Monday, September 28, 2009

The Trouble with Capitalism

The Trouble with Capitalism is, apparently, everything that governments do to try to mitigate the trouble with capitalism, according to Harry Shutt.

It all starts with boom-and-bust, something economists assure us is a natural feature of the capitalist paradigm. In the nineteenth century, all of this capital floating around was ploughed into industrial ventures in the expectation of its generating stuff (good) and more capital (also good), which could then be ploughed further into more ventures, etc. This snowballing of prosperity was occasionally punctuated by hideous crashes, such as the stock market crash of 1873, when invested capital failed to produce more stuff or more capital, either through failures in the level of demand or because the prospective stuff had been over-valued in the first place.

All well and good, except for all those people adversely affected by the busts, who also tended to be the same people who accrued the least advantage during the booms. This was all quite scary; and then two world wars came along, which were also very scary - so frightening in their death toll and genocide and nationalism that the obvious response was to entrench
...the inescapable responsibility of the state for the maintenance of minimum economic security for all citizens.

Shutt says some stuff here that suggests the reasoning behind this was that the disaster that was World War II was caused, in part, by the economic suffering of the common people in the fascist countries, who turned to nationalism/fascism because it promised to protect them from boom-and-bust. Keynes's The Economic Consequences of the Peace suggests differently, but I'm getting away from the point, which is that, for whatever reasons, insulating people against the crappy part of the capitalist cycle became a priority for Western governments.

So what did those governments do? order to maintain full employment governments could and should 'adopt a compensatory fiscal policy to offset the irreducible fluctuations in the private sector of the market'...

...which they did... using the tools of demand management (monetary as well as fiscal policy) to manipulate the level of economic activity so as to keep unemployment below the level at which the fiscal costs of the welfare and social-security budgets would become too burdensome.

They also:
...became significant promoters of investment, whether through state subsidies or incentives to private investment, or else through direct state equity participation in enterprise.

And this all trundled along quite nicely, because in the couple of decades post-war, Western economies enjoyed such a massive growth spurt that unemployment was almost non-existent and even many of the poorest in society experienced an unprecedented increase in their quality of life.

But then the 1970s happened. Growth slowed dramatically; saturation had occurred in many markets, especially that of consumer durables; the need for non-durables was fairly static; and essentially demand grew in line with population growth, governed by replacement rather than first-time purchases. Companies diversified; new markets were sought. Universal employment and social welfare turned out to be government policies that could only really be practical as long as the economy continued to grow at a quite high rate. When growth slowed, unemployment grew, as did the demands on the welfare state.

Government response was, inevitably, fiscal and monetary stimulus.

And therein lies the problem Shutt identifies: rather than adjusting to lower rates of growth, and attempting to define a new understanding of prosperity in the absence of tremendous growth, governments adopted policies that merely put off the day of reckoning whilst at the same time ensuring that when the reckoning did occur, it would be infinitely worse due to that delay.

There was now, on the one hand, an excess of labour: reduction in demand and production meant that not only could there now not be full employment, but the price of labour shrank as well.

More worryingly, however, there was now an excess of capital. Monetary stimulus had created a lot of money that had to be invested somewhere, and traditional avenues for investment were now not as profitable as they had once been; gone were the days of a 12-15% return. New markets were slow to open up; where, then, could all this money go?

The answer turned out to be riskier investments; the possibility of collapse was high, but if successful, the returns would also be correspondingly huge. Property, for example, futures, derivatves, junk bonds: this is where the money flowed, even as people understood, as time went on, that the assets backing them might be tremendously over-valued.

And this is where, the reader begins to feel, Shutt is getting pretty fucking angry. Because this whole process of crazy investment with the capital glut has been going on since the late 1970s. And every time the risks don't pay off, government response has been to 'mitigate' the problem with further stimulus—thereby worsening the capital glut, which was the original problem. And of course, in the process, creating a tremendous deficit burden.

Of course, stimulus has not been the only response, just the worst one. Governments have also tried to open up new avenues for investment: new geographical markets, privatisation of state services, corporate subsidies, etc. All of these good intentions have resulted in corresponding problems: exploitation in the third world, fraud, corruption, organised crime, corporatism.

