Marx and Engels famously explained in the Communist Manifesto (1848) that the emergence of capitalism – or as they then called it “the bourgeois mode of production” – as the dominant economic model during the Industrial Revolution was the inevitable result of the adoption of new technology (steam-powered mechanisation) which totally superseded and marginalised pre-industrial technology. Although not all their contemporaries welcomed this development as much as they did – as a transition to the proletarian revolution they eagerly anticipated – few then or since have seriously disputed their analysis of how it came about.
Despite this implicit general recognition that capitalism became dominant largely as a result of a technological revolution some 200 years ago the ruling global élites of today – and the vast majority of economists and analysts directly or indirectly in their pay – seem unwilling or unable to draw the moral of what this implies for economic development in the 21st century. Hence they are apparently refusing to recognise that what the first industrial revolution did to the handloom – or indeed the “second” industrial revolution of a century later did to horse-drawn transport – the so-called Third Industrial Revolution of today has begun to do to the established manufacturing and other technologies inherited from the post-World War II era or earlier.
In fact this seeming resistance to change cannot be ascribed to today’s leaders of capitalism being either insensitive or ideologically resistant to technological change. Indeed it is their proud claim that the capitalist economic model has been the most crucial factor in bringing to fruition the unprecedented advances in human wealth and welfare made possible by technological change in the last 200 years. On the other hand they have long been aware that technological innovation is very much a two-edged sword from their perspective, threatening the viability of existing investments while at the same time offering outlets for investment in new products. That is why large corporations have always sought to control and (if necessary) restrict the rate of innovation in such a way as to maximise the rate of return on both their existing and new investments. Their ability to do this was for a long time enhanced by the fact that ability to compete in many areas of manufacturing still depended on large-scale mass production, requiring substantial capital investment – a reality which constituted a serious barrier to the entry of new competitors. Such was the basis of the model of corporate management dubbed the “planning system” by J.K. Galbraith in the 1960s, which enabled multinationals such as General Motors to maintain global market dominance throughout the immediate post-war period and beyond.
Increasingly since the 1980s, however, this privileged position of traditionally dominant global corporations has started to crumble in the face of competitive forces they can no longer control. While there are diverse factors contributing to this tendency, none has been more significant than the accelerated pace of technological change involving electronics, digitisation and advanced materials (such as carbon fibre). This is because
The new technologies often require relatively small amounts of investment in fixed capital (compared with traditional factories based on mass production). Hence existing producers heavily invested in older technology tend to be more vulnerable to competition from start-ups which correspondingly find fewer barriers to entry.
The speed of innovation can be such that investments in new technology are increasingly perceived as too risky – i.e. liable to be rapidly superseded by the latest “new thing” – particularly as the rate of return demanded by investors has been pushed ever higher by the cyclical forces of the competitive globalised market.
The effect of these forces has been to drive the investible funds of capitalists away from the dwindling opportunities in productive investment in favour of either a) purely speculative investment (e.g. the mergers and acquisitions boom facilitated by the great financial liberalisation of the 1980s or the more recent real estate and other bubbles much assisted by the repeal of the US Glass-Steagall Act in 1999) or b) investment in utilities or public infrastructure where competition is typically limited and high returns can be more or less assured by collusion with “captured” state regulators. These distortions, underpinned by the “moral hazard” stemming from states underwriting the financial sector as “lenders of last resort” and the political corruption enabling private investors to plunder the public sector at will, have been behind the huge misallocation of resources leading to the ongoing implosion of the financial markets since 2008.
In considering how the world is to emerge from this disaster we must look beyond the immediate problem of the financial crisis, which can only end – as argued in the first instalment of this blog – with generalised debt default and mass destruction of capital values. In order to prevent such a calamity ever occurring again it will be necessary to ensure that a future economic model is structured so as to avoid recreating the unnecessary and distorting treadmill of mindless accumulation which has brought us the ultimate capitalist catastrophe. At the same time we must respond to the ever more pressing need to limit, if not reverse, the threat to the biosphere posed by the compulsion perpetually to expand production and consumption – on a finite planet with a still exponentially rising population – inherent in the existing capitalist model. Fortunately the possibilities opened up by recent technological advances – including those referred to above as the “Third Industrial Revolution” – give us the chance to meet the needs of the world’s population at much lower cost and with less use of scarce resources than at present.
Yet while this is good news for the planet and the global community as a whole, it is clearly bad news for those still dominant groups who would restore a world of capitalist “business as usual”. Naturally their central preoccupation remains to maximise the opportunities for investing their capital at an acceptable rate of return. But as such opportunities continue to shrink – not only under the impact of changing technology but because the financial sector’s scope for reckless speculation has inevitably been curbed in the wake of the crisis – the perception has grown that almost the only promising outlets are ones in public infrastructure (whether nominally privatised or not) where competition is limited and / or the level of returns can be effectively guaranteed by state subsidy. Quite apart from the potential added burden to taxpayers at a time of extreme fiscal stringency, such pressures are clearly tending to result in huge misallocations of resources compounding those that have already brought the financial sector (and the entire global economy) to its present ruinous pass.
The main manifestations of this tendency since the bursting of the real estate bubble in 2007 have been in the form of investment in public infrastructure of all kinds, involving private sector capital underpinned by state subsidy or guaranteed revenue streams. Perhaps the most conspicuous recent example of this in Britain is the proposed high-speed railway (HS2) intended to link London and Birmingham – projected to cost well over £30 billion – the economic viability of which is extremely doubtful. Yet the world is already littered with similar white elephants – including several airports in Spain which will never open and roads and railways to nowhere in Japan and China.
Nowhere have the distorting effects of this tendency raised bigger threats to the public interest – both financial and environmental – than in the energy sector, as it struggles to come to terms with the demands of the low carbon economy of the future. This issue will be addressed in detail in the next instalment of this blog.
Set against the historic trend of technological evolution as described above, such perverse acts of waste and vandalism increasingly appear like desperate attempts to resist the tide of history. The next 10 years will be crucial in determining whether this struggle ends in ruinous global conflict and catastrophe (casting doubt on the survival of the human species) or the beginnings of a new era for global society in which new technology is at last allowed to benefit the community as a whole – both in terms of adequate living standards for all and a rational and sustainable management of the earth’s finite resources – without the need for endless growth of investment and production.
2 July 2012