Mark Blyth on the past and Future of Capitalism

The indispensable Scottish economist Mark Blyth has written an article for Foreign Affairs Magazine called Capitalism In Crisis where he reviews three recent books on the past, present and future of capitalism. In fact, they break down along those lines:

  • Capitalism: A Short History, by Jürgen Kocka – Capitalism’s past.
  • Buying Time by Wolfgang Streeck – Capitalism’s present.
  • Postcapitalism by Paul Mason – Capitalism’s future.

Although in reality, that’s a vast oversimplification; all three of these deal with both the past, present and future of capitalism, each in their own way. And, at least some of them depart from the hoary standard economic orthodoxy that sees no problems with our current trajectory and everything getting better for everyone in the future forever. Another theme linking all three of these together according to Blyth is the escalating tensions between capitalism and collective governance, i.e. democracy:

Ever since the emergence of mass democracy after World War II, an inherent tension has existed between capitalism and democratic politics; capitalism allocates resources through markets, whereas democracy allocates power through votes. Economists, in particular, have been slow to accept that this tension exists. Instead, they have tended to view markets as a realm beyond the political sphere and to see politics as something that gets in the way of an otherwise self-adjusting system. Yet how democratic politics and capitalism fit together determines today’s world. Politics is not a mistake that gets in the way of markets.

The first book is a straightforward history of capitalism in only 163 pages, but does provide some interesting philosophical insights:

For [Jürgen] Kocka, capitalism is …a set of institutions that enshrine property rights, promote the use of markets to allocate resources, and protect capital. is also an ethos, he claims, a set of principles and ideas. Defining capitalism so expansively allows Kocka to see its earliest forms developing among traders in Mesopotamia, in the eastern Mediterranean, and along Asia’s Silk Road, until, by the eleventh century, the beginnings of a merchant capitalist bourgeoisie had emerged on the Arabian Peninsula and in China.

Capitalism developed later in Europe, boosted by long-distance trade with Asia and the Arab world, between the twelfth and fifteenth centuries. Merchants formed cooperative institutions that led to greater risk sharing, which encouraged the accumulation of capital. This develop­ment, Kocka writes, led to “the formation of enterprises with legal personalities of their own,” rudimentary capital markets, and, finally, banks whose fortunes became intimately connected with the rise of modern states through the management of their debts.

This alliance between merchant capitalism and the emergent state helped usher in the age of colonialism. Merchants, entrepreneurs, and conquistadors, with increasingly powerful states backing them, propelled European expansion. Critical to this expansion was the tri­angular trade, in which European merchants brought finished goods to Africa, traded them for slaves, and then exchanged those slaves in the New World for sugar and cotton that went back to Europe. This process helped embed capitalism deeper in Europe than in the Middle East and China: the scale of investment that such ventures required led to the rise of what would become known as “joint-stock companies” and the beginnings of what economic historians call “finance capitalism”—stock exchanges opened in Antwerp in 1531 and Amsterdam in 1611.

When discussing the possibility of full employment and the existence of unemployment, a number of readers have pointed me to the work of Michael Kalecki. Kalecki’s insights are central to the second of Blyth’s reviewed books, and he ably summarizes the ideas of the Polish economist in a very clear and concise manner:

Kalecki argued that if full employment ever became the norm, workers would be able to move freely from job to job. Not only would this undermine traditional authority relationships within firms; it would also push wages up regardless of productivity levels, since workers would have more leverage to demand higher wages.

In response, firms would have to raise prices, creating a spiral of inflation that would eat into profits and lower real wages, which would, in turn, promote greater labor unrest. Kalecki argued that to restore profits, capitalists would rebel against the system that promoted full employment. In its place, they would seek to create a regime in which market discipline, with a focus on price stability rather than full employment, would be the primary goal of policy. Welfare protections would be rolled back, and the discipline that unemployment provides would be restored.

The response to this situation was to unleash Neoliberalism, one of the central tenets of which is the “disciplining” of labor through various means, outsourcing, mass immigration, automation, union-busting, student debt, and so forth:

Kalecki’s predictions proved aston­ishingly accurate. By the 1970s, as Kalecki had foreseen, inflation had risen dramatically, profits had fallen, and capital began its rebellion. Organ­izations…pressured governments to reduce taxes, especially on high earners. But cutting taxes in the recessionary early 1980s meant that revenues fell, deficits widened, and real interest rates rose as those deficits became harder to finance. At the same time, conservative govern­ments, especially in the United Kingdom and the United States, set out to weaken labor and shrink the role of the state as they dismantled the regulations that had reined in the excesses of finance since the 1940s.