All of these 'solutions,' Shutt claims, are understood to be empirically imperfect; they are all predicated on the belief that, one day, growth will return to its post-war levels, sucking up excess capital and labour once again and freeing the government from the penalties of its Keynesian overspending. Except that this return to huge growth keeps not happening.

Shutt wrote The Trouble with Capitalism in 1998, perfectly predicting the bust that has been occurring in the past two years. You can see why he's irritable:
The resulting financial and economic collapse [of 2007-2008], which is by now perceived as the most serious crisis of global capitalism since the Great Depression of the 1930s (if not in its entire history), is clearly in line with the predictions made in the book. Yet, while to that extent it may appear to have been vindicated, its analysis of the causes of the crisis is still very far from being generally accepted. Indeed mainstream analysts have devised some bizarre explanations for the onset of the crisis, while steadfastly ignoring its long-term, fundamental causes.

If he's right, then his frustration is wholly justified, because governments' response to this bust has been to do exactly what he claims will exacerbate the problem further.
Such deliberate distortions of reality reflect a more general, and all too understandable, tendency on the part of the global establishment to try to ignore the longer-term factors behind the crisis. In particular they seek to divert attention from the chronic relative stagnation of the world economy since the 1970s, which has made it increasingly impossible to find sufficient outlets for reinvestment of inexorably accumulating corporate profits—not to mention the artificially stimulated flows of capital into pension funds and other savings vehicles—in productive assets, as opposed to unproductive and highly risky speculation. The central theme of the how the would-be saviours of the capitalist profits system have since the 1970s resorted to ever more ingenious methods to overcome this inescapable tendency—the essence of the business cycle, familiar from the earlier history of capitalism since the nineteenth century.

His thesis - and this makes a lot of sense—is that the way to mitigate the more destructive parts of the cycle of profit-motivated capitalism is not to encourage further that profit motive by creating more capital and more risky ways of generating profit. And if it is true, as Shutt claims, that growth has forever stagnated, then it is true that we need to redefine some way of measuring value besides the accumulation of profit:
It is self-evident that free-market, profit-maximising capitalism is incompatible with a low-growth or no-growth economy, since to survive it requires the possibility of perpetual accumulation of profits and expansion of shareholders' funds. From this it must follow that the untrammelled pursuit of profit maximisation by corporations can no longer be accepted as their primary objective, at least as long as they enjoy the privilege of state protection or subsidy.

What, then, can we put in its place? This is where Shutt's work falls: 'How can we measure value apart from profit?' 'I dunno, let the people decide':
Any criteria used as alternatives to the supposedly impersonal one of profit maximisation would need to be derived from conscious political must be the presumption under a democracy that the purpose of any economic system is, broadly speaking, to provide the mass of people with what they want - or, ideally, what they would want if they had full knowledge of the choices open to them. Handing responsibility for deciding this to bureaucrats or politicians is never likely to provide durably satisfying results. Mechanisms will therefore need to be devised to enable the wishes of citizens to be reflected in the determination of priorities in resource allocation.

Some of what he suggests is stuff we need anyway: more frequent consultation of the electorate (including referenda), decentralisation, limits on political funding, greater transparency in government and greater scrutiny of public officials, a more critical media, and greater accountability. He also warns against protectionism and advocates a more globalist approach.

The rest? Redistribution of wealth and resources from rich to poor, equality of outcome, and the European Union.

Thus the book ends on a most unsatisfying note; quite apart from that fact that there are many who would assert that growth can recover and markets can expand, either through the advancement of technology or geographically if we stopped stifling growing economies with 'development aid' that props up their corrupt governments (to be fair, Shutt does address this as a problem), democratic redistribution of wealth and goods does not really seem like a very holistic replacement for the profit motive—ignoring, as it does, the question of incentives. At the moment, the desire for profit is what drives innovation, expansion, and pretty much every other economic action. Is he suggesting, as so many people do these days, that we should be satisfied with the wealth we have so far created, and merely shuffle it hither and thither until everybody has a decent share? Let us not forget that, even now, what most people do with their days is produce stuff; what is the point of producing stuff if not in the expectation of getting other, or better, stuff in return?


Martin said...

Sounds interesting, if propagandistic; not unlike Barnett's 'The Pride and The Fall' books.

