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.

The decline in global trade – end of an era

Of the numerous ideological shibboleths under threat from the ongoing demise of the established liberal-capitalist economic order none is more venerable than belief in the beneficence of international trade.

This belief is reflected in the continuing official acceptance of the theory of international trade formulated by the classical economist David Ricardo some 200 years ago based on the principle of “comparative advantage”. According to this all countries would benefit by maintaining freedom of access to their home markets, as it would guarantee maximum benefit to their consumers and, by avoiding protection of their producers from competition, maximum efficiency of use of their domestic resources. Over the intervening two centuries this theory has been much criticised – one might think for obvious good reasons – but has never been dislodged from the tenets of the ruling capitalist ideology. This seeming endurance seems surprising. For it has occurred despite the fact that no country has ever actually practised a policy of free trade, with the possible exception of Great Britain in the period 1860 to 1914.

Different explanations may be offered as to why this dogma has proved so durable in the face of evident resistance to applying it in practice. Among these are the fluctuating power of different vested interests – such as that of the landed aristocracy in England up to the repeal of the Corn Laws in 1846. But perhaps the most important single motive behind continuing official insistence on the need for free trade was the long-standing prominence of trade, particularly of imports, in the pattern of economic activity among those Western nations – most notably Great Britain – where the rules of “political economy” were first formulated into something vaguely resembling a science.

The reasons for the importance of commerce in the economy are rooted in the fact that trade in commodities – comprising largely raw materials – for centuries constituted the largest and most lucrative sector of economic activity in Europe. This in turn is to be explained by the relatively primitive level of technological development prevailing in production industries (agriculture and manufacturing) and transport prior to the first Industrial Revolution dating from the late 18th century – such that these activities were concentrated in small-scale “cottage” enterprises of low capital intensity. Hence the largest and potentially most profitable outlet for capital investment in Europe up to that time was in the importation of those goods – for the most part largely unprocessed – that could not be found or produced locally. The attractiveness of these activities was often all the greater to the extent that the main sources of supply were in distant lands with which communication was difficult or hazardous, making the potential profits to those who could succeed in bringing them back to Europe phenomenally attractive.

Such was the basis of the so-called mercantilist economic ideology that still predominated at the time Adam Smith’s Wealth of Nations appeared in 1776 – and which he strongly criticised. According to this doctrine wealth and power would belong to those groups or nations who could secure most effective control of the supply and price of more or less scarce commodities – to the exclusion of rivals from other countries. This was evidently demonstrated by the success of such small states as Venice and the Netherlands in commanding enormous wealth based purely on maritime trade and despite a total lack of
their own domestic natural resources.

Hence the perception that control of trade and trade routes was the key to national success, a view that inspired the first wave of European overseas expansion in the 16th, 17th and 18th centuries. No country was a more committed exponent of this ideology than Great Britain. This lay behind the moves to increase British naval strength in the fifty years after 1714, when political power lay predominantly with the Whig party representing mainly commercial interests. At the same time the development of infrastructure in the shape of trading companies (including the East India Company), commodity exchanges and financial institutions based in London served to reinforce the powerful British vested interest in maximising opportunities for overseas trade.

The advent of the Industrial Revolution from the late 18th century, in which Britain was the world leader, further underpinned this commitment to “free” trade, although increasingly this was as much concerned with opening export markets to British manufactures as to securing control of import flows. (On the other hand, it should be noted, from the 18th century in Britain tariffs were imposed on imports of textiles from India, which had previously had a dominant position in the British market, while cheap textiles from Britain were enabled by the authorities of the Raj to have free access to the Indian market, with disastrous consequences for local manufactures. This was a demonstration of what has become a familiar reality over the ages: that belief in free trade is never more than skin deep).

Such considerations undoubtedly go a long way to explaining why Ricardo – himself a highly successful City trader – was so committed to minimum restraint on trade. What is at first sight much harder to understand is why in the 21st century it is still the received wisdom within the global establishment that

a) free trade (so-called) is generally beneficial, and
b) the rate of growth of international trade is regarded as an important indicator of global prosperity.