This “financialization” of the economy reduced taxes on wealth and shrank the tax base by hollowing out the middle classes of the formerly industrialized world. To finance government expenditures in the era of haute finance, politicians turned to debt instead, but government debt is also an asset on the balance sheets of major financial institutions and the one percent, giving them effective control over the politics of nation-states. As I have described it before, we stopped taxing the rich and started borrowing from them instead:

The financial industry could now grow unchecked, and as it expanded, investors sought safe assets that were highly liquid and provided good returns: the debt of developed countries. This allowed governments to plug their deficits and spend more, all without raising taxes. But the shift to financing the state through debt came at a cost. Since World War II, taxes on labor and capital had provided the foundation of postwar state spending. Now, as govern­ments began to rely more and more on debt, the tax-based states of the postwar era became the debt-based states of the contemporary neoliberal era.

The debt-based states of the Neoliberal era were hamstrung by the investor class who demanded safe returns and high interest rates, and could exercise veto power over government spending through the bond market. So not only were the workers forced to compete against the labor pool of the entire world thanks to Neoliberalism, but governments could do nothing to ease the pain of the transition or redistribute the spoils of globalization even if they wanted to:

This transformation has had pro­found political consequences. The increase in government debt has allowed transnational capitalists to override the preferences of domestic citizens everywhere: bond-market investors can now exercise an effective veto on policies they don’t like by demanding higher interest rates when they replace old debt with new debt. In the most extreme cases, investors can use courts to override the ability of states to default on their debts, as happened recently in Argentina, or they can shut down an entire country’s payment system if that country votes against the interests of creditors, as happened in Greece in 2015. The financial industry has become, Streeck writes, “the second constituency of the modern state,” one more powerful than the people.

The use of debt financing initially seemed to restore prosperity to nations and citizens after the crisis of capitalism that occurred during the stagflation and oil shortages of the 1970s. But it was all illusory, created by bringing spending forward in time through the unrestrained extension of credit (following Catton’s Overshoot, let’s call this “phantom wealth”). This blew up giant bubbles of indebtedness which were certain to burst at some point. In other words, none of this solved the basic underlying problems of capitalism that have been festering since the late 1970’s:

This shift from taxes to debt initially bought time for capitalism: it restored profits, destroyed labor’s ability to demand wage increases, tamed inflation to the point of deflation (which increases the real value of debt), and even seemed to provide prosperity for all after the crisis of the 1970s. Mortgages and credit cards allowed private citizens to rack up deficits of their own—a process the sociologist Colin Crouch has described as “privatized Keynesianism.” But it was all an illusion. Credit sustained the appearance of pros­perity for the lower classes. In reality, the rich captured most of the newly created wealth. In the United States, for example, the top one percent more than doubled their share of the national income over the last three decades, as wages for the bottom 60 percent stood still.

In 2008, as we know, it all came crashing down, and the world has been in stagnation mode ever since, thanks in part to debt overhangs. Another factor is the fact that “disciplining” labor has been so effective that the incomes are not there to drive consumer spending anymore, increasing the severity of the downturn and preventing expansion (since your spending is my income). The hourglass shaped incomes caused by Neoliberal economic policy also mean that escalating housing and education costs (both underwritten by lending) are eating up much of the spending power of the former middle class. Much of the wealth captured by the rich has been plowed back into the political system in order to throttle any attempts at reform and catapult propaganda messages that argue that system is doing just fine, and no one is to blame but the workers themselves (“the Chinese are getting rich!!!!”) It all leads to a downward spiral:

In 2008, the financial crisis shattered this illusion. Governments bailed out the banks and transferred the costs of doing so to public budgets. Public debt exploded as governments bailed out the rich, and austerity measures, intended to reduce this new debt, have only com­pounded the losses of the majority of citizens. Capital continues to dominate democracy, especially in the EU: in Greece and Italy in 2011, technocrats replaced democratically elected govern­ments, and in 2015, the so-called troika—the European Central Bank, the European Commission, and the International Monetary Fund—bulldozed Greek democracy.

So where Kocka blames profligate governments and debt-laden citizens for the current crisis, Streeck instead sees them as the victims. It’s not lavish public spending, he shows, but rather falling tax revenues and financial bailouts that have created so much government debt and empowered capital. If states are spending extravagantly on voters, as Kocka and those who fetishize austerity maintain, there is precious little to show for it. “Had the rise in public debt been due to the rising power of mass democ­racy,” Streeck writes, “it would be impossible to explain how prosperity . . . could have been so radically redistributed from the bottom to the top of society.” Streeck foresees a prolonged period of low growth and political turmoil ahead, in which states commanded by creditors, allied with transnational in­vestors, struggle to get resisting debtor states into line…

Blyth then turns to Paul Mason’s book, Postcapitalism, which I have written about before.

