.  After the second war capitalism had generally been left in a highly-controlled mode by governments following Keynesian economic principles.

“Out of this grew the democratic welfare-state capitalism of the three post-war decades, with hindsight the only period in which economic growth and social and political stability, achieved through democracy, coexisted under capitalism, at least in the OECD world where capitalism came to be awarded the epithet, ‘advanced’.”

From about 1970 on, this equilibrium would dissipate under a surge in neoliberal thinking and the combined effects of a series of economic and social crises.  Streeck highlights three economic crises that followed this transition point.

“To be precise, three crises followed one another: the global inflation of the 1970s, the explosion of public debt in the 1980s, and rapidly rising private indebtedness in the subsequent decade, resulting in the collapse of financial markets in 2008….This sequence was by and large the same for all major capitalist countries, whose economies have never been in equilibrium since the end of post-war growth at the end of the 1960s.”

During this post-war period the acceptance of neoliberal principles produced profound changes in capitalist societies.

“While in the 1970s governments still had a choice, within limits, between inflation and public debt to bridge the gap between the combined distributional claims of capital and labour and what was available for distribution, at the end of inflation at the beginning of the 1980s the ‘tax state’ of modern capitalism began to change into a ‘debt state.’  In this it was helped by the growth of a dynamic, increasingly global financial industry headquartered in the rapidly de-industrializing hegemonic country of global capitalism, the United States.”

The financial burden of debt would cause yet another transition to what Streeck refers to as the “consolidation state.”  If the level of debt was deemed to be insupportable, then the only way to keep indebtedness in check was to scale back government expenditures.  This trend was encouraged by the neoliberal crowd who believed that a strong market economy and a strong society were one and the same.  However, by diminishing the capabilities of government and virtually eliminating any possibility of collective action on the part of wage earners, capitalism weakened the sources of power that had kept it from running off the rails in earlier times.

“The advance of neoliberalism coincided with steadily declining electoral turnout in all countries, short-lived exceptions notwithstanding.  The shrinking of the electorate was, moreover, highly asymmetrical: those that dropped out of electoral politics came overwhelmingly from the lower end of the income scale—ironically where the need for egalitarian democracy is greatest.  Party membership declined as well, in some countries dramatically; party systems fragmented; and voting became volatile and often erratic….Also declining is trade-union membership—a trend reflected in an almost complete disappearance of strikes, which like elections have long served as a recognized channel of democratic participation.”

In addition, the continued accumulation of wealth in the hands of a very few that is an intrinsic property of market capitalism has supported a herd of oligarchs who use their money to influence political policies, and they use their philanthropy to recast society in a form with which they are more comfortable.  Streeck quotes a conclusion reached by Jeffrey Winters in Oligarchy and Democracy.  Winters constructed a Material Power Index to assess the degree of influence which the very wealthy possessed in comparison to the bottom 90% of the population. Winters produced an interesting comparison.  If one takes the wealth provided power of the top 100 households and compares that to that of the bottom 90% (excluding home equity) the ratio is 108,765 to 1. 

“….this corresponds roughly to the difference in material power between a senator and a slave at the height of the Roman Empire.”

Is capitalism really heading toward some ultimate crisis that will finally break its hold on society, or are we just moving towards another transition point?  Streeck points out three trends that have been running in concert over several decades that suggest the problems with capitalism are long term and intrinsic.  He focuses on lower growth, increasing inequality, and ever larger levels of both public and private debt.  These are long-term global trends.  The three feed off each other.  For example, low growth justifies wage stagnation, but wage stagnation and the inability to accommodate more debt limit aggregate demand, leading to continuing low growth.

“….low growth contributes to inequality by intensifying distributional conflict; inequality dampens growth by restricting effective demand; high levels of existing debt clog credit markets and raise the prospect of financial crises; an overgrown financial sector both results from and adds to economic inequality etc., etc.  Already the last growth cycle before 2008 was more imagined than real, and post-2008 recovery remains anaemic at best, also because Keynesian stimulus, monetary or fiscal, fails to work in the face of unprecedented amounts of accumulated debt.”

Extreme inequality and low demand, which seem to be coupled, leads the wealthy to seek essentially nonproductive ways to increase their wealth.  This is likely a source of the extreme risk taking that has permeated financial markets.  Wealth, with nowhere productive to go, bids up asset prices and leads to bubbles and crashes.

There is certainly danger in the power of oligarchs to influence society and government policy, but Streeck points out an additional aspect of extreme inequality: the tendency of the very wealthy to view themselves as above or at least separate from society.  In fact, a new term has been conjured up to describe such a situation: plutonomy.  We have this definition from Wikipedia.

