About Harry Shutt

Harry Shutt is a freelance economist, consultant and author of numerous books on the World Economy.

Inevitable implosion of the growth based economy

A recurring theme of this blog has been the chronic and ultimately futile attempt to sustain growth in support of an ever more fragile profit-based economic model. It has been the writer’s contention that the main proximate cause of the system’s eventual demise would likely be an implosion of the financial markets driven by speculation – itself a response to insufficient market demand for goods and services – leading to uncontrollable and unsustainable imbalances. At the same time, however, it has been increasingly stressed that environmental and demographic constraints would also pose physical limits to economic and market expansion.

The current political focus on the menace of global warming has belatedly made people conscious of the potential threat to the biosphere posed by excessive production and consumption in general and of certain commodities (such as fossil fuels) in particular. Remarkably, however, little mention is made of the one factor which, above all, is driving such excesses: the unprecedentedly high rate of world population growth. At nearly 8 billion the world’s population is now some four times what it was at the end of World War ll and eight times the level of two centuries ago, while authoritative projections suggest it will reach at least 10 billion by the middle of this century before starting to decline.

How are we to explain the virtual absence of any public consideration of such population growth, as phenomenally rapid as it is unprecedented, particularly in the context of concern over man-made global warming on a finite planet? It might seem obvious that growth in the aggregate output of goods and services is likely to challenge the Earth’s carrying capacity at a certain point. Yet it is striking that virtually the only factors being considered in addressing this constraint are supply-side (environmental) ones – as are the only possible solutions, in the shape of new technological fixes. Any notion that the demand side – in the shape of ever-expanding numbers of people – might need to be restrained is barely considered.

The explanation for this rather one-sided debate evidently stems from the compulsive need – under the prevailing economic model – to pursue the maximisation of rates of economic growth – i.e. of both production and consumption. A long-standing exponent of this point of view, the Economist newspaper, views the prospect of declining world population after 2050 with evident dismay, claiming without any evidence (27 March 2021) that “fewer people may also mean fewer new ideas”. Elsewhere they argue, far more plausibly, that such a trend would be negative for global growth.

In fact it is clearly the actual and potential fading out of such growth that is now tending to undermine the entire basis of the existing profit-based global economy. A major factor behind this development is obviously the onset of the coronavirus (Covid 19) pandemic. While it is still hard to quantify its potential impact, particularly beyond the short term, there can be little doubt that it will negatively affect the contribution to Gross Domestic Product (GDP) of such major sectors as public transport and aviation as well as petroleum production and marketing, while also reducing demand for and supply of commercial real estate.

To what extent these negative factors may be offset by the creation of new contributors to value added (GDP) and sources of jobs – many in sectors that hardly exist at present – can only be a matter of conjecture. Yet based on past trends it must surely be assumed that the impact of continuing technological change will be such as to further reduce demand for labour relative to output, if not aggregate output itself. Combined with the negative pressure on growth exerted by the presumed downward tendency imposed by environmental considerations, the overall prognosis for real global economic growth must surely be negative – or at best flat and extremely uncertain.

It is this uncertainty that is set shortly to undermine the prevailing profits system with probably terminal effect. As repeatedly noted in this blog, there is now – and particularly since the start of the GFC in 2008 – an almost total dearth of new fixed investment opportunities in the global economy, other than those such as electric vehicle production that are simply going to replace existing sub-sectors of production. This problem is only likely to get worse, especially the longer the Covid 19 pandemic endures. In such circumstances it will only be possible to recycle “surplus value” into ever more socially damaging activities, such as gambling and pornography, or ever riskier speculation. Arguably, in fact, this is already happening and has only been prevented from causing a massive market upset by further application of “quantitative easing” (QE) and related forms of officially approved market rigging designed to stop asset values (including share prices) from falling.

Such desperate market manipulation must obviously have its limits, though too many exponents of so-called Modern Monetary Theory (MMT) – who also naturally tend to favour QE – are seemingly unable (or unwilling) to grasp this reality. Equally many more mainstream economists allow themselves to be seduced by the notion that such monetary sleight of hand can keep inflation at bay indefinitely. Yet at the same time the monetary authorities assert that they are just about to raise interest rates from their all-time record lows in order to choke off inflationary pressures – something they have been vainly promising to do for several years while rates have only fallen still further.

The now pressing need to confront climate change seems bound to alter this perspective dramatically. For this must make it more starkly apparent that economic growth is no longer sustainable – even at a reduced pace.

In this context continuing monetary laxity – as reflected in further doses of QE – is bound ultimately to prove intolerably destabilising. For what amounts to money printing on this scale has already led to unprecedented macro-economic imbalances – such that total debt now exceeds 300 per cent of GDP in some two dozen countries, including the US, compared with half a dozen 20 years ago. Such imbalances would have been expected, under “normal” circumstances, to result in high inflation and / or high interest rates. Since either of these would impose intolerable stress on the global economy and society, the authorities have resorted to the expedient of “QE to infinity” in order facilitate market rigging on the scale necessary to hold down interest rates, while it has at the same time evidently been found possible – at least for the time being – to channel most of the extra liquidity generated into fixed income securities – typically sold to wealthier investors via hedge funds – rather than into potentially inflationary consumption.

While, as indicated, there must be a limit to such egregious distortion, it seems impossible to know in advance what that limit might be. In recent weeks, however, there are signs that the authorities may be losing control of inflation, as the US Consumer Price Index (CPI) rose to 6.8 per cent in November 2021, the highest monthly figure recorded for this official indicator in almost 40 years (although according to some unofficial estimates the true figure is much higher). In fact without the benefit of creative accounting to hold down the officially reported inflation rate – and corresponding interest rates – this would likely remain high or push higher still. Against the catastrophically high level of global indebtedness any rates over around 2 per cent would probably prove unsustainable, leading to a financial crisis on a scale even greater than that of 2008.

At the time of writing (December 2021) it is impossible to tell whether market manipulators can succeed in turning the tide of rising inflation with or without resorting to further bouts of QE. Given what is at stake, nobody should doubt that the powers that be will stop at nothing, including serial falsification of statistics, in order to maintain the delusion that the system is functioning more or less normally.

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War as an investment

Dwight D. Eisenhower, (president of the United States from 1953 to 1961), is perhaps best remembered today for a speech he gave three days before he left office in January 1961. In this he warned his fellow Americans that “in the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex,” something which he evidently saw as an imminent danger even 60 years ago.

If not many at that time clearly grasped what he was alluding to, it is now well understood that he had recognised the risks posed by the apparent concentration of vested interests favouring a build-up of the US military machine as the Cold War struggle with the Soviet Union continued and expanded. For such interests, it became clear, the arms race with the Soviets was not seen as a bad thing at all – even as official propaganda was all the while proclaiming the desirability of winding it down – given the opportunities it provided for enrichment of companies engaged in the supply of armaments. At the same time it may be said to have enhanced the prestige and influence of the military “top brass”, who doubtless also saw the potential for their own gainful employment once they left the service. Hence there may be said to have been a kind of symbiotic relationship between civilian and military decision-takers which favoured increased military expenditure in the private interests of both while naturally depending on the taxpayer to fund it.

At the same time the US was anxious to support the economic recovery of the defeated Axis powers, especially Germany and Japan, by aiding their (non-military) post-war reconstruction, notably through the Marshall Plan initiated in 1948. While this may be seen on the one hand as an admirable act of victors’ magnanimity, it should equally be viewed as an act motivated by self-interest in that it indirectly boosted the US economy and business as well.

Subsequent history has more than validated Eisenhower’s concerns. As long as the Cold War continued the prominence of the military-industrial complex in the structure of the US economy remained largely uncontroversial outside a fringe of protest groups whom it was still politically safe to ignore. Once it was over, however, political pressures grew from the 1990s to cut back on defence spending, not only through commitments made under the three START treaties with Russia from 1991.

In fact the possibility that such a state of affairs could arise had been foreshadowed in US policy since the end of World War II. This stemmed from the evidently justified perception that the war had provided an enormous stimulus to the US economy, banishing any remnants of the depression of the 1930s. Hence it was feared, not illogically, that reversion to a peacetime economy might lead to a damaging recurrence of depressed economic activity. This, together with the perceived threat of Soviet aggression, prompted the creation of the Department of Defense (sic) in 1947 along with the Central Intelligence Agency and the enactment of the National Security Act. This amounted to the creation of what has been called a “National Security State”, in which the needs of the military and the defence sector were henceforth to be prioritised, while at the same time anti-communist paranoia was allowed to grow and to dominate political discourse in the US up to and beyond the Korean War (1950-1953).

This conjuncture was the basis of the Cold War, which was to endure until the collapse of the Soviet Union in 1991. But this “victory” for the West, while greeted with triumphalist rhetoric in the US and among its NATO allies, was naturally not viewed as an unmixed blessing by the leaders of the military-industrial complex. For, as noted above, it removed much of the justification for the high level of defence expenditure that had been such a feature of the US (and to a lesser extent other Western economies) at least since 1940. These concerns were to be validated after 1990, when the US federal defence budget declined from over 5 per cent of Gross Domestic Product (GDP) to barely 3.1 per cent in 2000 (source: World Bank). Thereafter its share rose again to almost 5 per cent by 2010, only to decline again to 3.4 per cent in 2019 (the latest year for which data are available). Meanwhile other NATO member states have persistently failed to raise their defence budgets above 2 per cent of GDP despite their being pressed to do so by successive US administrations.

While it might seem implausible to suggest that any of the conflicts the US has been involved in since the 1990s may have been entered into with a view to stimulating increased defence expenditure, the above data could be seen as significant evidence to support the view that this has in fact been the case in some instances. In particular the so-called War on Terror – launched in 2001 in reaction to the 9/11 attacks on New York and Washington – can be regarded as partly a “war of choice” insofar as no clear (or legal) war aims were defined and the conflict was – and still is being – allowed to drag on inconclusively.

It is obviously inconceivable that the 9/11 atrocities – involving the simultaneous suicide of 20 Arab terrorists – could have been masterminded by the US government. What is somewhat less implausible, however, is that the US authorities could have become aware that such terrorist actions were being planned and might have taken steps to prevent them but failed to do so – even though they could not have foreseen the precise consequences of such failure. Such a hypothesis was advanced by the eminent commentator the late Gore Vidal (1925-2012) and is matched by many other informed claims that the attacks could have been foreseen if not averted. Although the truth may never be known, this is consistent with the view that many high-level US officials a) had some advance knowledge of the impending attacks and b) were persuaded that such a large-scale atrocity could be in the interest of the military-industrial complex by justifying a large-scale military action in retaliation – even without knowing quite how fearful its consequences might prove to be. It is clearly hard to believe that such unconscionable treason might be wilfully perpetrated by sane government officials – even if it might be presented, as it has been, as the result of mere negligence. Yet it is hardly more incredible than the idea that President Roosevelt was warned of the impending Japanese attack on Pearl Harbor in 1941 – in which some 2,400 US service personnel were killed – but deliberately chose not to alert his forces for political / tactical reasons (a hypothesis once generally dismissed but now quite widely accepted).

Over the 20 years it has lasted to date the most authoritative estimate puts the cost of the ensuing “war on terror” to the US federal budget – comprising mainly that of the still ongoing conflicts in Afghanistan and Iraq since 2001 – at around $8 trillion ($8,000 billion) – plus the loss of 900,000 lives. Spread over 20 years this suggests an average annual cost equal to at least 0.5 per cent of GDP, a significant amount which also comprises many billions that have swollen the coffers of the private contractors supplying goods and services as part of the war effort. However, as has been widely noted, it leaves out of account the massive non-financial costs of the so-called war.