In Postcapitalism, [Paul] Mason writes that capitalism is “a complex, adaptive system which has reached the limits of its capacity to adapt.” The roots of capitalism’s demise, Mason argues, lie in the 1980s (also when Kocka saw problems arise), when capi­talism was taken over by neoliberalism: an ideology and a set of policies that recognize no limits to the commodification of the world. Unfortunately for capi­talism, “neoliberalism is broken.” To explain why, Mason turns to the work of Nikolai Kondratieff, a brilliant Soviet economist whom Stalin had murdered in 1938. According to Kondratieff, capitalism goes up and down in 50-year cycles. At the bottom of a cycle, old technologies and business models cease to function. In response, entrepreneurs, both public and private, roll out new technologies to open up untapped markets, and an upswing begins. This leads to a loosening of credit, which accelerates the upswing.

Blyth then summarizes Mason’s description of the various Kondratieff waves that have determined the course of market capitalism since the onset of the Industrial Revolution in the English Midlands:

Mason’s first cycle runs from 1790 to 1848. The upswing began when British entrepreneurs first harnessed steam power to run their factories, and it ended with the depression of the 1820s. The subse­quent downswing produced the revolutions of 1848, when the emergent bourgeois classes of Europe burst onto the historical stage.

Mason’s second cycle runs from 1848 to the mid-1890s. The spread of railways, the telegraph, and shipping drove growth until the depression of the 1870s. In the decades that followed, strong labor movements gained momen­tum all over the world, and capital, in response, became more concentrated.

Electricity and mass production then powered a third upswing that crashed in the Great Depression and the massive capital destruction of World War II.

After the war, a fourth cycle began with innovations in electronics and synthetics, improvements in the organization of production, and labor’s relative victory over capital in the institutions of the welfare state. That cycle’s upswing peaked in the mid-1970s, but this time, there was no major depression. The fourth cycle stalled.

Why did the fourth cycle stall? Mason’s analysis has four components:

  • After U.S. President Richard Nixon took the dollar off the gold standard in 1971, the United States moved to a paper standard, which eliminated the constraints on deficit financing that the gold standard entailed.
  • The financialization of the developed economies masked the reality of stagnant incomes by substituting credit for wage increases.
  • The emergence of global imbalances in finance and trade allowed the United States to keep consuming as Asian countries stepped in as producers.
  • Advances in infor­mation technology empowered capital and weakened labor, and helped spread neoliberal practices across the globe.

This where automation comes into the picture. In all of the previous crises, labor managed to organize and fight for more rights and higher living standards. This caused capitalism to adapt, to the benefit of all stakeholders (including the capitalists themselves). However, this time, automation, globalization and mass immigration (and, I would add, the influence of the corporate mass media), have combined in an engine that has succeeded in crushing labor. Add to that the fact that the proliferation of digital goods has meant that Markets can no longer price goods correctly, since markets rely on excludable goods and scarcity, and digital goods are abundant, non-rival, and non-excludable:

Mason borrows from Marx and Kalecki the idea that average profits in any market will fall due to both compe­tition and the flood of capital into a new market, which reduce returns on investment. As a result, capitalists will always try to replace human labor with machines to protect their share of profits.

During a downswing, as profits shrink, capitalists will do everything they can to boost their share of profits at the expense of labor: they will force employees to work intensively and will accelerate their attempts to replace workers with machines…In the past, such attempts to restore profits simply by crushing labor failed. In each of the first three waves, one way or another, workers managed to resist. The best examples of such resistance were the postwar constraints on capitalism: strong unions, rigorous regulations, and generous welfare systems. When workers defy capitalists’ attempts to squeeze profits from them by building such institutions, firms have to adapt. Rather than fight labor over the fixed distribution of income, they are forced to invest in improving workers’ produc­tivity, to the benefit of both parties: this was the post–World War II growth story.

But under neoliberalism, capitalists have managed to squeeze labor in an entirely new way. Globalization oblit­erated the power of workers to resist, because if they did, capital—and jobs—could easily flow elsewhere. This explains why the number of labor strikes has declined so steeply all over the world. As Mason writes, “The fourth long cycle was prolonged, distorted and ultimately broken by factors that have not occurred before in the history of capitalism: the defeat . . . of organized labour, the rise of information technology and the discovery that once an unchal­lenged superpower exists, it can create money out of nothing for a long time.”