Such persistent views are all the more remarkable given that, as noted above, no major nation has ever practised anything resembling free trade for a sustained period. At the same time countries which have attained high levels of economic development – such as Germany and the United States in the 19th century and (more recently) Japan, Sooth Korea and China – have done so despite adopting highly protectionist strategies.

The most obvious explanation for this apparent perversity is the legacy of the traditional trade-based economies of pre-industrial Europe dating back centuries, as described above. These have spawned powerful vested interests with an ongoing commitment to maximising trade volumes, especially as shipping has continued to be dominated by large, mainly Western-owned enterprises, often in de facto cartels. The same is also true of all forms of freight transportation by land and air as well as the many service activities such as ports and trade finance that depend on maintaining a healthy volume of trade. These sectors also employ vast numbers of people world-wide.

Turn of the tide?

However, developments in recent years must cast doubt on how far these powerful forces favouring high levels of world trade can sustain traditional rates of growth, which have until very recently been typically well above those of global output. In fact since the onset of the Global Financial Crisis (GFC) in 2008 this relatively rapid growth has declined markedly, such that since 2008 global trade has, for the first time since the mid-19th century, been growing more slowly than output (GDP) – according to the most authoritative estimates (see Bank for International Settlements Annual Report – page 103). The main reasons for this appear to be:

  1. Disenchantment with globalisation. From the 1980s there was a worldwide trend in favour of what was termed globalisation, or the removal of barriers to cross-border movement not only of goods but services, labour and capital, with a view to enabling enterprises to access inputs and productive factors at the lowest available cost while also allowing suppliers of goods and services free access to end-user markets. This gave transnational corporations (TNCs) in particular the opportunity to create “global value chains” (GVCs) utilising the most cost-effective inputs at each stage of the production and distribution process. Yet while this might have worked well in theory from the perspective of maximising corporate profitability, it ran into the practical difficulty that

success depends on effective management of the whole process at every stage, avoiding the possible negative impact on costs of unforeseeable interruptions to supply;
resistance to attempts to minimise costs and maximise profit at each stage could generate precisely the kind of costly interruptions to GVCs that could imperil the whole operation.

More broadly, governments, particularly of poorer countries, have become increasingly resentful of pressure to open up their markets to agricultural and other exports from the advanced countries, especially as they perceive these – usually with good reason – to be unfairly subsidised. This was the essential reason behind the final collapse in 2015 of the Doha round of multilateral trade negotiations sponsored by the World Trade Organisation (WTO), after 14 years of increasingly fruitless haggling.

  1. Impact of climate and technological change on production and distribution costs.

Concern at the large contribution made by freight transport (particularly maritime) to global carbon emissions is leading to effective pressure to reduce this. This is likely to result in higher costs of global trade so that, other things being equal, there will be a greater premium on producing goods closer to end-user markets and shortening value chains. Meanwhile shipments of the most heavily traded commodities of all – oil and gas – seem set to largely disappear over the long term as they are progressively replaced by renewable energy sources. At the same time hi-tech advances in production methods have made it more cost-effective to supply markets for goods from local sources. This applies not only to manufactures, where techniques such as 3-D printing are making it possible to produce at low cost even with very small production runs; it also affects agriculture and horticulture, where the application of techniques such as LED lighting and aquaponics are enabling the
production of many fruit and vegetables, as well as flowers, close to urban consumer markets rather than importing them expensively by air.

Taken together these tendencies appear to foreshadow a steady shrinkage of the volume and value of goods transported internationally, particularly over long distances. Such a development is highly significant for three main reasons:

a) It seems bound to be a strongly negative influence on the amount of value added generated by the commerce sector – i.e. its contribution to global GDP;
b) Likewise it is likely to curtail the ability of TNCs to locate their activities in different countries according to whatever seems the most advantageous and profitable configuration from their point of view;
c) It will result in massive loss of employment not only in the trading activities directly affected by slowing or negative growth, but also in supplying industries such as petroleum and shipbuilding and ancillary services such as banking and finance (losses compounded by those resulting from technological change affecting these sectors, including notably road transport).

