Part 1 of 3 - Capitalism
What is Capital? Capital is value in motion. Capital in circulation is sequential continually undergoing changes. One minute it is paper, then it is liquid, then it is a number, then it is a commodity, it is a unit of production, goes back into money then back into commodity again. As it moves it goes into different states and in various transformations. At all times its value is at the point of demand and desire. For capital to go through a realisation or conversion process, it needs buyer and seller transaction that converts it into value. In other words, not all money is capital. Free goods such as searching Google or Wikipedia have cultural value that also revalue as it circulates. Commodity production and realisation are two different things. Therefore Capitalism is not an ideology but a system; money going through conduits of realisation in a Capitalist world Capital works within a framework held together by price mechanism and the profit motive.
Writing about Capitalism, it is inevitable that I start with Karl Marx. Though many of his thoughts associated with communism were wrong, he was right to stress that "Capitalism is unstable." The boom and bust cycle would eventually destroy it. By nature of this operating system, it goes in cycles of around 50 years. It's first high point was in the 1815 start of the Industrial Revolution and the machine age in Britain. Development in this area brought success in high economic growth not only in Britain but also reflected on other countries in Europe. Economic growth, however, was sectarian, constituted of a class structure as well as coming at a cost; responsible for atrocious urban living conditions. High industrial growth saw a downward spiral during the revolutions in Europe of 1848. Then on came the Golden era starting in 1870's but was only golden for some the masses saw increasing impoverishment and economic oppression that took the Great War in 1914 to infuse some egalitarianism. Mass production exemplified by Ford Model T was to follow it, up to 1929, the great crash and the depression that developed in the 1930's then again unreined capitalism dominated in parts of the world but not in others and that divide contributed to the crushing blow of Worl War II that saw the massive capital destruction. Since the end of that war, a new cycle driven by new technologies, consumerism and new techniques in the organisation of production. This time, however, new restraints on its excesses such as The Beveridge Report in Britain undergirding a welfare programme kept Capitalism under control. The system was also held together by other financial regulatory restrictions by both government and institutional frameworks.
It is important to realise the well-known fact that from early inception there has always been an inherent tension between Democracy and Capitalism but today they are also in conflict, and both are in retreat. Their marriage is facing a crisis; polarising societies and inviting populist agendas by those depicting themselves as mavericks or outsiders who have the wherewithal to sustain long periods of electioneering but more of that later. A definition of both terms from Mark Blyth of Brown University will help to gain a clearer understanding on the differences between Capitalism and Democratic Politics: "capitalism allocates resources through markets, whereas democracy allocates power through votes." At this stage, it is essential to consider that contrary to what some believe Capitalism is not a self-adjusting system but needs politics to control it. In other words, how these two are allowed to interact together determines our world.
Let's pause for a moment to look at the origins of Capitalism. A short history of Capitalism must start once more like most things in Mesopotamia when agriculture was settling in its roots. A division of labour there occurred where those who grew crops to provide for the elite warriors that defended the populations. Writing and reading came next where messages sent across long distances and when gaps were opening up between sections of societies; between town dweller merchants and rural illiterate peasant communities and through that door came inequality. Along came the Silk road that stretched between China into Arabia bringing Spices and Silk to Europe and for millennia trade flourished countries in continents exchanged culture, language and religions across free borders. Countries jostled, borrowed and competed with each other. Not until the seventeenth century triangular trade period put capitalism on the map in Europe. Buying slaves in Africa in exchange for beads, then, selling the human cargo in exchange for Sugar and Cotton in the Americas to ship back to England. The Enlightenment invited Political Democracy and Banks, Insurances, Stock Exchange and entrepreneurial culture, took off. In combination, they created wealth that helped finance Imperialism and colonialism leading on to the coming machine age and the Industrial Revolution propelling Britain to the world banker.
By now, inequality became the order, throughout that history, Capitalism was an exploitative system subjecting workers to long hours, inhuman conditions and low wages and inundated with cultural prejudices. Late nineteenth century saw institutional measures redressing imbalances efforts made to narrow the gap forming a clean environment and better working conditions. Actions towards more literacy, better working conditions and free franchise for political participation that gave strength to European economic supremacy. Early twentieth century saw unions with rights to organise and to bargain collectively and in the US restraints placed on ‘Robber Barons’; who were presenting an unacceptable face of Capitalism. After that, for many years, growth and higher per capita income came on an equal basis, though society was still divided along class structures. Relative economic security prevailed evidenced by good compromises between capitalism and democracy in the production of goods and services- an age of productive form of finance.
Late in 1950 and throughout the 1960’s in post-war economic order, the dread of unemployment receded, growth and prosperity were on the rise in both Europe and the US. However, marked inequality of income, and even more striking inequality of wealth, a typical characteristic of capitalism, was the dominant form of economic organisation in western European countries. Though an inherent feature, it was tolerated so long as it remained restrained within reasonable parameters. Some including me would argue such a gap was an accepted standard feature providing inspiration, drive and empowering entrepreneurial adventure. Nevertheless, up to the 1970’s the Western world experienced a post-war boom in the shape of an economic miracle.
The sudden ‘economic earthquake’ of the oil shock in 1973, however, inflicted serious harm to Europe’s economy. Dennis Healey, Britain’s Chancellor of the Exchequer at the time, was quoted “inflation, unemployment, bankruptcies, falling capital investment and a worsening trade deficit as its visible effects.” This cast into doubt the post-war economic modernity that confidently embodied technological advance, commercial growth consumerism and individualism. Arresting this danger became a priority, to carry on with the post-war system was not a plausible option.