The horrific history of this “war of choice” demonstrates starkly why, as noted in our last blogpost, the incentive provided by modern market capitalism to promote defence and armaments expenditure is one of its major dis-benefits – indeed probably the most damaging of all. Hence, assuming the absence of an economic model devoid of the need to maximise private profit, it is entirely conceivable that the 9/11 atrocities – and all the ensuing horrors of war, plus torture, Guantanamo etc. – would not have happened at all.

It would doubtless be hard for the public to come to terms with the idea that such appalling crimes and destruction might not have occurred if such a system geared to profit maximisation had not been in place. On the other hand, given the appalling collateral damage that has resulted in so many countries in the Middle East and elsewhere, it would be surprising if there were not soon stronger political pressures to address the problems that have been created. The most obvious example of this is the increasingly lethal explosion of refugees both from civil conflict and (often related) economic collapse – presently manifest, for instance, in the rapidly growing influx of boat people crossing the English Channel (many from Afghanistan, Syria and other countries laid waste by war as well as economic collapse) with a view to entering the United Kingdom illegally.

Purported solutions to such problems tend to be of the “sticking-plaster” variety and fail to address fundamental weaknesses. Hence there is no concerted movement to make armed conflict less likely notwithstanding the monumental misery and physical destruction caused. On the contrary, it appears that even members of the United Nations Security Council, particularly the US and Russia, are more prone than ever to treat military force as a first rather than last resort, typically in flagrant disregard of the UN Charter. This may be partly because the advent of “hi-tech” methods of warfare, such as drone strikes, make it possible to strike at perceived enemies without arousing as much reaction or protest as might happen in the case of a more conventional attack.

Meanwhile the financial / economic incentives to resort to war remain, perhaps enhanced by the lack of more conventional / peaceful opportunities to invest in potentially profitable activities. Moreover, it may not be too cynical to suggest that warfare as an “investment class” could be seen as more attractive than others to the extent that it entails the physical destruction of equipment and buildings which will need replacing. – as notably in the repeated bouts of Israeli destruction in Gaza.

It might be supposed that an economic system which incentivises such ruinous destruction and promotion of misery would by now have been subjected to ruthless collective scrutiny by the international community with a view to marginalising or replacing it, especially 100 years after the end of the “war to end all wars”. As suggested in earlier posts, the most effective single means of achieving this would be to make the granting of limited liability to any enterprise in either the public or private sector conditional on its allowing the public – whether at local, national or international level – the right of veto over key decisions concerning investment, pricing etc.

Regrettably no initiative along these lines is currently under discussion. Moreover, it may be presumed that in the event that any Western government or major political party were to propose such a change it would meet with uniform and vociferous hostility from international big business, which could correctly argue that such a move would spell the end of capitalism – even though the privilege of limited liability has only been generally available in Britain and other developed countries since the 1850s. However, if it were also considered that such a change might render the possibility of future atrocities such as 9/11 more remote – as well as eliminating many of the other disfiguring blemishes of contemporary capitalism – society might well see it as well worth while.

Decadence of the profits system: why economic activity needs a different purpose

Recent posts on this blog have tended to stress the increasingly outmoded orientation of traditional market capitalism, with its inescapable emphasis on the ever more futile objectives of both enhancing enterprise profitability and asset valuation while at the same time boosting economic growth overall. What they have perhaps failed sufficiently to do, however, is point out the profoundly anti-social and immoral consequences of this weakness, such as to pervert and damage the whole tendency of society. In other words, while it has been demonstrated that capitalism is incapable of delivering the benefits that its advocates claim for it in terms of economic efficiency, it has not been shown clearly enough that it has brought serious dis-benefits that render it positively harmful from a social perspective.

These negative impacts have in fact long been recognised, explicitly or implicitly, through the regulation of markets, although it is notable that any consequential restraints on particular activities – e.g. gambling – have been relaxed in recent years (see below). Such market liberalisation, it can be inferred, is usually the result of pressure from commercial interests, although naturally this is seldom if ever spelt out.

These dis-benefits include:-

  1. A compulsive tendency to promote economic growth, often at the expense of more socially desirable objectives. This arises from the inherent need for capitalist enterprises to accumulate ever more capital and the concomitant requirement constantly to amass profit – necessarily at the highest rate possible in order to appeal to investors in a competitive market. This in turn explains why it has long been a central assumption of Western policy makers that the promotion of maximum growth is of over-riding importance. However, this goal, always questionable from the perspective of the general public, is now looking absolutely untenable in face of the dire environmental consequences of economic growth increasingly in prospect – particularly bearing in mind the compelling necessity to end, if not reverse, the unsustainable rise in global heating. Equally growth has become increasingly constrained by the dwindling potential for further expansion of consumer demand, especially as that for traditional goods and services dries up.
  1. Support for armaments / war production.

Of all the questionable or anti-social activities which capitalist enterprises have a natural vested interest in exploiting those associated with war or “defence” are undoubtedly among the most egregious. This is reflected in the historic fact that war or preparation for war has very often coincided with booms in economic activity, while conversely the ending of such conflict has led to downturns. The latter was notably the case in Britain after the end of the Napoleonic War in 1815 and of the 1914-18 War. In contrast, after World War II the leadership of the victorious United States, evidently anticipating a possible post-war depression, moved to establish what has been dubbed the National Security State, which they were at pains to justify as a response to the supposed Soviet threat in the context of the Cold War. As will be elaborated in our next blogpost, such tendencies point to the conclusion that, while war is damaging to any society, it is all the more dangerous to a capitalist one, given that, in combination with the relentless propensity to pursue growth, it incentivises adoption of an aggressive foreign policy.

  1. Speculation / gambling.

One of the sectors that has been encouraged to grow in recent decades to compensate for the lack growth in traditional markets is gambling. It should be self-evident that gambling is of the essence of the capitalist economic model, given that market values are inherently subject to fluctuation and that capturing positive movements is at least as important an opportunity for profit as the margin on sales. What has only quite recently become apparent is the importance of gambling as an industry (comprising casinos, betting shops etc.) in its own right. Previously this was properly viewed as in many respects a form of vice and as such essentially discouraged except to the extent that “risk taking” was regarded as a capitalist virtue. What remains true is that gambling (speculation) only adds economic value to the extent that it increases the accumulated profit and market value of those enterprises engaging in promoting it as a main activity. Otherwise it is rightly seen as a potentially dangerous activity that can cause at least as much social harm as alcohol or tobacco consumption, without adding to the sum of human wealth. This danger has been largely lost sight of in relation to the National Lottery in Britain, which is generally regarded as a public good, especially as it is used to finance the efforts of British athletes participating in the Olympic Games – without regard to the dangers posed to those gambling excessively.

  1. Pornography

Much debate has occurred in recent years surrounding the apparently increasing incidence of

the abuse – particularly sexual abuse – of women, culminating in the “ Me Too “ movement from 2018, which has resulted in the exposure of Harvey Weinstein and other systematic abusers of women. To a lesser extent the same is true of the abuse of boys, notably in football and other sports, where the possibility /dream of achieving stardom, and with it vast wealth, often make them willing victims (see also below).

While it is fair to point out that such abuse occurs in non-capitalist economies, it is self-evident that such a tendency is greatly enhanced by the institutionalised profit motive. Equally it has, like gambling, been one of the sectors encouraged to expand so as to compensate for the drying up of more traditional areas of demand growth. Hence the progressive relaxation, since the 1970s, of restraints on pornography and the increasing sexual content of movies and television can undoubtedly be seen as driven by commercial interests in the competition for audiences. Although a causal relationship between this tendency and the rise in sexual violence is hard to establish – since rape statistics are notoriously unreliable – there is a strong suspicion that there must be a link between the two.

  1. Needless and damaging commercialisation of sport and other forms of entertainment.

This has been most conspicuous in the case of football (soccer), by far the world’s most popular sport (but has adversely impacted other sports – notably cycling – as well). This has been enabled to develop as a global spectator sport on a huge scale through the medium of television. In the process it has led to intense competition among different corporate interests for the right to show different matches and clubs performing. This in turn has resulted in the bidding up of the value of star players and teams – to the point where only very few TV channels can afford to bid for their services. The inevitable end-result has been that some clubs and many individual supporters have been priced out of the market and hence are unable to watch their own teams – with which they often have long-standing traditional links (involving entire local communities) – playing.

At the same time, global competition among clubs for the most talented and marketable players has produced a skewing of rewards accruing to certain players – some of whom now earn more than $12 million a year – such as to cause obscene imbalances in valuations and distorted behaviour such as that referred to above. As suggested above also, related pressures to achieve high performance in this sector have led to abuse of aspiring players in football and other sports.

  1. Environmental damage / wasteful over-production.

There is a particular need to curb profits and growth in certain sectors (such as, notably, household energy supply) to meet the requirement for reduced carbon output – and thus limit global overheating. This has come to be seen as ever more damaging as global production gets closer to the limits of what is seen to be environmentally sustainable. At the same time, however, it is necessary to maintain the minimum level of output of goods and services consistent with human survival and long-term prosperity. On the other hand the natural tendency, under capitalism, to encourage maximisation of consumption will need to be curbed, especially as the world’s population is set to continue rising, albeit not quite as fast as in the 20th century.

  1. Drugs criminalisation.

Of all the unnecessary and harmful activities encouraged by modern capitalism by far the most lucrative and economically significant is certainly the criminalised trade in narcotic drugs (cannabis, heroin, cocaine etc.) as well as opioid prescription drugs, which are highly addictive. It is also by far the most damaging to the economy and society, given the huge costs imposed in terms of law enforcement and correctional action entailed.

As noted in an earlier post (The “War on Drugs” – the ultimate monument to capitalist corruption, 11 October 2019), there are powerful vested interests anxious to sustain this lethal business (including perhaps some at the very heart of government) – even in the face of overwhelming evidence that the most benign way of dealing with it would be via decriminalisation and licensing – coupled with treatment for addiction – as has been done in the case of alcohol and other addictive substances. As it is, the continuing illegal status – and hence freedom from taxation – of the production and supply of such drugs makes it a highly attractive activity to organised crime and difficult for addicts to get treatment. At the same time it tends seriously to distort prison systems, as illustrated in the recent BBC Television drama series “Time”.

The obvious remedy for this situation would be to implement decriminalisation and licensing of such drugs across the board. To date, however, the only country where this has occurred is Portugal, although it has been enacted in respect of cannabis in a number of US states, including California – a trend that seems bound to gather momentum (especially since Portugal has gone from having the worst to the best record in Europe for drug abuse) despite inevitable attempts to slow it down.

  1. Dangers to public health. This stems naturally from the tendency to see health care (or the lack of it) as a profit-making opportunity, particularly in the United States, rather than a primary necessity for human welfare. Symptoms of this perverse attitude can be seen not only in over-charging for routine healthcare procedures but even in the performing of unnecessary operations. Likewise it is reflected in the failure to report the negative impact of products such as cigarettes even when this is well known to those in the producer industries concerned. This obviously explains the systematic suppression by the tobacco industry from the 1950s of clear evidence of the dangers of smoking, while the same applies to the impact of fossil fuels on aerial pollution and global warming. At the same time the ability of pharmaceutical companies to impose patent restrictions on the use of new drugs they have developed – even where this been heavily supported with public money – adds needless billions to the cost of treating life-threatening conditions.
  1. Growing inequality. This results from the continuing process of asset accumulation and holding in relatively few hands that inevitably occurs under the capitalist model, especially if profits are lightly taxed. It also stems from the compulsion, under capitalism, to promote individual selfishness – encapsulated in the phrase “greed is good” proclaimed in the movie Wall Street (1987). This in itself is sufficient grounds for rejecting capitalism, since prioritising maximum equality should now be central – and always should have been. The malign impact of inequality on society as a whole was well spelt out by Pickett and Wilkinson in the best-selling The Spirit Level (2009), the irrefutable conclusions of which were studiously if predictably ignored by the Western establishment.
  1. Chronic and increasing underdevelopment of most of the world.