Best comment in English on 'The Economic Consequences of The Peace' comes from Sir Arthur Salter, writing in 1942 -

"on the whole (Keynes's) most famous book, brilliant and sincere as it was, did more harm than good; and that he was most in error when he achieved his most dramatic public success".

ThousandsOfMilesAway said...

Dangerous to assume that "growth has forever stagnated", just predicated on what has happened since the 1970s.

There is one very obvious way that growth could return to post-WW2 levels: WW3.

FlipC said...

"'I dunno, let the people decide'"

But they have it's called the stock market. If a company increased its profits last year by 20% and only increased its profits by 15% this year it gets penalised by the stock market.

As such is it any wonder when presented with a same-as-last-year's risk level with a return of 5% compared to 10% last year a company will turn to a higher risk higher return investment.

Yes I agree that the government's throwing of money into the hole is supporting and, most probably, exasperating this predicament, but to an extent they're also reacting to the companies demand for continuous growth over the threat of increased unemployment and/or a complete move to a country that will throw money at them.

By all means blame the government, but we shouldn't let companies wash their hands of things.

Obnoxio The Clown said...

"All well and good, except for all those people adversely affected by the busts, who also tended to be the same people who accrued the least advantage during the booms."

I'm curious as to the evidence of this blandly asserted statement.

Anyway Shutt's analysis is pretty good, ironically it sounds like he commits the same crime at the end as any government, he prescribes what we should do and it's all stuff that governments would love.

What we should do (ipse dixit), is deregulate as much as possible and minimise the dead hand of government. We may never return (or we might, who knows) to the high-growth days of the past, but we can let what can happen, happen as well as it can. :o)

Anonymous said...

"If he's right, then his frustration is wholly justified, because governments' response to this bust has been to do exactly what he claims will exacerbate the problem further...."

I'm no economist, but that has seemed obvious to me for years. I can't believe the government don't get it. They are just all in it for the short term and their own piece of history.

neil craig said...

It strikes me that from the end of the 60s goverment has increasingly not so much sought new avenues for investment as prvented them. That was the era when they started regulating new nuclear power out of existence. Nowadays it is everything up to & including GM. Perhaps this may be a significant factor in conventional investment ceasing to make a return & causing crashes. It is certainly a factor without which we would all be at least twice as well off.

Tomrat said...

More worryingly, however, there was now an excess of capital. Monetary stimulus had created a lot of money that had to be invested somewhere, and traditional avenues for investment were now not as profitable as they had once been; gone were the days of a 12-15% return. New markets were slow to open up; where, then, could all this money go?

Question: how is this capitalism?

My understanding of capital and the free market in generl is that it is the free flow and exchange of goods and resources you desire for ones you don't- when was the last time you were able to trade apples for pears?

Money is merely the governments means of taking a slce of your apple, your pear, your diamond etc.; this they do by either taking a proportion of it (i.e. Tax) and/or by putting more in circulation (i.e. inflation), the second put in place to mitigate the effects of government and it's chosen clientelle debt (I.e. In this case the banking industry). Making any efforts at levereging, saving or spending ultimately worthless.

Ultimately the real culprit of this problem is a centrally controlled, private fiat currency which has enslaved us all; it has taken the healthy (albeit) risky practice of levereging as seen in business and turned it into a means of control.

Tomrat said...

Sorry- trying to write on an iPhone!

My point is that what we currently have is barely capitalism and even less a free market; third parties have not only skewed the actions of the market but taken complete control; the easiest way is with money which intrinsically has now value.

Maturecheese said...

One point nobody has mentioned is, with high economic growth comes high population growth. Surely anyone can see that population growth has already gone too far so a completely new ideology is required, but I'm buggered if I know what that is. It certainly isn't 'The Third Way'.

neil craig said...

Britain's population growth is down to immigration & increasing longevity so buggery wouldn't help.

Actually I don't think overall population growth is a problem because with modern technology there is no real limit to what we can support, though differential growth between different nations/ethnicities may be the driving force of most wars.

julymorning said...


I'm curious as to the evidence of this blandly asserted statement.