Such tendencies, it may be noted, appear to fit with emerging trends among developed countries towards “bringing home” production and service activities that had earlier been moved offshore, supposedly in the interests of greater cost-effectiveness. This is most conspicuously reflected in the policies of President Donald Trump in the US, which have been overtly protectionist in imposing tariffs on imports of steel and other products from China and the EU. As such they seem to reflect the growing awareness of the flaws in the whole ideology of globalisation referred to in another recent posting. Significantly, this also shows signs of being in line with the views of Jeremy Corbyn’s Labour party that there should be a greater emphasis on local provision, particularly as Britain is freed from its obligations to the EU Single Market following Brexit. Any such tendency is of course anathema to upholders of the status quo, including the big business interests seeking to maintain a post-Brexit regime similar to that enshrined in the EU’s Lisbon Treaty, the epitome of the ideology of neo-liberal globalisation.

Whatever the shape of post-Brexit Britain turns out to be, it is certain that the trends and pressures described above will continue and intensify. Hence, although it would be premature to try and forecast trends in the pattern of activities in the commercial sector in either the short or long term given the huge changes and obvious uncertainties in prospect, it is safe to say that the volume as well as the value of international trade is set to dwindle further over the long term, with momentous consequences in terms of value added, profitability and employment for the sectors concerned.

The End of Wage Slavery

Around 250 years ago – during what is known in the West as the Age of Enlightenment – there emerged two parallel but related tendencies of profound significance for human economic and social development, namely

  • The invention and application of techniques, especially based on steam power, that facilitated mechanised production and transport, which formed the basis of the first Industrial Revolution, and

  • The growing recognition of the idea of universal human rights, reflected in the assertion of the US Declaration of Independence that “all men are created equal”.

Taken together these two developments may be said to have made possible the movement towards the formal abolition of slavery which spread steadily across the Western world, starting in the British Empire in 1834 and culminating in its abolition in the USA in 1862. Also, in that very same year in Russia the emancipation of the serfs, whose status was little different to that of chattel slaves, was decreed, a move that may also be said to mark the final end of the feudal system, which had been the main basis of society and the economy in Europe – particularly rural society – for 1000 years or more.

As noted by a number of commentators, the trend towards greater emancipation was to a significant extent facilitated by the technological revolution rather than by growing moral revulsion at the idea of human beings being one another’s property, important as the latter undoubtedly was. This was because the vast increase in labour productivity resulting from mechanised production, in both agriculture and manufacturing, meant that it became less and less cost-effective to maintain a permanent labour force at an employer’s expense, especially where demand was seasonal or subject to frequent market fluctuations. This led instead to the horrors of labour exploitation in 19th century Europe, under which most employers took no responsibility for housing or feeding their operatives during good times or bad – as described by Engels as well as Dickens and other English novelists of the period. This new order was aptly termed “wage slavery” by Karl Marx. Gradually over the next 150 years (to around 1975) the worst excesses of the early 19th century were eliminated as political rights were for the first time extended to the whole population in Western countries and “welfare states” were established. At the same time a substantial minority – if not a majority – of the population of the world’s richer countries, accounting for some 10 per cent of global population, was enabled to attain a substantial degree of affluence at least for significant parts of the post-World War II period.

The rise of robotisation and artificial intelligence since the start of the present century needs to be seen in this context. For if the first Industrial Revolution may be said to have been the essential driver of the phasing out of feudalism and chattel slavery in the 19th century, the present one – whether called the second, third or fourth Industrial Revolution – seems likely to spell the gradual demise of wage slavery. Exactly how this process might unfold, and what form of society and economy will emerge to replace existing structures, evidently remains a matter for speculation. But it clearly holds out the prospect that future generations will come to view the period since the start of the first Industrial Revolution as a continuum leading to the progressive liberation of human beings – thanks to technological advance – from the necessity to undertake paid work in order to procure the means of subsistence, which will instead be guaranteed by the unconditional provision of a Universal Basic Income (UBI) to all.