In parallel with rising inequality in the developed world there has been a chronic failure to address effectively the much greater inequality and grinding poverty affecting the less developed countries (LDCs), which account for the vast majority of the world’s population. This despite the efforts of the international development agencies – led by the World Bank and International Monetary Fund – and the expenditure of trillions of dollars in “development aid” since 1945. While it has been claimed that these efforts have led to at least a billion people in the LDCs being “lifted out of poverty”, the growing symptoms of unrest around the world suggest a rather different story. In particular, the millions of migrants from countries affected by both civil disorder and long-term economic failure who are annually seeking to enter developed countries in search of a better existence – putting increasing strain on the host countries – is a measure of the inadequacy of efforts to stem the growth of global poverty.

This disastrous record makes clear that the neo-liberal model is no better suited to meeting the needs of the developing countries than those of most of the rest of the world. In its place it will rather be necessary to devise (non-market-based) structures which assure a more equal share of global income and resources for the “South”. This is all the more urgent given that the climate crisis now precludes any recourse to rapid global growth to help close the gap.

A more benign alternative

The above list of negative impacts of contemporary capitalism is not intended to be exhaustive. It is probably sufficient, however, to demonstrate why it is an economic model that has not only outlived whatever usefulness it may once have had but to have become a disastrous burden on global society. In place of this existing purely market-based model designed to promote corporate profit maximisation it therefore behoves us to try and determine a more benign purpose of economic activity and organisation based on quite different principles.

These principles should certainly comprise the following:-

  1. Eschew or minimise growth of output;
  2. Encourage cooperation rather than competition;
  3. Maximise equality both within and between nations.

These may be seen as mutually reinforcing objectives, tending to promote stability – both economic and social – rather than the conflict and disruption resulting from the competitive market-based model. The desirability of pursuing this approach is all the greater given that a) the scope for further growth is in any case limited by the dwindling potential for further demand expansion, and b) the highly restricted physical capacity for increased output in view of the ever more pressing need to limit, or even reduce, production so as to counter the threat of global warming and other environmental dangers. Equally it must seem increasingly untenable that, in an era when the future of human civilisation looks precarious as never before, the “great powers” of the world should engage in a struggle for supremacy which is all too likely to lead to destructive conflict.

While the above principles may appear fanciful or utopian as the supposed basis for the future development of global society, there are two ways in particular in which communities and their leaders may be propelled in the direction of more rational behaviour along such lines:-

  1. Restriction of the right to limited liability. As made clear in our post Dethroning the profit motive (16 November 2015) the most obvious way of curbing unnecessary or wasteful investment is to restrict the automatic right to limited liability to those companies which grant the state effective right of veto over their investment decisions. Such a provision would have made it much harder to justify projects such as the disastrous HS2 railway in Britain – set to cost over £100 billion if completed – and many other white elephant infrastructure projects.
  2. Recognition of the growing global surplus of labour in light of changing technology and the limited future scope for growth. This is leading to increasing world-wide interest in the idea of Universal Basic Income (UBI), which if accepted would amount to conceding the right of all individuals to an unconditional income at a minimum survivable level irrespective of their employment status in a global economy where the opportunities for full-time employment will be rapidly vanishing. It would also tend to promote a less unequal distribution of income.

As always, the existence of powerful vested interests stands in the way of implementing such vital reforms. Nevertheless the hope must be that the global community and its leaders can be frightened or inspired by the possibilities and alternative prospects before us to embark on a radically new path

Market insanity precedes a historic bust

Trends in financial market values in 2020 have shown an astonishing capacity of market players throughout the world to ignore fundamentals and project an optimism belied by the weakness besetting the real economy. As a consequence the ratios of the main indicators of value to output (GDP) have reached unprecedented heights – e.g. (in the US S&P 500 market) Price to Earnings ratios (27.9), Cyclically Adjusted Price to Earnings multiples (32.9), Price to Sales ratio (3.0) or Total Market Capitalisation to GDP (170%)were all at record high levels as of 7 January 2021. Such exaggerated ratios – it must be stressed – are apparent globally, even in markets such as the UK where stock markets have been relatively depressed.

Ultimately these market price levels could only be justified by the reality – or a plausible prospect – of very high profits. However, not only have such profit levels not been reached in the present period (since 2019); rather there has been a fall in economic performance such as to indicate they are unlikely to be attained in the near future. In the absence of such a prospect investors have been mainly driven by a hope and/or belief that others will be lured by continually rising prices of securities to put their abundant spare cash into the same equities, regardless of market fundamentals, thereby sending prices yet higher. The principal source of this cash is the large-scale money printing engaged in by central banks in order to facilitate the purchase of the massive quantity of debt issued by their governments resulting from the huge fiscal deficits occasioned by the need to sustain spending and activity during the Covid-19 pandemic. The market value of equities has been given a further boost (“turbo-charged”), it should be noted, by companies buying back their own shares, thereby facilitating speculation on an even greater scale. (This practice, it should also be noted, had been effectively outlawed from 1934 until about 1980 – precisely because it had been so instrumental in promoting excessive market speculation prior to the Great Crash of 1931-1933).

Superficially it might appear plausible to suppose that asset values could be bid up infinitely without provoking an eventual market crash, especially if it can appear credible that stock markets will bounce back sharply from the downturn induced by the Covid-19 pandemic. However, the capacity of markets to absorb still greater levels of public debt is not unlimited. Hence it is likely that a “demand gap” will occur which can only be closed by raising interest rates – i.e. allowing both bond and equity prices to fall to more sustainable levels. Yet in any case it must be presumed that in the absence of some recovery in corporate earnings the bubble will at some point be pricked and that asset prices will collapse accordingly.

Meanwhile speculative tendencies are also reflected in a willingness to lend on what appear ever more risky terms for the purchase of corporate assets. This has resulted in some enterprises now having leverage ratios (gearing) as high as 8 or 9 times earnings before interest, tax, depreciation and amortisation (Ebitda) – compared with a more typical average of 4 to 5 times.

A still more spectacular symptom of wild speculation is provided by the market for cryptocurrencies such as Bitcoin. The price of the latter had risen over six-fold in the four months to 1 January 2021, a phenomenon that can only be ascribed to pure speculation – i.e. gambling without any genuine consideration of market worth. Those commentators and investors who maintain that such exponential rises in value can be continually repeated base their argument on the belief that Bitcoin supplies are finite in the short term (unlike the dollar and other fiat currencies) and hence akin to gold. Yet this ignores the reality that the diverse “miners” of this or other cryptocurrencies (including official monetary authorities) could agree arbitrarily to increase the supply whenever they found it appropriate. Hence in the final analysis cryptocurrencies are seemingly no different from the openly fiat variety.

Obtuseness of mainstream commentators

These extreme speculative tendencies have occurred in spite of – or even abetted by – the supposed accumulated wisdom of an economic establishment which should properly have been pointing out their unsustainability. Thus, although it has been obvious from the outset that a principal, if not the only, purpose of quantitative easing (QE) is to hold down interest rates by mopping up government debt at prices far higher than those they could have commanded in an undistorted market, most mainstream economists maintain or assume that its aim is primarily, if not solely, to sustain the level of public spending and thus the pace of economic growth.

Hence it is even seemingly argued by some – e.g. Martin Wolf of the Financial Times – that low interest rates in the face of the massive public deficits and debts generated by QE are a purely fortuitous – or exogenous – phenomenon which has nothing to do with massive buying of excessive public debt by central banks deliberately designed to drive down interest rates artificially.1 This view is in line with (rather puzzling) claims of the Bank of England that the policy is designed to help raise the rate of inflation.2

Yet the fact that not all commentators have swallowed such simplistic explanations for the prevalence of low interest rates is an indication that the reality is more worrying. As noted in the Guardian of 11 January 2021, the veteran British financier Jeremy Grantham, who co-founded the US investment firm GMO, has warned the company’s clients, “The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929 and 2000.”3

As many commentators have discovered to their cost in recent years, “calling the top” of a market bubble can easily prove to be a hazardous, if not impossible, undertaking. The reason for this, it may seem obvious with hindsight, is the desperate lengths to which governments, central banks and other market players are prepared to go to prevent a systemic market collapse. This in turn is clearly to be explained in terms of how much these ruling vested interests stand to lose in such an eventuality. Whether the comments of Mr Grantham reproduced above prove to be any more prophetic than dozens of other similar ones in recent years clearly remains to be seen (at the time of writing). For reasons given earlier, however, there are good grounds for believing that markets are stretched close to their limit.

One factor which has long seemed likely to be crucial in bringing an end to the market boom is the possibility of an outbreak of inflation. Many observers, including the present writer, have been anticipating just such an inflationary bust ever since the start of the Global Financial Crisis (GFC) in 2008-9, bearing in mind the exponential rise in global public debt that has been ongoing since then. Indeed it still remains something of a mystery quite why prices have stayed so stable for so long given the volume of monetary creation, although the most widely accepted explanation is that it has been possible hitherto for the financial institutions to channel most of the excess funds into asset purchases rather than current (personal) accounts. The result has been steep rises in equity and other asset prices rather than in the general price level.

Now, however, it appears that the latest money printing binge (induced by Covid-19) is no longer containable in this way within the capital markets. This may be partly a symptom of concerns that the huge rise in the market prices of equities and other assets is exclusively benefiting the wealthy, so that the gulf between them and the vast majority of the more marginalised is becoming ever more intolerable, leading to pressure to close the gap between the relatively slow rise of wages and salaries and the massive capital gains accruing to owners of assets – pressure which may be harder to resist than previously.

If such is indeed the case it may be expected that both wages and consumer prices will now start to rise faster than in recent years – as indeed already appears to be happening in a number of countries. Should this build into a more general trend it is likely to lead to more deep-seated inflationary pressure.

In theory there exists the alternative of attempting to reduce, or even ultimately eliminate, the debt burden by growing out of it – i.e. so that it can be paid down out of higher GDP – which is what most indebted governments claim is their goal, notwithstanding their chronic inability to do this. Unfortunately, however, this objective increasingly conflicts with the ever more urgent necessity of curbing the relentless rise in global warming, which is now widely recognised to be incompatible with sustained fast economic growth. Hence, even if demand growth prospects were such as to permit a more rapid expansion of GDP – a highly questionable assumption in the light of recent experience4 – there is growing recognition that this would not be compatible with environmental stability in general and reduced global warming in particular.

Nowhere to go but down

Faced with this impasse, policy makers have a potentially terrifying choice. They can allow asset prices to continue rising rapidly while letting real wages stagnate – and risk a consequent social explosion among the marginalised masses – or else they can permit the channelling of more inflated asset prices into generalised price inflation (as well as higher wages) and consequent increased market and economic instability. In fact whichever option is followed a market upheaval seems bound to ensue sooner rather than later.

This likelihood is reflected in much of the reporting and analysis seen in the financial press since the start of 2021. A number of commentators have pointed out that the current exceptionally high market ratios now being recorded – see above – are in many cases attributable to the extreme over-valuation of just a few component stocks of the market indices concerned. A conspicuous example of this is the successful pumping up of the market price of GameStop – a failing US video game retailer that has lost much of its market share to online trade since 2015 – by a large number of speculators operating in open collusion with one another, in opposition to the equally overt efforts of hedge funds and other large financial institutions seeking to “short” the stock and thereby drive down the market price to their collective profit.