Shutt says on p. 8:

'Naturally resistance to the advance of this self-serving ideology of private property based purely on moneyed wealth was strong - and was not confined to the still disenfranchised masses who suffered it worst consequences. It was further deepened by the appearance of a phenomenon hardly foreseen by Adam Smith - the trade cycle - which precipitated periodic deep recessions in capitalist economies. Such phenomena were not unknown in the pre-capitalist era; yet their effect in terms of lost wealth and levlihoods had been generally less sever under a system based on customary obligation than under one where profit maximisation was paramount...'

No citation, however.


Question: how is this capitalism?

My understanding of capital and the free market in generl is that it is the free flow and exchange of goods and resources you desire for ones you don't- when was the last time you were able to trade apples for pears?

Capitalism =/= the free market. My understanding of this book is that it is not about the free market at all, but about the problems involved in maintaining an economic system based on the investment of capital into production - i.e., capitalism.

Tomrat said...


Agreed there is a difference between capitalism and the free market, but my point is we have neither, and that the main culprit is control over the monetary system which is what causes the boom and bust cycle and our longer term problems.

Maturecheese said...

Neil Craig

'Actually I don't think overall population growth is a problem because with modern technology there is no real limit to what we can support'

No offence meant but I think that statement is wrong. There is only so much wholesome food that can be grown on the planet and we are running out of room to grow it, not to mention the effects of climate change wether it be man made or natural. This planet is not resourced to sustain 6 Billion people and rising. I once read something along the lines of the planet only being able to support something like 2 billion(can't remember the exact figure, it could have been 1 billion) using the energy from the sun. The reason we are currently able to sustain three times more, is because we are using Banked energy from the sun (fossil fuels). Fossil fuels are the energy from the sun that has taken millions of years to accumulate. A bit of topic so sorry.

Junican said...

There is only one source of increased wealth and that is PRODUCTIVITY - individual productivity. Increases in productivity derive from discovery, invention and ingenuity. There are many examples, but one that springs to mind is Michael Faraday's discovery of electrical induction which paved the way for the large scale production of electicity BY A FEW PEOPLE FOR THE USE OF MANY. The ingenuity of certain individuals enabled the provision of electic street lights, without much continuous intervention of large numbers of people.

Thus, many other individuals are freed from mundane tasks and are able to produce other things, such as pretty clothes. But it is necessarily true that the MONEY required to pay for the pretty clothes must come from those who MAKE MONEY from the increased productivity.

Markets in goods and services are necessary and good. They drive further discovery, invention and ingenuity.

Unfortuately, around these good markets have grown MONEY markets. For some reason that I do not understand, these money markets have become more important than the markets in goods and services. As a result, there are many people making fortunes out of a no lose situation - well, no lose for them - in the money markets.

I have no doubt that, in the fullness of time, the whole money market situation will become computerised so that all these people who are currently making fortunes will cease to do so.

Eventually, the people will have to take back the fortunes that these charlatens have made. How will it be done?

neil craig said...

Maturecheese while it is regularly claimed that the planet is currently supporting 3 times/twice/5 times as many people as the planet canm support it is rubbish. Termites eat more food than all mammals combined. The maximum yield per acre achieved with conventional crops & such things as hydroponic farming, is many 10s of times higher than our average. With GM the potential is much higher than that. The potential of sea farming through things like the Aquarius project are at least 3 times greater than on land. The theoretical limit would be if all sunlight was harnessed at maximum efficiency to produce food for humans. That would make a population of around 1,000 trillion possible. I don't advocate that but certainly with proper management feeding people is not a problem.

Roger Thornhill said...

1. Brown's "bankrupt ideology" line about Markets played to the dribbling ranks of useful idiot seals clapping in the audience, the brainwashed masses spoon-fed Fabian pap and the in-denial self-loathers.I suspect it was a way to try and 'take possession' of the meme "bankrupt ideology" when their own, Socialism, is quite patently so. Typical Leftist inversion.

2. Markets. Money markets create liquidity and allow companies to trade and function. Yes, a few get very rich on it, but in the meantime transactions are cheaper and less risky as a result of the liquidity. You cannot "control" those markets so that nobody gets rich. That is like controlling football so that no player earns over X.

Tomrat said...


Further to Neil's comment I would also point out that the "running out of room" arguement is also a nonsense; you could fit every human being on the planet into a space the size of one of the larger eastern European countries at a population density similar to that of New York- I'm not suggesting this is what we do but that would give us plenty if space to grow.

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