This is the first installment in a series running throughout the week.
"The Future of Capitalism" – What Kind of Capitalism Do We Mean?
What is so striking in the recent debates about the future of capitalism is confusion about just what kind of capitalism is being talked about.
Most people have in mind industrial capitalism’s tangible investment in plant and equipment, employing labor to produce output at a markup (profit). But the Western world is now on a path of economic austerity, shrinking employment and downsizing. Corporations are using their cash flow and borrowing mainly for stock buybacks, debt-leveraged privatization of public assets and buyouts of assets already in place. Banks are lending mainly to other financial institutions, not to investors or consumers, and most credit growth is for speculating in foreign exchange and interest rate arbitrage.
This is not what was envisioned when the Industrial Revolution was peaking in the 19th and early 20th century. To expand markets and increase their economies’ competitive pricing position, classical economists sought to free their societies from the legacies of feudalism — a landed aristocracy extracting land rent, and a banking class extracting interest and converting national debts into the creation of monopoly trading privileges.
Progressive Era reformers accordingly defined a free market as one with a government strong enough to tax away land rent and either break up monopolies or keep them in the public domain. The aim was to bring market prices in line with minimum necessary cost-value. This required a strong enough government to tax and check the vested financial, insurance, and real estate (FIRE) interests.
When Joseph Schumpeter spoke about creative destruction, he was referring to innovations that raised productivity, enabling new companies to unseat the old by lowering costs below those of competitors. The main change that he envisioned was new industrial companies emerging on the wave of innovations. Lower costs were supposed to be passed onto consumers in the form of falling prices. The resulting expansion of production would raise wage levels in keeping with productivity, as production required a parallel growth in consumer demand.
Companies were not supposed to be destroyed and left as bankrupt shells by financial raiders. Banking was expected to be modernized to promote industrial capital investment, not loot it by loading it down with interest charges and financial fees by raiders wielding junk bonds as their weapon of choice. To supporters and strategists of industrial capitalism, the driving dynamic was what the Wharton Business School professor Simon Patten called the “Economy of Abundance.”
Innovations in modes of financial takeovers of industry were more in the character of parasitic destruction—and few observers anticipated just how creative this destructive appropriation could become. Or that it would achieve ultimate victory by attacking and taking over government agencies, the central bank, and Treasury.
Despite the steady rise in productivity, prices have not fallen and real wages have not increased for the past generation (since the late 1970s in the United States). Economic gains have been enjoyed by the FIRE sector, dominated mainly by high finance. Industrial capitalism has evolved into finance capitalism in ways not dreamed of a century ago. And finance capitalism itself turns out to be an evolutionary family of offshoots: pension fund capitalism, the bubble economy, debt deflation, austerity—and the way today’s trends seem to be leading, perhaps settling into a terminal stage of debt peonage and neofeudalism.
What already is clear is that instead of the promised economy of abundance, economic policy from the United States to Europe and the post-Soviet countries is now all about austerity. In a bubble economy, most gains are made not by industrial investment, but by borrowing to buy assets whose price is being inflated by bank credit. The shift of focus from industrial profits to debt-leveraged “capital” gains took the form mainly of land-price gains and higher capitalization multiples for stocks and bonds reflecting falling interest rates. Real estate spurted for a while, but price rises reversed after September 2008, leaving a trail of negative equity (when debts exceed asset valuations). This has dragged down balance sheets for the banks and insurance companies whose loans and default guarantees went bad.
Foreclosure time has arrived, reducing debt-strapped populations, “financialized” industrial companies, cities, states, and entire national governments from Ireland to Greece to debt peonage. Even the banking sector finds itself in negative equity. Companies and localities are claiming that they face bankruptcy if they cannot roll back pensions and even current wage levels and health care commitments. This is what debt deflation looks like.
Instead of suffering a merely temporary deviation from an underlying positive growth trend — a “cyclical downturn” resulting from “illiquidity” — Western economies have entered a fatal phase change. Debt service exceeds the economic surplus, leading to shrinkage. The problem is insolvency — an overgrowth of debt, growing autonomously by its own dynamics (“the miracle of compound interest” plus the banks’ electronic creation of new credit). Belief that “automatic stabilizers” will correct the problem is a cover story for deterring public policies to rein in the banks from their over-lending and speculation.
The solution must come from outside the industrial economy by a debt write-down. This is how economies normally restored balance and renewed growth from before 2500 BC to 500 BC, by royal Clean Slates. It is how Solon acted to ban debt bondage in Athens, paving the way for the democratic take-off, and how Sparta’s kings Agis and Cleomenes later sought to reverse the financial polarization between creditors and debtors. In Judaism, the Jubilee Year was what Jesus announced that he had come to proclaim. In more modern times, Germany’s Economic Miracle was triggered by the 1947 Allied monetary reform and debt cancellation.
The great economic fiction of our time is that all debts can be paid — if only countries submit to enough austerity, impoverish their labor force, close down enough industry, and let banks foreclose on enough factories — and while they are at it, cut back social security, health care, and social spending across the board. This is class warfare waged by finance against the rest of the economy. It is even stifling the industrial economy, “post-industrializing” it in the West by destroying domestic consumer markets for output that employees produce.
It is ironic that the left wing of today’s political spectrum — socialist, Social Democratic and Labour parties — tends to support the financial sector and its policy of “advance foreclosure” on public debtors (euphemized as “privatization”). One Marxist tradition blames the financial crisis almost entirely on the internal dynamics of industrial capitalism — the fight between labor and its employers over wages and benefits.
In this view, capitalists accumulate industrial profits by not paying labor enough to buy the products it creates. The industrial sector behaves in a self-destructive way as employers seek their own immediate gains, not that of the economy at large. Rising wages are a precondition for raising labor productivity (and hence, for cutting costs), and poorly paid labor lacks the purchasing power to buy what it produces. Other critics of industrial capitalism blame the economic crisis on high technology causing unemployment— and off-shoring production to low-wage countries.