Such deliberate, overt distortion of the stock market in the interest of speculative gain for a few seems bound to undermine what little public belief there may still be in the efficacy of the capitalist profits system as a mechanism for promoting productive investment and economic prosperity. In the short run this can surely only portend the bursting of yet another major market bubble in succession to those of 1987, 1998, 2001 and 2008 – and all the resulting world-wide financial mayhem.

Whether in the longer term this will continue to be seen as an acceptable process for determining the allocation of resources in a supposedly modern, civilised society must be open to doubt, especially if it requires, as now, the effective dragooning of workers to invest their savings – via tax-subsidised pension funds – in assets whose market value can be open to being artificially determined, as in the case of GameStop. To a rational observer it may seem more likely that there will be growing cries of “enough is enough”.

1 Restoring UK growth is more urgent than cutting public debt, Financial Times 13 December 2020; Bank of England Investors believe BoE’s QE programme is designed to finance UK deficit. Financial Times 4 January 2021

2Tommy Stubbington and Chris Giles, Bank of England Investors believe BoE’s QE programme is designed to finance UK deficit. FT 4 January 2021

3 Larry Elliott, Are soaring markets and house prices an ‘epic bubble’ about to pop? The Guardian 11 January 2021

4 see The Impossibility of Growth (posted 2 July 2020)

Covid19: a catalyst for Universal Basic Income

It would be hard to deny that the radical idea of Universal Basic Income (UBI) has been attracting increasing support in recent years, including that from a prominent candidate for the Democratic nomination in the US presidential election of 2020. One of the main reasons why this is so, almost certainly, is the growing perception that jobs which are both satisfying and sufficiently remunerative are increasingly hard to come by for most of the working population. At the same time the necessity of certain types of traditional work – e.g. bank tellers – is being increasingly called into question as the advance of automation enables human workers to be replaced by machines, at an accelerating pace.

Consequently doubt is being cast, probably as never before in history, on whether or how far human labour is necessarily required to fulfil all the tasks needed to satisfy society’s demands at a given point in time. If such is the case it might suggest that our civilisation has evolved to an advanced stage in its use of labour. Very crudely speaking, this evolution may be said to have been in line with the following pattern:-

  1. From pre-historic times to the Roman Empire. Heavy dependence on de facto chattel slavery;
  2. From the Middle Ages to the start of the Industrial Revolution (18th – 19th Century). Feudal structures in which labour was provided on a quasi-contractual basis (though with residual elements of effective slavery).
  3. From the Industrial Revolution to the present. What Karl Marx called wage slavery (where employers of labour provided some cash compensation but otherwise largely disowned responsibility for supporting it) has increasingly become the norm – latterly underpinned by state-funded benefits for the unemployed or destitute (otherwise known as the Welfare State). Concurrently chattel slavery was progressively outlawed by the end of the 19th century, at least in the Western world, although that has not prevented its being illegally revived in the present day (Modern Slavery).

(The changes over time referred to have mainly reflected the evolving technological environment, particularly since the start of the Industrial Revolution.)

Throughout these various phases of history it has evidently been understood that whatever structure of labour deployment was applied would also effectively constitute a mechanism for income distribution, thereby enabling all actual or potential operatives to receive more or less adequate compensation for their labour in the form of wages or welfare payments – or else, in the case of chattel slaves, payment (in kind) for the cost of keeping them lodged and fed. Today, however, the apparent lack of need for labour in certain activities or occupations means that such an understanding no longer holds good – so that (for example) many jobs, such as those offered on “zero hours” terms, may not guarantee any remuneration at all. Despite such anomalies many economists and others still maintain that the labour market is self-balancing over time, so that jobs lost to technological change in one sector or occupation are somehow “automatically” replaced by a comparable number of (more or less adequately paid) new positions elsewhere.

Serious economists and other social scientists should be quick to recognise this belief as simple-minded economic determinism. It has nevertheless been an implicit assumption of Western policy makers for generations and one that is still generally reflected in labour market policies everywhere – while “full employment” is still the avowed goal of most governments, even though it has become an increasingly meaningless term, especially as the average number of hours, days, weeks or years assumed to be worked by each worker varies so much.

Yet behind this simplistic assumption lies what might be termed an age-old superstition as to the nature and purpose of work itself. In fact it has hitherto been common to most, if not all, human societies to insist that an individual be required to make a contribution through work (however this is defined) in order to qualify as a member of society at all – although the aristocracy has been generally excused from this obligation. This view is enforced by moralistic pronouncements such as that made by the British Chancellor of the Exchequer in delivering his statement of July 2020 on support for employment following the Covid19 emergency, when he said “I believe in the nobility of work”. However, this traditional ideology has been increasingly questioned since the Victorian era, notably by such writers as Ruskin, William Morris and Oscar Wilde, and more recently by, among others, the American futurist Buckminster Fuller and the French philosopher André Gorz.

As noted above, it is by now almost self-evident that this shift in perception is largely a function of the displacement of labour by technological advance in production, even though this is still denied by some. Yet as most governments and political parties cling to the view that income can and should continue to be allocated by traditional market mechanisms, it is inevitable that its distribution is becoming ever more unequal, as more and more relatively low-skilled workers are forced to compete for a rather static, if not dwindling, share of aggregate value added (Gross Domestic Product), while those few with higher skills can remain assured of obtaining a high and probably rising share.

Against this background the outbreak of the Covid19 pandemic is now set to result in a sudden and sharp diminution of demand for less skilled workers which, other things being equal, will cause their remuneration to shrink even further – in relative if not also in absolute terms. It is thus easy to imagine that there will be an irresistible outburst of popular demand for a drastic shake-up of the welfare and social protection systems across the world so as to ensure a more equitable distribution of income in favour of those who are presently more disadvantaged. This seems all the more likely to the extent that the latter are now experiencing real hardship if not destitution.

Basic income: the obvious starting point

In the present circumstances, as outlined above, it is clearly difficult to define a market mechanism whereby wage or salary rates could be set on a sustainably equitable basis. It is impossible to determine, a priori, the appropriate basis for allocating shares of value added (GDP) between different activities or occupations, and experience suggests that any attempt to impose rates of pay for different positions, based on some kind of arbitrary administrative fiat or collective value judgment, is bound to fail. Furthermore, in the post-Covid economy, which may increasingly resemble a “zero marginal cost society”, it is virtually certain that, after a period of adjustment, relative costs and values of different activities will differ greatly from what they are now. This will apply particularly to those factor costs – e.g. real estate or energy – which may be sharply depressed thanks to suddenly reduced scarcity or lower production costs, while broader trans-sectoral dynamics will tend to push down costs and values across the economy generally. Thus, for example, lower real estate values will sooner or later cause the market prices of many financial securities – which are typically related to property prices – to fall, ultimately perhaps precipitating a sharp and permanent contraction of the financial sector as a whole. Clearly, however, it is impossible to predict the exact pattern of such fallout in advance.

The huge level of uncertainty surrounding this complex process serves to underline why it would be unwise to try and pre-determine as a given what absolute or relative values to assign to particular labour activities or occupations in any given economy. On the other hand we have also noted the growing dissatisfaction with the extreme levels of inequality in the existing pattern of income distribution in most economies. Hence there is an urgent need to find a mechanism or mechanisms that could facilitate the distribution of income on what might be accepted as a more equitable basis than that which currently prevails. It should be stressed that any such mechanism for income determination should be sufficiently flexible to allow for dynamic processes of adjustment in the labour market while ensuring that the minimum needs of all are met. Equally, it should be based on the presumption that, where necessary or appropriate, collective provision of services (or goods) should be made available on a universal basis, paid for out of general taxation. An obvious example is health and social care, the first of which is already provided on this basis in Britain (where, as in several other countries, it has been conclusively demonstrated that collective provision is far more cost-effective than private commercial provision), while the second seems likely to be provided on the same basis in the near future, especially in light of the UK’s disastrous experience to date with private care homes during the Covid19 pandemic.

Aside from such obvious instances where collective provision is more appropriate (also likely to include housing) , it seems entirely reasonable to begin an attempt to establish a more equitable and acceptable structure of income distribution by formulating a Universal Basic Income (UBI) at an adequate level to meet the basic consumption needs of a typical individual. As the word universal indicates, this would be paid to all adults within an identified economic jurisdiction at a flat rate, unconditionally for a defined period, which should be long enough to allow the dynamic impact of

the system to become observable and adjustments made accordingly. In addition to the basic UBI all special needs – such as schooling for handicapped children – should be provided at cost as required.

The potentially high cost of such a UBI – which would need to be set initially at or close to the prevailing poverty line – has been identified as a significant objection. However, it is important to note that

  1. It would be paid in lieu of all existing cash benefits, including the basic state pension and personal tax-free allowance;
  2. The administration of social protection would be vastly simplified and its cost reduced accordingly;
  3. Those individuals who are sufficiently well-off not to need the extra income from UBI would have it clawed back through the tax system;
  4. It is likely that the poverty line would be reduced over time in line with the falling cost of goods and services in a dynamic “zero marginal cost” economy.

As already mentioned, it is not possible to foresee the detailed fallout of such dynamic processes, especially bearing in mind that no country has yet introduced such a UBI on a comprehensive and sustained basis. Nevertheless, bearing in mind that Britain – along with several other countries – has been compelled to engage in unplanned fiscal expansion (deficit financing) on a massive scale in response to the Covid19 emergency, it would be entirely reasonable to expect that a similar approach could be adopted in respect of the implementation of a UBI.

In any event, the only thing it is possible to say with certainty about the long-term shape of the post-Covid economy is that it will be barely recognisable from what it is at present. On the assumption that a form of UBI is widely adopted it may be expected that the disparity between the highest and lowest incomes will be enormously reduced.

The impossibility of growth

In the wake of the onset of the Covid19 pandemic the world is confronted with the manifest collapse of most sectors of the global economy. The attention of governments has understandably been focused on how to restore as soon as possible the level of economic activity that prevailed before the outbreak. However, as they struggle to determine how far this may be achievable – if at all – it is right to ask whether such a goal is even appropriate, bearing in mind the constraints to maintaining, let alone expanding, global output that existed even before the outbreak of the pandemic.

Such constraints may be defined as being of two particular kinds:-

A. Economic

In macroeconomic terms this collapse is set to be reflected in a large contraction of Gross Domestic Product (GDP) – or negative growth – and corresponding attempts to counteract it are therefore being concentrated on achieving the highest possible positive rates of growth. This has in any case been the more or less explicit aim of official policy in the West ever since World War II, although one that has mostly yielded disappointing results since the early 1970s.

The macroeconomic policy instruments applied in order to achieve such higher growth have been those of monetary or fiscal expansion – i.e. keeping interest rates low and public spending high relative to government revenue – consistent with maintaining financial and budgetary stability. These are the very tools, sanctified by Keynes, which were applied during the post-war boom years (1950-73) and are widely – but wrongly, as is now apparent, see below – believed to have facilitated the relatively rapid growth that was achieved in the industrialised world during that period. Unfortunately, too many unreconstructed Keynesians still believe that pursuing such expansionary policies – including, for example, investment in publicly funded infrastructure projects such as Britain’s HS2 railway – tends to have a lasting impact in stimulating growth – i.e. beyond a project’s construction phase. Hence this is seen as justifying an emphasis on increasing fixed investment as a way of boosting GDP growth.