Just as significant for the future shape of economic development will be the impact of the present technological revolution on the costs of producing and distributing goods and services. As noted in earlier postings, this is clearly going to lead both to an economic environment of increasing superabundance and correspondingly much lower costs, which the energy sector is already starting to demonstrate. This will mean that a cardinal assumption of traditional (capitalist) economics – that resources are scarce and that they must be priced and allocated accordingly – will no longer apply in future, or only to an increasingly limited extent. This in turn will mean that a) profit margins for investors engaging in such productive activities will tend to be small and shrinking, and b) any speculative profits (economic rents) resulting from short-term scarcities will be short-lived.

A parallel development that is likely both to condition the demand for labour on the part of employers and for paid work on the part of would-be employees is the phasing out of the capitalist profits system as the main driver of economic activity – along with prioritisation of economic growth – as capital, which is already in chronic excess supply, becomes ever more redundant (see earlier postings). This tendency, which will be a function of the same rapid technological change that lies behind dwindling demand for labour, will obviously mean a steep decline in the level of fixed investment and associated employment growth. Indeed it may be more pronounced to the extent that, with an adequate basic income for all in place, government policy will no longer need to be geared to promoting increased investment or employment. On the contrary, it should seek to withdraw all artificial incentives to capital accumulation – particularly the right to limited liability, which privileges capital investment – now that society no longer requires it, in contrast to the position in the mid-19th century. Altogether, indeed, there should cease to be any motivation for expansion of aggregate output; rather there is more likely to be pressure to restrain or diminish it, if only on environmental grounds.

Revolutionary implications

It would be hard to overestimate the significance of such an outcome of contemporary economic evolution. This is for three main reasons:

  1. The ending of a profit-based system inevitably geared to maximising growth would mean that the assets supporting the value of securities (stocks and bonds) on the financial markets would become progressively less attractive to investors, especially as they appeared less and less likely to grow in value. By the same token funded pension schemes designed to provide workers with an adequate income in retirement will become ever more insolvent until they collapse altogether, as many are already doing. The same fate awaits other funds representing large accumulations of assets , including so-called Sovereign Wealth Funds which many states have established on the basis that they will provide them with a source of income in the event of major economic dislocation.

  2. Such tendencies would in their turn lead to a drastic long-term reduction in the value of assets and securities, and hence in the size of the financial system which has come to occupy a dominant position in the economy of the Western world – and of the UK in particular, where it presently provides employment for millions of people;

  3. Acceptance of the idea that nobody will be obliged to work in order to obtain the basic means of subsistence will be a historic first for the human race and will utterly transform economic, social and political relationships from anything that has gone before.

The fact that the progressive failure of funded pension schemes and similar funds is already the focus of turmoil in industrial and financial markets is another compelling reason for the early introduction of UBI. For it graphically demonstrates how the capacity of accumulated capital assets to yield an adequate income stream has dwindled with technological advance, so that a capitalist economic model can no longer deliver adequate pensions or any other form of guaranteed income while at the same time providing an acceptable rate of return to shareholders. By the same token, however, the enterprises of the new “post-capitalist” structure – many of which will be relatively small-scale and collectively owned – will increasingly be able to deliver goods and services at a fraction of the costs and prices presently attainable, especially as there will be no need to generate extra value added (surplus value) to meet the demand of capital markets for higher returns. Existing, profit maximising enterprises can be expected to struggle mightily to try and maintain a high market value in order to avoid further erosion of their margins and return on capital, but ultimately this will be as vain as the efforts of the Luddites and machine breakers in the early 19th century to halt the advance of mechanisation.