The economic cycle yet again turning, the boom and bust nightmare returns, it was time for new ideas and a new course for Capitalism to be put in place to meet new challenges.
Faced with such a national economy that seemed to be staggering from crisis to crisis some economist concurred the interventionist state was impeding economic growth. For the ‘neo-liberals’ services such as insurance, housing, pensions, health and education – could be provided more efficiently in the private sector. Time was ripe to return to a free market economy even though many considered the schemes politically myopic and economically anachronistic. Margaret Thatcher, the then British Prime Minister stood for ‘new’ Victorian values: reduced taxes, the free market, free enterprise, privatisation of industries and services, patriotism, and ‘the individual’ – neoliberalism.
In a natural sort of way Capitalism, in an unplanned economy, breeds on itself and marches onwards from one point to the next dynamic in form, individualistic, continually reforming setting new ideas as it prods along. On this path of an evolutionary process, the world started to move from a productive economy to a finance economy. A new discipline concentrating on the stability of prices, measures to impose industrial order and to rebel against a system that promoted full employment. New rules also included reducing taxes especially on high earners that had hitherto funded state spending. To do so in a recessionary period of the 1980’s meant falling government income, higher deficit turning the economy into debt financing; from tax-based state to debt-based state in a new neoliberal era.
Modern finance in a continuum of Capitalism gave entry to ‘financialisation’ many would deem unproductive form where Hedge funds capitalists cannibalise good firms. For example in the pharmaceutical industry the firm producing essential medicine selling a pill at £10.00 each the company is bought by investors only to see the same product selling on the market at £500 a tablet. Nothing there to stop them and the cost of medical insurance in the US is a case in point.
Money finance was now master of the economy. It worked for a while at least, and the financial industry national and transnational capitalists grew unchecked. Both were now overriding the preferences of private and developing countries, vetoing policies with which they disagree, and here Greece comes to mind. Such a transformation in other areas of the economy seemed to bring economic stability. Mortgage and credit card made loans easier for their private citizens and prosperity was felt by most. It was all an illusion and once more the bubble burst and the cycle stalled in 2008. It was not bad news for all, in fact, the middle and lower classes suffered only the rich top one per cent captured the newly created wealth.
This new economic drive of neoliberalism of minimal state interference in the economy was most active in Britain and the United States. Such measures were considered malevolent only ideally suited for the rich. The rest of European countries were hesitant in applying such rigorous form from fear of social polarisation opting out instead for harmony and conciliation. Many people consider neoliberalism makes the wealthy free to abuse their economic power by dominating the rest of society. That belief gained credence during the financial crisis of 2008 when governments had to bail out the banks which meant government debt exploded.
Following the housing market crash and the corresponding banking crisis of 2008, The collapse of Lehman Brothers created economic turmoil. The Federal Reserve, the United States central bank, started printing money to buy government bonds (government debt ‘asset holding’) to stimulate the economy in the face of subsequent economic recession. Over the years since it has increased funding from one trillion to four trillion dollars to what initially started as emergency bailout money for the banks. The Fed would later call this Quantitative Easing (QE). It is an alternative system to lowering interest rates to jump-start a flagging economy. At zero interest rates, they couldn’t go down any further. Over this period the idea was exported to European central bank, Japan central bank, Bank of England and so forth. In the process over the last ten years, they have created twenty-one trillion dollars of ‘printed’ money buying bonds and stocks around the world that will somehow create economic stability. Between then and now at almost zero interest bank rate there has not been any growth but neither has there been a recession throughout the world. An artificial inflated financial system but the Fed knew if it were removed the financial market would collapse. To save them from future collapse, it seems the banks have colluded among themselves creating a bubble they cannot abandon. This is a world of bonds and stocks that Wall Street manipulates that can influence not only money supply but also dominates the financial systems of every country (except China) around the world.
Another side of financialisation is currency manipulation. August 15th 1971 Richard Nixon, President of the United States, took the Dollar off the Gold Standard. At the threat of War, he forced Saudi Arabia and all other Arab Oil producing Gulf states to trade oil for Dollars. An action that also released the Banks from a disciplined market that was previously regulated by the price of gold, banks were now free to speculate ‘playing the currency market’. It was the George Soros moment; by converting Sterling to Deutsch Marks, he made One Billion Dollars in two days of trading. If you can make that much in 48 hours why go into production and the headache of employing thousands.
Looking at things more broadly, today Financialisation is 24/7 around the globe open all hours. Clearly, we have a scenario where Capital is now dominating Democracy. Banks and Economy are an ensemble, and for a government, it meant by saving the former is saving the latter.
Money flows around the world information technology, and service industry follows. People from all walks of life, religion or race become more integrated than ever before demand for specialisation has expanded gradually bringing communities together. Globalisation is multi-dimensional, increasingly characterised by the mobility and cross borders of people, capital, and ideas and accelerated by the rapid development of communications and information technology. Free boundaries also meant a change to social structure, multiculturalism, the growth of multinational companies. On the reverse side, it has put pressure on wages and widened the inequality gap. The fear would be on an even grander scale, just as authoritarianism and totalitarianism were an existential threat to democracy in the west so might globalisation. Short of transforming the architecture of the economic system Democracy must prevail, as we shall see in part 2 'Globalisation', next week.
Compiling these series I had access to many sources and sincerely hope I have done justice to their contributions. I, therefore, like to thank the following;
Professor Ronal Inglehart of the University of Michigan
Professor Mark Blyth of Brown University
Professor Michael Cox of London School of Economics
Professor Julia Black of London School of Economics
Professor David Harvey of London School of Economics
Professor Simon Deakin of Cambridge University
Last but not least Nomi Prins, former Wall Street insider.