The basic delusion behind this policy stance is the notion that aggregate consumer or investment demand can be artificially stimulated by “kick-starting” the economy with fiscal or monetary stimulus. Likewise it ignores the reality that sustained high growth in demand is only attainable under exceptional market conditions, such as prevailed in the industrialised countries (OECD) after World War II, where pent-up demand for consumer goods combined with technological change and the massive need for post-war reconstruction to bring about an unprecedented boom in demand. The result was that GDP growth in the OECD averaged 4.3 per cent annually in the 1950-73 period, compared with a more typical historic long-term average of little more than half that level.1 Hence we should hardly be surprised that attempts to restore post-war rates of growth have proved futile since the 1970s, even though technology-driven advances in consumer product capacity (notably of electronic goods) and quality have continued to occur.

Unfortunately, however, these attempts at artificial stimulation of demand have led to distortions in the economy and society which have only grown greater the more that governments have persevered with them despite their demonstrated futility. In particular, they have encouraged the tendency to run up enormous debts, both public and private, in the apparent belief that this will help facilitate faster growth, whether at sector or macro level. The persistent failure of these efforts to result in anything but still greater debt has not deterred the parties concerned from persevering with the strategy.

What might have deterred such profligacy under normal market conditions would have been the refusal of the markets to continue holding the resulting increased debt without demanding much higher interest rates. Had this been allowed to happen in undistorted markets rates would have risen rapidly to unaffordable levels, probably 10 per cent or more, thus precipitating mass bankruptcy in both public and private sectors. To prevent such a financial catastrophe, while maintaining the appearance of a still functioning capitalist economy, the authorities have resorted to the use of debt monetisation (euphemistically called Quantitative Easing) in order to hold down interest rates artificially. This process, which amounts to money printing (creating it “out of thin air”) involves the issuance of public debt which is then bought up by the central bank at a high price – implying a very low interest rate – even though under free market conditions the rate would, as noted above, be prohibitively high.

This officially authorised market distortion – which now even extends to central bank buying of private debt – has been sustained for so long in the main Western markets (US, Japan and the EU) that by now it is evidently accepted as normal behaviour, even though it had for long been (rightly) rejected by the International Monetary Fund and World Bank (guardians of the “Washington consensus”) as unsustainable market distortion. It has even given rise to a belief in what in academic circles is called Modern Monetary Theory (MMT), according to which a country that controls its own currency can print it in unlimited quantities without eventually suffering high inflation or other adverse consequences.

It is a remarkable demonstration of the degenerate state of contemporary economics that such an idea could be accepted by so many of the most respected economists of the day, without considering that it implies a belief that there need never be any practical limit to budgetary spending – even though this is clearly a nonsensical position. The fact that interest rates are historically low is not recognised as an anomaly, ascribable to officially inspired market manipulation in the face of record high levels of debt. Rather it is regarded as an opportunity to finance borrowing at (fortuitously) very low cost. Yet there is little sign that this is translating into much increased productive investment – as opposed to official deficit spending. This is probably because potential lenders – at least in the private sector – are not attracted to put money into projects carrying an ultra-low interest rate while the risk of loan default involved remains considerable in their eyes – i.e. the potential rewards are seen as too low to justify the risks.

Seemingly the one notion that can never be allowed to crystallise in the minds of Western economists or their paymasters is that high growth rates such as prevailed in the immediate aftermath of World War II are no longer attainable. As explained in my book The Trouble with Capitalism (1998) and subsequent works, this is mainly due to a combination of chronic relative stagnation of consumer demand and rising productivity of capital resulting from technological change. Hence even historically typical average growth rates of, say, 2-3 per cent annually should probably be viewed as the upper limit of what can now be achieved over the long term.

It is perhaps unnecessary to point out that the reason for this apparent obtuseness on the part of the economic establishment is that any suggestion that sustained high growth of GDP, and hence the need for commensurate fixed capital investment, might be in long-term decline would be seen as fatal to the future of the capitalist market economy itself – and hence profoundly unwelcome to the ruling élite.

In fact the only way such growth could conceivably be achieved is through promoting speculation in existing assets such that their value may be bid up to ever higher levels without any need for new fixed investment. However, since such a strategy clearly amounts to gambling pure and simple – without any possible long-term benefit to the real economy – it is bound to be seen, sooner rather than later, as not only anti-social from a public perspective but extremely risky from the point of view of the average investor.

This has not prevented increasing resort by investors to pure speculation in an ever more desperate effort to generate profits, even as many among them feel compelled to recognise that such activity is “socially useless”. It should be noted that such speculation has nonetheless been effectively encouraged by Western governments – as, for example, by allowing companies since the 1980s to buy back their own shares, a practice previously de facto outlawed since the Great Crash of the 1930s.

Another argument commonly deployed, implicitly or explicitly, in favour of continued expansion of fixed investment is that it is necessary to enhance or maintain the national competitiveness of a given country’s economy vis-à-vis the “national champions” of those countries deemed to pose a serious threat to its competitiveness in its own or global markets. An example of such competition – which is naturally underwritten or directly subsidised by the state – is the present struggle for supremacy between China and the US in relation 5G mobile networks. Such arguments, which in any case amount to an explicit negation of belief in ”free trade”, must be rejected by governments claiming to be in favour of limiting unnecessary growth of output and investment in the interest of minimising global warming or other forms of damage to the environment.

B. Environmental / demographic

While the lack of consumer or investment demand is a serious enough threat to the economic status quo, the fact that continued expansion of investment and output could pose a terminal danger to the environment and the biosphere constitutes a far more serious menace.

Hitherto this threat to the environment has been largely ignored by the global establishment while it seeks other ways to perpetuate the pursuit of profit enhancement, as described above. However, a growing number of activist organisations and individuals, such as Extinction Rebellion and the Swede Greta Thunberg have begun to demand earlier and more drastic action than the somewhat vague and less than unanimous commitments of different national governments to cut carbon emissions by 2050. In fact, it seems quite likely that many such activists will welcome the present outbreak of the Covid19 pandemic as the kind of dramatic event many of them have come to believe is needed to shake the world out of its complacency over climate change and force truly drastic action – such as, for example, the almost total cessation of commercial aviation which has now occurred by default in response to the Covid crisis, rather than as a result of government policy.

Population. Few have considered the possibility that the very survival of our species may depend on our ability to keep the size of the human population at a sustainable level within the planet’s finite limits. It is not widely understood that world population has quadrupled in the 75 years since the end of World War II – a rate of growth orders of magnitude higher than ever previously recorded in human history, and one that is likely to persist for the foreseeable future, so that on present trends another 2 billion people are expected to inhabit the world by 2050 (a 25 per cent increase over today’s level).

Remarkably, this problem is receiving hardly any attention either from activist supporters or governments who claim to be concerned about environmental pressures on the planet. This may be for a number of reasons:-

  1. Political sensitivity. Attempts to impose growth limits – e.g. through restrictions on family size, as briefly in China – are rightly seen as unworkable and unacceptable – while even the encouragement of family planning is often seen as contentious, typically on religious grounds, such that even the USA has barred the provision of aid to countries which incentivise contraception.

  2. Nationalism. A large population is often seen as actually or potentially a political advantage in international relations – e.g. UN Security Council, G20.

  3. Private sector bias. Corporate interests instinctively see market size expansion as advantageous to themselves – especially as other positive influences on market growth start to weaken (see above) and may often see rapid population growth as beneficial for this reason (the Economist newspaper has often tended to favour it).

Many commentators draw comfort from the fact that world population growth is now slowing and is projected to cease altogether by mid-century. This, however, ignores the fact that this process is very uneven, leaving huge imbalances between more and less heavily populated countries or regions.

On the face of it there is liitle danger that the agricultural sector will not be just as able to support the food needs of the additional billions as they have in the recent past (population growth being a function of productive capacity driven by technological advances in food production, rather than the other way round). However, concerns have been raised about the long-term dangers posed both to human health and other aspects of the environment by the steady intensification of farming methods, particularly in the area of meat and dairy production. For it is well known that cattle are a major source of methane, a greenhouse gas. Yet even if animal production could be sharply reduced from today’s level – which seems unlikely given the ongoing growth of the human population – there would clearly be serious negative impact on the environment in the absence of any restraint on global growth.

In summary we must conclude that growth at a sustained pace fast enough to assure a return on capital sufficient to satisfy the markets has by now become

  1. unattainable – owing to market demand constraints, and

  2. unacceptably destructive given its impact on the environment.

A number of commentators have expressed the hope that the Covid19 crisis may prove to be a watershed moment, in a positive sense, in the evolution of human civilisation. If that turns out to be so, it will mean that our species has – almost miraculously and for the first time ever – developed a capacity for recognising when it is on a dangerous and unsustainable course and has found the collective wisdom to step back from the brink.

1See Shutt, The Decline of Capitalism, pp 13-15

What is to be done about global mass migration?

Arguably, aside from climate change, the most intractable single problem facing the world in the 21st century is that of demographic instability arising from shifts in population both within and between countries and continents. While it has to be acknowledged that even now many analysts refuse to accept there is really any problem, those who do would probably agree that it dates from the second half of the 20th century.

While opinions differ as to both the nature of the problem and solutions to it, it would probably be generally conceded that it would not have arisen – or at least not so soon – but for the huge and wholly unprecedented rise in the world’s population since World War II. This has been such that by 2019 it had reached 7.7 billion, almost four times the level recorded in 1950 – when the then level of around 2 billion had merely doubled in the preceding 100 years. In fact the total figure would almost certainly have caused alarm bells to start ringing much earlier than they actually did (in the 1980s) but for the fact that the post-war period (up to 1973) was one of exceptionally high economic growth in the developed world, where it was generally agreed that more or less full employment was prevailing. Another factor of great importance from around 1970 has been the “green revolution” enabling the progressive banishment of chronic famine – and consequent lesser restraint on population growth – from developing countries such as India.

The withering of the post-war boom after 1973 – leading to a fall in average annual GDP growth from around 4 per cent to 2.5 per cent or less since the 1970s – was scarcely recognised as a long-term phenomenon by any mainstream political party or movement in the OECD countries at the time or since – nor by most economists. Yet the pace of population growth has scarcely moderated in the subsequent period, while that of technological change has if anything accelerated, leading to a progressively diminishing need for labour. Consequently the vision of global “development” entertained by many economists, and governments, for decades after World War II – according to which growth would steadily expand and encompass an ever increasing proportion of the global population – was shown to be utterly deluded.

The human impact of this trend has been reflected in a remorseless rise in levels of unemployment and underemployment, not least in “middle ranking” economies such as Algeria, Chile, Colombia, Egypt, Hong Kong, Iraq, Lebanon and South Africa, not to mention scores of even less developed countries, particularly in sub-Saharan Africa and South Asia. Increasingly this has led to levels of frustration that have boiled over into civil unrest as young people in particular have sensed that their prospects of achieving an adequate and sustainable living standard in their existing country of residence are increasingly remote for the vast majority. While in most cases such frustration has not been explicitly identified as a cause of the recent manifestations of discontent in such countries, it is clear that lack of economic opportunity for the mass of young people is a common underlying factor– and even in more advanced economies such as France and Italy.