Evolution of a new economy

Although it is impossible to foresee precisely what processes will occur – or in what sequence – to bring about this new economic order, it seems likely that they will include the following features:

  • Chronic global financial crisis as existing enterprises, government structures and markets experience repeated breakdown due to failure to balance the books in the face of competition from new, low cost businesses;

  • Progressive moves to greater equality of income, particularly through adoption of UBI, the affordability of which will be greatly enhanced by the diversion of a growing share of corporate value added to finance an adequate UBI;

  • In the medium-to-long term, to the extent that major enterprises – including new media-based giants like Amazon and Alphabet (Google) – are not brought under state control, their surplus value added will be diverted via taxation to finance both an adequate UBI and collectively provided public services such as health and social care;

  • Progressive reductions in overall living costs thanks to technological improvements and consequent productivity enhancement. Such reductions should interact, in a dynamic process, with the diversion of excess corporate value added to facilitate greater affordability of UBI.

It seems obvious that such processes will not be able to take place in the present globalised economic environment, where the kind of radical changes that are envisaged could not be adopted by universal agreement – or even at the level of groupings such as the EU. Hence it seems likely that the economic organisation of the world will re-fragment into nation states or even smaller, local entities pursuing their own agendas independently of each other. In fact this process of fragmentation was already occurring even before the collapse of the WTO Doha Round of tariff reductions in 2015 and is also manifest in unrest within the North American Free Trade Area, the EU and the ECU. Indeed, as we shall show in more detail in our next posting, the benefits of international trade, so long taken for granted, are increasingly being called in question and may well be foregone without much, if any, disadvantage.

It is possible to conceive all kinds of ways in which human society might evolve under the emerging conditions of liberation from wage slavery. Writing in 1891, Oscar Wilde – positing an economy in which machines would be able to do all the menial, degrading or boring work required by society – anticipated a world where the ownership and management of production would be collective (socialistic) while individuals would be free to fulfil their potential as human beings – or, as he preferred, as creative artists. Although, as Wilde himself conceded, such a vision was clearly Utopian in the conditions prevailing at that time, it is by now far easier to imagine it becoming a reality – perhaps far sooner than we may expect.

What hope for a lawless world?

As is well known to generations of economists, the application of double standards and officially approved market distortions in what is supposed to be a “free market” economic system has attained widespread acceptance over many decades. But, as those whose memories extend to the 1970s may recall, once upon a time such interventions could be seen as rather exceptional – and needing to be officially justified as temporary measures required to sustain or restore growth or employment in countries or regions adversely affected by short-term market weakness. Even in such cases, however, free market ideological purists warned of the “moral hazard” involved in allowing state subsidies or guarantees (underwriting) of projects or loans which might give rise to conflicts of interest and are in any case intrinsically distorting and thus potentially damaging to the health of markets.

By now such interventions have become so commonplace that this stance can be said to have been institutionalised – to the point where even the most blatant manipulations of the market are allowed to occur without legal consequences or any apparent expressions of public concern. The shift in attitudes can be illustrated by events surrounding the Guinness trial of 1990 and the more lenient treatment of more recent comparable cases. In the former case three leading City figures and the former CEO of Guinness himself were convicted of “making a false market” in the company’s shares and sentenced to prison accordingly – although several years later they were able to establish that their convictions were flawed. By contrast recent comparable instances of market manipulation have either been officially ignored or, where this had become impossible, treated with maximum indulgence. Most notably the Libor scandal, which was uncovered in 2012 and involved the systematic distortion of market interest rates by major banks (of which Barclays was identified as the lead perpetrator – in which role it was even seemingly encouraged by the Bank of England), has led to no criminal convictions other than of a few relatively low-level traders, with no penalty at all for the complicit top executives, although the CEO of Barclays was forced to resign. Fines levied on the bank by the UK authorities – totalling £285 mn – were of course charged to shareholders. In such a climate it is hard to imagine that today the Guinness Four would even have been questioned, let alone prosecuted.