“Plutonomy is a term that Citigroup analysts have used for economies ‘where economic growth is powered by and largely consumed by the wealthy few’.”

A society in which a few extremely wealthy people continue to make money while everyone else treads water and watches cannot go on forever.

Capitalism has also created problems for itself by moving market solutions into areas that should, and ultimately, must be controlled by society.  Following Karl Polanyi, Streeck mentions the three “fictitious commodities” of “labour, land (or nature) and money.”

“A fictitious commodity is defined as a resource to which the laws of supply and demand apply only partially and awkwardly, if at all; it can therefore only be treated as a commodity in a carefully circumscribed, regulated way, since complete commodification will destroy it or make it unuseable….Unless held back by constraining institutions, market expansion is thus at permanent risk of undermining itself, and with it the viability of the capitalist economic and social system.”

Advanced nations are all struggling to deal with capitalism’s commodification in these areas as they increasingly impinge on and alter the nature and stability of societies.  As low growth persists in the economies, ever more complex and risky methods of gaining profits are being pursued.

“….we may note that it was an excessive commodification of money that brought down the global economy in 2008: the transformation of a limitless supply of cheap credit into ever more sophisticated financial ‘products’ gave rise to a real-estate bubble of a size unimaginable at the time.  As of the 1980s, deregulation of U.S. financial markets had abolished the restrictions on the private production and marketization of money devised after the Great Depression.  ‘Financialization,’ as the process came to be known, seemed the last remaining way to restore growth and profitability to the economy of the overextended hegemon of global capitalism.”
Streeck lists a number of predictions on how capitalism might ultimately fail and require a reimagining of how societies must work in the future.  The two most compelling thoughts involve inevitable crises involving land (nature) and labor.  In the former case, global warming has the potential to impose catastrophic changes on climate and the environments in which nations must exist.  This will require advanced planning and resource allocation on a broad scale.  Will states weakened by generations of neoliberal market-driven propaganda have the strength to counter the profit-driven oligarchs and their legions of lobbyists?  Can profit-driven capitalists be expected to come to their own rescue? 

The world must also deal with an ever increasing population with ever increasing demands on the earth’s resources.  As more nations increase in wealth and demand the right to have a lifestyle similar to that in the advanced countries, the impact on resources will worsen.  Again, will profit-driven capitalists contribute to wise discourse on allocation of critical resources, or will they counter any attempt to limit their profits?

The excessive commodification of labor may force society to rise up and demand a new societal approach before climate change becomes critical.  Capitalism has brought increased wealth to nations, but its decision to not share that wealth has led not to increased prosperity and improved lives for the majority, but rather the opposite.

“Deregulation of labour markets under international competition has undone whatever prospects there might once have been for a general limitation of working hours.  It has also made unemployment more precarious for a growing share of the population.  With the rising labour-market participation of women, due in part to the disappearance of the ‘family wage,’ hours per month sold by families to employers have increased while wages have lagged behind productivity, most dramatically in the capitalist heartland, the U.S.  At the same time, deregulation and the destruction of trade unions notwithstanding, labour markets typically fail to clear, and residual unemployment on the order of 7 to 8 percent has become the new normal, even in a country like Sweden.”

The combined impact of automation and artificial intelligence has yet to be fully felt.  There will be very few jobs for which human interaction is absolutely required.  It is the duty of a market-driven capitalist to replace all humans with more reliable and cheaper options whenever possible.  Some sort of intervention in the system will be required by society through its agent, the government.  Will profit-driven capitalists be willing to address the problem by limiting their freedom of operation or by limiting their profits?  Or will they fight against any such resolution?  Who will win the day?

Streeck believes capitalism as we know it must eventually disappear, but he does not profess to know exactly how or when it will happen.  And he does not expect the transition to a new economic model to be quick or easy.  Part of the problem will arise because there has been, up to this point, no serious and credible proposal for how to replace our current form of capitalism.

“Not just capital and its running dogs, but also their various oppositions lack a capacity to act collectively.  Just as capitalism’s movers and shakers do not know how to protect their society from decay, and in any case would lack the means to do so, their enemies, when it comes to the crunch, have to admit that they have no idea of how to replace neoliberal capitalism with something else….”

“Before capitalism will go to hell, then, it will for the foreseeable future hang in limbo, dead or about to die from an overdose of itself but still very much around, as nobody will have the power to move its decaying body out of the way.”

Interested readers might find the following articles informative:

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