Undoubtedly the growth of unemployment and underemployment are a reflection of chronic low global economic (GDP) growth since the 1970s. In response to this constraint developed-country governments have sought, in line with orthodox neo-liberal assumptions, to promote higher growth by containing inflation, holding down corporate tax rates and public spending and otherwise acting to encourage private investment – particularly since the onset of the Global Financial Crisis in 2008. However, by 2020 this strategy of austerity is widely perceived to have failed, particularly in Europe, where it has been most consistently and assiduously pursued despite growing scepticism as to its effectiveness – doubts that have even been given expression in the columns of the Financial Times1

Just as unrest has grown along with the perceived failure to deliver improved material prospects for most people there have also been increasing political upheavals associated with the chronic failure of governments to demonstrate minimally acceptable standards of competence or integrity, often accompanied by increasingly intolerable levels of repression. The strongest expression of protest against such abuses was given vent in the “Arab Spring” of 2010-2012 . All these tendencies have coalesced in the breakdown not only of economies but of political and civil order more generally, as witness the total collapse of the Syrian state and society since 2011.

This combination of chronic economic failure and political and civil breakdown has served to precipitate a steadily rising outflow of refugees from the affected countries or regions in search of a better life elsewhere. This has been going on at least since the 1980s, although it has only been noticed as a serious problem – at least in Europe – since 2015, when a huge upsurge in refugees from the Syrian conflict – and other humanitarian disasters (civil and economic) in the Middle East and adjacent regions – finally caught public attention. Meanwhile a similar process has been going on more gradually across the Atlantic, as the flow of economic migrants and political refugees seeking to move north of Mexico has become increasingly chronic.

It is perhaps to the credit of the existing inhabitants of the wealthier regions of Europe and North America that many of them have been inclined to welcome displaced migrants. However, as the German government discovered following its generous offer to accept 1 million Syrian refugees in the wake of the crisis of 2015 (out of a total of at least 5 million estimated to have been displaced since the start of the civil war in 2011), such gestures can have negative political consequences among those sections of the existing population who feel threatened by them. In these circumstances attempts to depict resistance to major refugee inflows as racist or xenophobic tend simply to exacerbate rather than ease tensions, while the plight of the refugees only gets worse. Moreover, these pressures tend to disguise the fact that most of the refugees created by this instability are not surprisingly anxious to return to their country of origin as soon as possible – a fact lost on many of their supporters in host countries who are keen to promote their integration into the societies of which they are reluctant guests.

At the same time the flows of new refugees from the numerous destabilised source countries continues unabated. As the constraints to accommodating or absorbing them within the putative host countries in the more or less “developed” world of the OECD become ever greater, other more far-reaching, fundamental solutions must be sought. Thus far the only ideas to have emerged from debates on possible alternative approaches seem to consist of increased allocations of resources to the interventions traditionally supported by international aid programmes, notionally aimed at promoting faster growth of output. employment and consumption per head in the target countries.

Clearly, however, this approach fails to take account of the lack of success of such strategies hitherto in achieving a generalised rise in the living standards of the vast majority of the populations affected. Equally it reflects their proven inability to ease rather than exacerbate the chronic levels of inequality that have hitherto resulted from the neoliberal, market-based model of economy which has been the pattern ordained by the dominant Western powers. More serious still is their failure to take account of the growing pressures to restrain world growth more generally in the interests of protecting the biosphere as well as human habitat.

This record of failure suggests more strongly than ever that totally new structures must now be put in place if the world’s economic resources are to be equitably and sustainably shared among its burgeoning population. This is not only with a view to diminishing the symptoms of mounting social unrest referred to above but also in consideration of the need to combat global warming and other environmental pressures now threatening the very survival of our species if not the planet itself.

Above all, such a new approach must be based on a rejection of the idea of economic growth (GDP) as a desirable goal of public policy. Instead it would seem self-evident that mechanisms must be devised to promote a progressive reduction in levels of inequality while at the same time meeting the minimum survivable needs of all. Equally, it must obviously be recognised that anything like rapid growth cannot be compatible with global environmental sustainability. It should be immediately apparent that any such model of income and resource allocation amounts to a complete rejection of the basic principles of the market economy which form the basis of the present dominant ideology based on maximisation of profit and growth. In short, what we know as capitalism must be seen to have outlived its validity as an economic system.

Clearly such a model, aiming gradually to eliminate significant differences in living standards both within and between countries and regions – i.e. on a global scale – is only likely to achieve its objective in the very long term. In order to have any hope of attaining it, however, the global community will clearly need to establish some measure of agreement on whether and how to do so, something which may well seem improbable to many. Without such a quasi-utopian vision, however, it may be evidently wondered if our species can expect to survive at all.

1 How austerity blighted the middle ground of European politics by Wolfgang Münchau, FinancialTimes 23 December 2019

The “War on Drugs” – the ultimate monument to capitalist corruption

Ever since the presidency of Richard Nixon – almost 50 years ago – the world has been in thrall to what is known as the “war on drugs”. Participation in this campaign, although not required by any UN resolution, has been widely regarded as mandatory for all nations, a view encouraged by successive US administrations, although their own policy measures have been primarily targeted – ostensibly at least – at the reduction of drugs use within the United States. By 2019, however, it is increasingly conceded – in both official and unofficial circles in the US and throughout most of the rest of the world – that the “war” has been lost and that the undoubted scourge of addiction to narcotic drugs must be addressed by other means – i.e. abandoning reliance on criminalisation.

The essential feature of the war on drugs is the criminalisation of possession, which obviously by extension puts any form of trade in illegal substances outside the law. For most of the time the policy of criminalisation has been in force the substances targeted have been largely confined to those three – cannabis {marijuana), heroin and cocaine – that constitute the bulk of the illegal trade. However in recent years there has been a proliferation of newly formulated substances on the market offering new experiences to users – in addition to more harmful derivatives of the existing drugs such as crack cocaine and skunk (a stronger form of cannabis) – and at the same time intended to escape classification as an existing designated substance. This obviously makes enforcement of the law increasingly difficult.

At the same time supply of illicitly produced opium-based painkillers (opioids), which are highly addictive but legally available on prescription, has mushroomed, particularly in the United States, where they have accounted for as many as 50,000 deaths a year through overdose.

The effect of prohibition

The result of criminalising possession for any purpose, it is well understood, is effectively to introduce a degree of scarcity into the market – and consequent price inflation – which otherwise would not exist, bearing in mind the evident need felt in any society to consume narcotic (addictive) substances of one kind or another. If there were any doubt about this the experience of the United States with the prohibition of alcohol (the Volstead Act) from 1919 until it was repealed in 1933 should provide a good illustration of what to expect.

During this period the absence of legal sources of supply was sufficient by itself to push up the market price, which in turn attracted the interest of those criminal elements willing and able to meet the illegal demand. At the same time the illegality of the business also made it inevitable that criminal gangs would become involved, particularly in order to limit territorial disputes between suppliers and to assure protection from the law – through corruption of law enforcement authorities.

A re-enactment of this process in the drugs market has created an explosion of crime, resulting in a situation where a huge number of prisoners in gaols all over the world – almost certainly the majority – are being held, at enormous public expense, for drugs-related offences. At the same time many other crimes are associated with the compulsion to obtain drugs to satisfy addiction:

  1. A notorious instance of this in Britain was the case of the so-called Suffolk Strangler, who in 2006 murdered five women in the vicinity of the city of Ipswich, all of whom had resorted to prostitution in order to finance feeding their addiction.

  2. A more serious symptom of drug-related crime is the epidemic of lethal knife crime and trafficking of juveniles entrapped into “county lines” drug gangs that has been ongoing in Britain for the last several years;

  3. In Mexico, where the war is far more a reality in what is still a relatively poor country – next door to the United States, the main market for drugs – the number of drug-related murders perpetrated by organised crime since 2007 is put at over 100,000 (according to Wikipedia).

Such are merely the extreme manifestations of the immeasurably huge social costs of the “war”, not to mention the vast but scarcely quantifiable costs to the public purse. Given the scale of the problem, it is surely a matter for the utmost astonishment that there is so little public concern or political questioning over the performance of governments in dealing with the issues raised.

Signs of surrender

The utter futility of continuing this “war” – as well as its extreme danger to society – has at last begun to be recognised across the world. This is indicated by the fact that as many as 30 countries have now either decriminalised the possession of cannabis or signalled their intention to do so. Among these is Malaysia, a country where most of the 70,000 prisoners in the country’s gaols have been convicted of drug-related offences and as many as 10 per cent of the national population have been estimated to be addicts. This despite the fact that, as in other South East Asian countries, the death penalty for drug dealing has remained theoretically in force until very recently (though seldom applied).

In Europe, meanwhile, it is notable that since the turn of the century Portugal has effectively decriminalised the possession, but not the supply, of all drugs, thereby enabling the encouragement of addicts to apply for treatment without fear of prosecution, as is the case for alcoholics elsewhere. The result is that Portugal has gone from having the highest incidence of heroin addiction in Europe to the lowest. At the same time Scotland – a nation made notorious as a hotspot of heroin addiction by the movie “Train-spotting”, and where prohibition is still in force – has now taken Portugal’s place at the bottom of the heroin addiction league table.

In the United States, remarkably, there is manifest division between the Federal government (including both houses of Congress), which remains staunchly opposed to any relaxation of prohibition, and a rapidly growing number of individual states – led by Colorado and including California – which are moving swiftly towards decriminalisation (at least of cannabis). Interestingly, it appears that the latter tendency is driven not least by the realisation among states on the brink of fiscal bankruptcy (probably the majority of them) that it would be possible to raise substantial tax revenues from duties levied on legal drug sales – as, of course, is already done in the case of alcohol and tobacco.

Perhaps most tellingly of all, in 2015 the United Nations Office of Drugs and Crime (UNODC) launched a briefing paper “Rethinking the War on Drugs” which clearly favoured decriminalisation, though this has evidently been downplayed by the mainstream media and most governments.

Given these developments and the unanswerable arguments against continuing to criminalise drugs, what obviously cries out for explanation is why there has not been a more general move towards decriminalisation and why so many leading supporters of the “war” – notably including the British government – refuse even to discuss the matter, beyond repeating incontestable but irrelevant arguments about the potential harm caused by drug abuse.

A hidden agenda?

In seeking an answer to this conundrum it is obviously appropriate to consider which powerful sections of global society have a particular interest in perpetuating the status quo (cui bono?) – especially bearing in mind the huge costs, budgetary and otherwise, that continue to burden already bankrupt states across the globe. Since governments are the ones who are still resisting demands to end prohibition it is reasonable to ask who in government or close to it are benefiting from maintaining the status quo. The obvious answer is that it must be a group or groups who gain from keeping drug prices high.

Since the most obvious beneficiaries from continuing drug prohibition are those with links to organised crime this would seem to point inexorably to the conclusion that such criminal elements have effectively infiltrated the highest levels of government all over the world. Equally, it is hard to avoid the conclusion that this malign influence permeates the entire global establishment, given that the mainstream media appear uniformly reluctant to raise such obvious questions.

However, it is perhaps not necessary to conclude that such shadowy interest groups are personally direct beneficiaries of the criminal drugs trade. Rather, they may perhaps have been persuaded that the number of those in high positions in government and the corporate sector across the world who are substantially dependent for their livelihood on the continuing high market value of hitherto illegal drugs – and would stand to lose much personally from their general devaluation – is so large that any general moves in such a direction could prove both economically and politically destabilising on a large scale. Given such a presumption it follows there may be a perceived collective establishment vested interest in maintaining the status quo, however unsatisfactory that may be for the wider public interest. While such a hypothesis may seem far-fetched, it needs to be borne in mind that the vast majority of countries in the developing world probably fall into the above category, including most if not all of the former Soviet bloc states (some now members of the EU).

Furthermore, the ramifications of the drugs business are so vast that many ostensibly respectable sectors of activity which themselves have no direct links to organised crime may nevertheless see themselves as having an interest in perpetuating the war on drugs. Aside from the obvious example of operators of private prisons (notably in the United States) by far the most substantial interest group in this category is undoubtedly the global financial sector. This is because the major banking institutions have evidently come to depend for a large but unquantifiable part of their business on flows of laundered money from illicit sources.