Hence the plummeting living standards all over the industrialized world–North America, Western Europe, Japan. Meanwhile the abundance of digital goods has meant that copyright and legal protection have become onerous and excessive to protect corporate profits (and no other reason). Mason’s hope is that digital technologies will allow new para-capitalist and extra-capitalist (my terms) structures to emerge which will be the seeds of a new and growing economic arrangement that will ultimately be better for people and for the planet:

Still, Mason believes that these factors have only delayed capitalism’s inevitable collapse. Where Marx thought that organized labor would rise up and overthrow the system, Mason bets that information technology will destroy it from within. Digital goods, such as music files and software, create a real problem for markets: they destroy the role of price in balancing supply and demand. People can copy digital goods freely forever: they have zero marginal cost and are nonrival in consumption. When one person downloads a music file or a piece of code from the Internet, for example, she makes it no harder for anyone else to do the same. So the only way that firms can maintain their profits is by enforcing monopoly property rights…

Mason is optimistic about what will replace the profit motive. He points to decentralized networks such as Wikipedia…and the rise of the so-called sharing economy: nonmarket peer pro­duction systems, where work has value but cannot be priced in a traditional manner. The result is a “contradiction in modern capitalism . . . between the possibility of free, abundant socially produced goods, and a system of monopolies, banks and governments struggling to maintain control over power and information.” In such a world, the central battle will be between those who want to preserve property rights and those who wish to destroy them in the name of democracy. The stakes, Mason argues, could not be higher. Without the revolution he calls for, the world will be vulnerable to a much greater threat: catastrophic climate change.

Mark Blyth makes a major, major mistake in this otherwise excellent review, however. The fact that even someone as knowledgeable and aware as Mr. Blyth has fallen for the propaganda is both astonishing and very depressing: “A group of experts called the Club of Rome famously published The Limits to Growth in the 1970s, forecasting economic and environ­mental crises—and those predictions have failed to come to pass. But this time may be different.”

No, no no! Limits to Growth did not make any predictions. Let’s say that again: Limits to Growth did Not make any predictions!!! It used models to forecast a number of possible scenarios. The standard run scenario is actually very close to how the world economy has unfolded over the past few decades. In fact, one could argue that it’s so-called “predictions” are far more accurate than any economists’. As Ugo Bardi has explained multiple times:

Now, you may have heard that “The Limits to Growth” (let’s call it “LTG”) is an outdated work; that it was all a mistake, that they made wrong predictions and the like. Those are just urban legends. People tend to disbelieve what they don’t like and that is why LTG was so widely rejected and even demonized. ..Limits to Growth was a very advanced study for its times; it was not a mistake and its predictions were not wrong. In any case, these models are there to show you trends; not to give you exact dates for what will happen.

Mason argues that capitalism in its current form will engender catastrophic climate change:

The world is in trouble…The world cannot burn 60 to 80 percent of remaining known carbon fuel stocks without causing catastrophic warming. But under capitalism, this is exactly what the world will do. Carbon taxes will do little to change this reality…Add to this mix an aging developed world with huge pension liabilities and a climate-shocked developing world of young people who have nowhere to go, and it’s little wonder that the Organiza­tion for Economic Cooperation and Development has forecast stagnant growth for the global economy for the next 50 years and an almost 40 percent rise in inequality in the world’s rich countries…Mason thinks that climate change may be the one bullet that capitalism cannot dodge. Neoliberals often naively assert that capitalism will generate a miracle technology at just the right moment to stave off catas­trophe. But Mason argues that previous Hail Mary passes, such as geoengineering and carbon capture, have failed to pay off. What gives him hope is that large-scale technological innovations may not be as important as micro-level changes in the structure of property rights themselves…

Blyth concludes:

Mason emphasizes an aspect of capitalism that both Kocka and Streeck underplay: its adaptive potential…Although capitalism may be reaching its adaptive limits, it has been more robust than most doomsayers realize…Whether or not such a restructuring will be enough to save the world remains unclear. But Mason is right to hold out hope. Capitalism, in its current form, has reached a dead end. If ever there were a time for pessimism of the intellect and optimism of the will, it is now.

Or, it could all lead to collapse. I guess we’ll see. But that’s another column…

More Mark Blyth:

Austerity’s Big Bait-and-Switch (Harvard Business Review) (P.S. the joke’s on him–in Milwaukee we all have thick Scottish accents!)

In a highly indebted world, austerity is a permanent state of affairs (Aeon)

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