While a small number of banks – notably Hong Kong and Shanghai Bank (HSBC), Deutsche Bank and Wells Fargo – have been identified as conspicuous money launderers, remarkably it appears that there is scarcely a single major global bank that has not been found guilty of it. It is striking, however, that – as with fraud and other contemporary forms of financial crime – instances involving such large institutions are generally only punished by large fines, almost never by prison sentences, so that the individual perpetrators escape sanction while the only pain is that felt by shareholders (although that is typically small enough to be accepted as a cost of doing business and hence hardly much of a deterrent). Equally, there are many non-bank corporations – such as Chelsea FC and other sports clubs – who have become dependent on the ability to finance themselves with laundered money.

Whatever the real balance of forces in this inevitably murky world, it is clear that, to the extent that the continued stability of the global economy depends on such criminal relationships its future prospects are exceedingly fragile. In particular, it is well known that the financial sector, to the extent that it recovered at all from the crash of 2008, is still hugely in debt and teetering on the brink of mass insolvency, while at the same time continuing stagnation in the wider economy means the scope for banks to write profitable new loan business is restricted, while speculative investment is ever more risky. Hence the temptation to engage in dubious or downright illegal activities such as money laundering.

As readers of this blog may be aware, one of its consistent themes over the years has been the growing incidence of the application of double standards and institutionalised hypocrisy at the highest level of both government and corporate life throughout the world. A parallel theme has been the failure of the capitalist profits system to overcome its chronic inability to restore its stability based on a pattern of sustained, if cyclical, economic growth and matching demand for investment capital.

This fundamental flaw in the system was first identified by the author over 20 years ago in his book The Trouble with Capitalism. Sadly, despite continuing catastrophic contradictions and crimes such as those identified in this blogpost there is still little, if any, willingness to recognise this reality on the part of those who should by now know better.

Capitalism’s silent surrender

It has been abundantly clear at least since the start of the Global Financial Crisis (GFC) in 2007-8 that what is called the capitalist system has entered long-term decline, although it could well be argued that this decline actually set in many years – even decades – earlier. Despite this the Western financial and political establishment remains – for quite understandable reasons – resolutely in denial.

If there is one conspicuous reason why it is possible to pinpoint the system’s failure as being now unmistakeably beyond the point of no return it is the abandonment of any official pretence among the major industrialised powers (USA, Japan and EU) of pursuing a rational or sustainable monetary policy in line with the basic principles of market economics. This first became manifest with the widespread adoption of the monetisation of public debt – officially known as quantitative easing (QE) but really amounting to simple money printing without the backing of gold or any otherne finite reserve asset – in the wake of the onset of the GFC in 2008. At the same time the printed money was used by the central bank to buy up (mainly government) debt (bonds) at artificially high prices with a view to forcing market interest rates down to very low levels – the effective interest rate on a bond being inversely related to its price – thereby preventing the real insolvency of highly indebted governments as well as private borrowers from becoming manifest. The “success” of this manoeuvre is evident from the fact that the Bank of England has been able to keep its official discount rate at no more than 1 per cent ever since 2009 – whereas previously it had never fallen below 2 per cent at any time since the Bank’s foundation in 1694 (a pattern mirrored in the record of other leading central banks).

This drastic act of market distortion became necessary – at least in the eyes of the global financial and political élite – in face of the widespread threat of bank failures. These were only averted, in the first instance, by the injection of trillions of dollars of public money to shore up the balance sheets of otherwise insolvent institutions – effectively recapitalising them – as bad debts mounted in the unfolding GFC. Not to have taken this bold step would have led to the collapse of most if not all major Western banks as well as Lehman Brothers, the one major institution which was allowed to go bust in 2008 – with catastrophic effect. The resort to QE was needed as a supplementary support to the financial sector in face of its continuing fragility after the market crash in order to prevent interest rates from rising to unbearably high levels.

Such was the strategy adopted by the G7 leading industrial nations in 2008-9 and which led Gordon Brown, then Britain’s prime minister and one of its leading exponents, to proclaim that he had thereby “saved the world”. What was recognised at the time, at least by the more economically literate minority, was that this strategy was one of the utmost desperation which was not only without precedent in the history of global market capitalism but defied the most basic principles of financial orthodoxy – not to mention human rationality.

As such it was clearly not sustainable, as was evidently recognised by leading officials of Western governments when such money printing strategies were initiated in the immediate aftermath of the market meltdowns of 2008. Since then indeed it has been the unspoken official assumption that these policies would soon boost growth sufficiently to permit both a recovery of government revenues – enabling some paying down of debt – and a corresponding rise in interest rates. This optimistic view – that such extraordinary stimulus measures would be strictly temporary and shortly be reversed – is reflected in the pronouncements of Mark Carney, governor of the Bank of England, who almost from the start of his term of office in 2013 has promised an early rise in bank base rates. In reality he and his Monetary Policy Committee have been unable to impose any sustained increase in the Bank’s all time low rates in face of continued market weakness. Essentially the same fate has now befallen the attempt in 2018 by Jerome Powell, appointed by President Trump to be Chairman of the Federal Reserve Board, to raise US interest rates by a significant amount and to start the process (Quantitative Tightening) of unwinding the Fed’s massive balance sheet accumulated under QE.

QE to infinity

These developments vindicate the assertion of those critics of this central bank strategy of monetary expansion that, so far from enabling growth to be restored to the point where public debt could start to be paid down, it had trapped them in a vicious cycle of endless money printing – “QE to infinity” – to prevent the ever mounting pile of debt from crashing the global economy. The seeming paradox is that, despite general awareness that it is unsustainable – and that hence a point must soon be reached at which the enormous debt bubble will burst with devastating financial consequences, there is little sign at present that this is causing serious worry in the financial markets, even though many commentators have suggested that the stock market is overdue for a correction to the prolonged 10-year bull market that has endured since its collapse following the start of the GFC.

This apparent unconcern in the face of looming disaster – reminiscent of Monty Python’s Black Knight – may be partly encouraged by the emergence of a school of thought among some economists that seeks to suggest that debts can be allowed to rise much further (or even infinitely) without necessarily causing ruinous financial instability. According to this so-called Modern Monetary Theory (MMT) a state which controls its own currency can effectively borrow unlimited amounts to support investment and output – up to whatever level is needed to attain full employment – without suffering any adverse monetary consequences. Without attempting to assess this highly questionable “theory” in detail it is fair to say that it would never have been taken seriously in official circles in the absence of a perceived need to try and justify QE.

As it is, whether or not MMT is believed in by market players, the resulting general market euphoria is reflected in aggregate stock market indicators that remain remarkably buoyant notwithstanding their prolonged rise since 2009. Thus the price-earnings (P/E) ratio on the S&P 500 index of the US stock market is now around 21.5, which although high by historic standards is well below the astronomic levels attained just prior to the start of the GFC.

As against this, there are signs of growing nervousness among investors. This is reflected in multiple indications of weakened performance by pension and other investment funds, often accompanied or driven by substantial investor withdrawals, as reported more and more frequently in press outlets such as the Financial Times fund management supplement FTfm. This in turn feeds into a vicious circle in which fund managers’ high fees are measured against chronic poor performance and are consequently being forced down – even to negative levels, as fund managers compete desperately to retain investors’ funds. This tendency can only be offset for a limited time by speculative rises in asset values, driven by QE as well as by the phenomenal rise in the volume of (previously illegal) share buybacks designed to sustain the values artificially (i.e. effectively rigging the market). At the same time there is a chronic dearth of viable investment opportunities resulting from the twin pressures of a lack of visible market potential for new projects and the absence of attractive rates of return in financial markets depressed by artificially low interest rates.

Aside from these extreme cyclical factors affecting markets it must be emphasised, as noted frequently in this blog, that there is clear evidence of a long-term down-trend in demand for capital. Mainstream commentators are unsurprisingly reluctant to recognise this tendency openly, since to do so would amount to acceptance that capitalism has no validity as an economic system in the long term. However it was recently given voice – appropriately in the columns of FTfm – by the leading commentator John Dizard, when he posed the question, “What if… there is just too much capital in the world to support the income streams that have been promised?”

Another symptom of the malaise in financial markets is the continuing tendency of “the herd” (of speculative investors) to put high valuations on the equity of companies which have yet to make a genuine profit. This has come about, it would appear, due to a combination of

the lack of scope for earnings growth among established companies with already high P/E ratios;
the declining need for new capital in general (see above);
the huge volume of funds flowing into the market, both from still accumulating corporate earnings and share buybacks – frequently financed by cheap debt.

All these factors have given rise to an orgy of reckless speculation as investors and institutions engage in an ever more desperate search for remunerative yield. Thus Amazon, which had a high stock market valuation long before it started to record any actual profits in 2011, still has a P/E ratio as high as 80 (May 2019), while at the same time some of the most highly valued “hi-tech” stocks, notably including the ride-hailing taxi companies Uber and Lyft, are seemingly on track to follow Amazon’s example by attracting strong investor interest despite generating only losses to date – so that they were enabled to float on the stock exchange recently at multi-billion dollar valuations despite having made no profits.

It is a measure of the debauched state of the global capitalist order that such blatant distortions are evidently now regarded as normal by market participants. This is all the more extraordinary when viewed in the context of the ever growing mountain of non-repayable debt (private and public) and record (artificially) low interest rates. Because of this it is now clear that all funded pension schemes – particularly important in the US – are effectively bankrupt and will need to be wound up sooner rather than later, with the associated pension “promises” either dishonoured or the subject of hugely expensive bailouts by the taxpayer.

Creeping nationalisation

An even more striking example of stock market distortion is provided by Japan, which may claim the dubious distinction of having invented QE (in 2001). Since the onset of the GFC in 2008 it has had to resort to it again – with renewed intensity. This time, moreover, the Bank of Japan, ever more mindful of the chronic reluctance of the Japanese public to invest in either equities or bonds offering little prospect of a positive return, has felt obliged to intervene strongly in the market for both. The result is that the BoJ – which has lately set a negative official discount rate (-0.1 per cent), meaning that investors will have to pay to deposit money with it (signalling its frantic desire to encourage new capital investment) – is now estimated to own at least half both of all outstanding government bonds (JGBs) and of equities quoted on the Nikkei 225 Index of the Tokyo stock exchange. (Comparable data for other major economies are not readily available, although it is apparent that the Federal Reserve has by now accumulated a massive proportion of outstanding US Treasury bonds).

If this trend continues it is evident that the Japanese state will become the de facto owner of the bulk of what has been the hitherto privately owned enterprise sector. At the same time such a tendency to widespread nationalisation by default now appears as a looming possibility in other leading market economies. This is indicated by

a) a move by German market interest rates into negative territory, suggesting possible incipient “Japanification” of the German economy if not of the rest of the Eurozone;
b) official encouragement of reckless levels of speculation in markets, which amount to effective subsidisation of extremely risky businesses (distorting competition), as in the recent cases of Uber and Lyft;
c) the nationalisation of General Motors by the Obama administration in 2009 – before returning it discreetly to the private sector; without this intervention there would have been a catastrophic meltdown of the economically vital US motor industry.

Another indicator of a trend to covert public control of much of the supposedly capitalist economy is the growing dependency of much of what few major investment opportunities there are on public subsidy or guarantees to make them attractive to private investors, who remain the nominal owners. This applies notably to projects such as the new runway planned for Heathrow airport and the inherently loss-making HS2 railway in Britain as well as to numerous comparable infrastructure projects in other countries.

The above developments clearly point to an inexorable tendency to ever greater public involvement in the running of enterprises and the economy – even if corporate ownership remains vested in private shareholders, who also continue to ensure that management decisions are still taken mainly in their interests, reflecting the enduring dominance of narrow corporate interests in what remains a profoundly undemocratic order. Quite how this trend will unfold from now on is hard to predict in detail. What seems certain, however, is that in any event there will be no limit to the authorities’ desperate efforts to rig markets in order to try and avert their collapse. Nor is there likely to be any widespread public recognition of capitalism’s terminal failure until the GFC has been re-enacted at least one more time. When that happens it may suddenly dawn on the public that it has already, by default, assumed ownership of most or all of what was once believed to be the private enterprise sector – without ever having taken control of it.

The perversions of latter-day capitalism

Since this blog was initiated in 2012 it has made frequent reference to the many and growing economic distortions and perversions resulting from a) destructive and anti-social actions undertaken in the name of boosting corporate profits or the market value of assets, and b) wasteful over-investment and over-production undertaken in an attempt to maintain the level of economic activity as well as the market value of assets. This is not exactly a new phenomenon in the history of market capitalism, which has always depended on ensuring continual expansion of demand for capital to maintain the system’s health; systemic crises such as those of 1929 and 2008 can invariably be attributed to the periodic failure of markets to maintain sufficient demand for capital on the part of investors.

What is arguably new, compared with previous phases of the capitalist epoch, is the sustained effort, in which corporate interests have been substantially supported by the state, to provide artificial support for market demand and thus the rate of economic growth – defined as the growth of Gross Domestic Product (GDP) – a target barely considered by policy makers before the war. This had the twin objective of a) sustaining the level of employment – regarded as a political priority after World War II – and b) trying to keep asset prices rising – an ultimately indispensable requirement of system survival. This was perhaps the most important lesson drawn from the teachings of Lord Keynes: that markets cannot be relied on to deliver adequate levels of growth without some degree of market-distorting intervention, official or otherwise.

In truth, however, experience has shown that there are limits to how far such intervention can be effective in sustaining the level of economic activity or asset prices. Thus since the 1970s levels of GDP growth in the industrialised (OECD) countries have generally stagnated at around 2-2.5 percent annually, compared with 3-4 per cent for much of the post-war period up to 1973. The failure of “Keynesian” strategies of fiscal expansion to stimulate faster growth was for long a puzzle to many economists, although it is now clear – if only with hindsight – that the main source of macroeconomic dynamism in the post-war period was in fact a) the huge amount of pent-up / unsatisfied demand stemming from both the stagnation of consumption in the 1930s and enforced war-time austerity and b) the stimulus provided by the post-war reconstruction effort. Thus the relatively slow growth of GDP recorded from the late 1970s onwards must be attributed to the inevitable fading of such sources of growth, although this is still scarcely recognised by many economists.

In the absence of such continued sources of dynamism it was obviously necessary to seek out others, bearing in mind the absolute imperative of sustaining economic growth, although this compulsion was seldom if ever spelt out in analysis or debate over how to ensure continued growth. Rather it remained the unspoken assumption that growth could and would resume / occur at sufficiently high levels provided the right policies, particularly macroeconomic, were pursued. In reality since the war it had never ceased to be a central feature of official policy to promote strategies based on support for certain sectors which were seen to be vital to sustaining demand in the economy as a whole. Foremost of these were the defence industries, which had since World War II been regarded, particularly in the United States, as requiring to be maintained at a certain level of activity in order to avoid economic stagnation or even contraction, as had occurred after the First World War. This principle was implicitly enshrined in the US National Security Act of 1947, which created the superstructure that was to underpin support for the military – and thus for the “defence” industries.

This establishment of what has been called the “National Security State” has been widely recognised as creating distortions not only in economic strategy but in foreign policy as well, leading to generally uncritical US support for states such as Israel and Saudi Arabia, with what many have reasonably viewed as dangerous consequences for regional and world peace – and ones which may by extension have contributed to the currently unfolding global disorder. Yet many other economic sectors have been encouraged or enabled by governments to promote activities which are highly questionable in their social or economic consequences even though they may provide a limited boost to corporate employment or profits. These include:

  1. Production and distribution of goods and services that are known to be harmful to public health. The growth since the 1970s of harmful industries such as pornography and gambling, which were previously severely restricted activities, but which now cause untold social damage all over the world;

  2. The ever more pervasive professionalisation and commercialisation of competitive sport. This has reached the point where, for example, the amateur ideal originally enshrined in the founding principles of the modern Olympic Games has by now been totally abandoned. Likewise the swelling flow of funds coming into the sector has led to the spread of corruption visible in an epidemic of cheating (also driven by gambling incentives) in many sports – including football and cricket – and has risked destroying the reputation of cycling as well as the World Anti-Doping Authority for a generation.

  3. Wasteful construction of unnecessary infrastructure such as the HS2 railway and London Olympic Park in UK and the monstrous construction of 5 new football stadiums for the 2022 World Cup in Qatar, a country of only 2 million people with no domestic need of such facilities, not to mention tens of millions of empty dwellings in China.

  4. The continuing encouragement of investment flows into pension and mutual funds even though it has become obvious that these can no longer deliver gains to savers – and in fact are just as likely to lead to crippling losses for savers and investors. In theory such flows are meant to provide the capital for new productive investment, but by now are for the most part purely speculative, only serving the interests of fund managers and the rest of the otherwise increasingly redundant financial sector – once described as “socially useless” by Lord Adair Turner, former Chairman of the Financial Services Authority.

The West’s progressive trashing of its own values

For much of the period since 1945 the leadership of the Western world has proclaimed its commitment to universal values – human rights, the rule of law and democracy – as embodied in the Universal Declaration of Human Rights (1948). Indeed throughout the Cold War (up to around 1990) Western propaganda contrasted the so-called liberal values espoused by Western democracies with the totalitarian tendencies of the Soviet Union and other communist countries. At the same time countries were barred from full participation in the institutions of the international market economy if they did not comply with certain minimum standards of economic liberalisation – such as openness to foreign investment – and democratic government. It may be said that this principle was never consistently applied. Thus Japan was admitted as a full member of the Organisation of Economic Cooperation and Development (the club of “free-market” industrialised economies) despite applying some restrictions on access to its market. On the other hand South Korea was denied membership until it ceased to be a military dictatorship after 1988.

Over time, however, it came to be recognised that restrictions on doing business with illiberal regimes and “non-market” economies were acting as a hindrance to economic expansion, just as curbs on gambling and pornography had done. The first major breach in the wall of supposed ideological purity was the launch of the “ostpolitik” of West German Chancellor Willi Brandt around 1970, which facilitated trade with and investment in the Soviet bloc countries in spite of the lack of commitment by the latter to a market economy ideology or political pluralism. Equally, there can be little doubt that the Nixon administration’s historic overture to the People’s Republic of China in 1972, after decades of mutual hostility since the Communist revolution of 1949, was motivated to a significant extent by consideration of trade and investment opportunities, although naturally this was never stated to be a reason for the change in policy.

These developments may be seen as the start of the progressive abandonment by Western democracies of their claim to uphold the principles of human rights, the rule of law and democracy in international relations on a consistent basis. In fact it could be said that their approach to China following the Tienanmen Square massacre of 1989 marked the watershed moment in this decline, when, following their initial horrified reaction – expressed in gestures suchas barring China from hosting the 2000 Olympics – the Western establishment rapidly relented and allowed Beijing to host the 2008 Games. Since then Western governments and corporations have made no serious attempt to hold China to either established human rights norms or open market standards of economic conduct, while allowing its admission to the World Trade Organisation in 2001.

At the same time the West has promoted the creation of the G20 (Group of 20) – comprising what are deemed to be the world’s 19 most economically important nations plus the EU – in 1999, to sit alongside the much older G7 grouping (dating from 1975) and ultimately, it is supposed, to supersede it as a forum for global economic policy coordination. The significance of this move is that, whereas the G7 comprised only industrialised countries fully accredited as upholders of human rights and free-market standards, the G20 includes a number of countries with a highly questionable – if not non-existent – commitment to such standards, particularly in respect of human rights and the rule of law, notably China, Russia and Saudi Arabia. The inconsistency of this change, which has been widely criticised in the West, was brutally exposed when Russia, which had also been admitted to the G7 (thus forming the G8) annexed Crimea (part of Ukraine) in 2014, whereupon it was expelled from the G8, though not from the G20.

Taken together, all the developments described above can be said to constitute a steady crumbling in the commitment of nations of the “free world” to upholding the ideological principles on which they themselves had led the world in insisting that the post-war world order should be founded. It is perhaps obvious that this decay in moral leadership provided by the Western powers has not been confined to the narrowly economic sphere, even if that provided the main motivation for such a deviation from established standards. Thus the US and its allies have increasingly resorted to a) open flouting of the UN Charter in defiance of international law – most notably in their invasion of Iraq in 2003 – and b) increasing disregard for legality in selectively allowing or encouraging political abuses, including electoral malpractice, in different countries.

It follows from our earlier analysis that the roots of this moral degeneracy of the West lie largely in chronic economic and market failure – in particular the need to feed the insatiable hunger of the capitalist god for ever more unattainable levels of growth and investment. Hence the need to convert as many activities and assets as possible – including most public services as well as previously amateur sport – into profit-yielding businesses. As noted in another recent posting – What Hope for a Lawless World? – the desperation to keep the profits machine going is such that blatantly wasteful, anti-social and even downright criminal behaviour is more and more being treated as acceptable or even positively commendable. Thus the phrase “greed is good” is not simply an example of poetic hyperbole from Hollywood.

It is important to try and understand how this obsession with the search for profit feeds through into disregard for moral standards more generally. Naturally the determination to subordinate traditional activities and values to profit seeking – as, for example, in the new permissiveness towards pornography – tended to loosen people’s commitment to upholding such values. But the sector with the biggest propensity to subvert received moral principles is clearly that of defence and armaments – given that it has an inherent tendency to promote or perpetuate conflict in pursuit of enhanced profits.

What should alarm citizens of the Western world is that the apparent progressive decline in their adherence to moral standards – while still trying to present themselves as model exponents of the rule of law and democracy – means that this self-image has now turned into its opposite in the eyes of many in the rest of the world, particularly in the light of such manifestations as the continuing atrocity of the Guantanamo Bay detention camp 17 years after it was opened and egregious unpunished breaches of international law such as the US / UK invasion of Iraq in 2003. Instead leaders of these countries and their mainstream media devote much energy to denouncing the multiplying threat of terrorist attacks from Islamist and other groups who they claim despise Western values – without allowing for the possibility that they might actually be an expression of contempt for the sickening hypocrisy of Western nations in trampling on their own supposed values. A conspicuous example of this was the refusal to recognise the plausible evidence that the 7/7 suicide attack on London in 2005 – resulting in 52 dead and over 700 injured – was viewed by its perpetrators as in part a response to Western attacks on Muslim peoples such as the Iraq invasion of 2003.

If it is true, as we have suggested is clearly the case, that such perverse tendencies are ultimately the consequence of the pressure to find outlets for capital investment in a world where the genuine economic need for it is progressively dwindling, this clearly points to the need for a radical reorientation of our present economic model if even more serious damage to society is to be avoided. Above all this would point to the need to end the present fatal emphasis on profit maximisation by enterprises, which currently drives their efforts to nurture the acquisitive tendencies of consumers. This in turn indicates the importance of revising key features of the present economic order – notably limited liability – which now serve to exacerbate economic instability rather than preventing it, as was originally intended.