More generally, it is evidently now understood by all insiders that the authorities in the industrialised West have assumed responsibility for rigging markets – to “do whatever it takes” to insure against any global financial meltdown, although for obvious reasons this strategy must not be publicly spelt out and the related actions must remain covert as far as possible. Despite the secrecy it is possible to date this tendency from the 1987 stock market crash, when the US government established the “President’s Working Group on Financial Markets” , whose activities are not on public record but which is known to be charged with coordinating government actions to prevent too severe falls in the stock or bond markets. It is easy to see that the creation of this informal committee (known colloquially as the Plunge Protection Team or PPT) amounts to the official sanctification of moral hazard, not to say of criminal conspiracy to commit fraud where this is in the interests of the powerful.

The success of the US authorities in keeping the existence of the PPT under wraps may perhaps be judged by the fact that the present writer was unaware of its existence some 10 years after its creation. Hence when he wrote his book The Trouble with Capitalism:  he felt able to write “The crudest approach to using state resources in support of the market value of assets is that of officially inspired buying of securities in the market. This technique is known to have been used from time to time by the Japanese government, through the agency of major banks, to prop up values on the Tokyo Stock Exchange. However, it is not an expedient likely to find much favour with most governments or financial markets – unless at least it could be applied covertly – since it would obviously tend to foster a perception that the market was rigged and that prices of securities were essentially artificial.” In the light of what we now know this obviously shows the author to have been, not for the first time, somewhat behind the curve in recognising the capacity of the ruling élite for committing ethical atrocities. By now, however, in 2017 such naivete is scarcely possible as highly successful movies such as The Big Short (based on a true story) have exposed how deception and fraud have almost attained the level of public virtues on Wall Street.

Although such signs of moral degeneracy within the Western financial hierarchy have been discernible for many years, history will probably record that the watershed moment in this systemic decline was the failure of the giant Lehman Brothers bank in September 2008 and the decision of the US administration – led by Treasury Secretary Paulson – to make available hundreds of billions of dollars to other major banks to shore up their balance sheets against the reality of impending insolvency matching that of Lehman. The same policy response was adopted by the UK and other major financial powers, involving the loan of vast sums of public money to otherwise bankrupt institutions. Given that most of the sponsoring governments were themselves already heavily indebted, such emergency liquidity could only be procured by de facto large increases in public borrowing. But the natural response of the market to such massive increases in debt issuance by already bankrupt financial institutions and governments would have been to demand higher interest rates. Since such higher interest costs would only have rendered them even more insolvent it was immediately apparent that there was no way of avoiding mass bankruptcy via conventional market mechanisms.

“Quantitative easing”

In these circumstances the method adopted for thus rescuing the entire financial system was effectively without precedent. Known as quantitative easing (QE) it entailed the creation of new money – “out of thin air” – by the official monetary authorities (central banks) which they then used to buy up financial securities (mainly bonds) from other banks at a substantial premium to the market price – or what that price would have been without official intervention in the market. The high prices paid, which took no account of the inherent market worth of the securities or the solvency of the issuing institution or corporation, were designed to drive down market interest rates generally, with a view to reducing the pressure on the balance sheets of hard-pressed borrowers – or “zombie” companies, most of which would have otherwise been forced out of business.

Although it has never been officially spelt out, it is clear that the theoretical aim of QE was to provide relief to debtor organisations until they could generate sufficient revenues from their core activities to run down their debts (or “deleverage”) to sustainable levels while avoiding bankruptcy, a process which was supposed to be aided by keeping interest rates low enough to stimulate demand and new investment. Yet in the 9 years since the strategy of bank bailouts, QE and record low interest rates was initiated globally there has been no sign of meaningful recovery from the depressed levels of economic activity that marked the onset of the crisis in 2008. This harsh reality is confirmed by the fact that there has not only been no rundown of the huge global debt mountain; it has actually risen by over 40 per cent, or $60 trillion, since 2008, indicating that insufficient growth in value added has occurred to permit a reduction in total debt. Moreover, no central bank has given any indication of how they plan to exit their positions in the securities they have purchased from the private sector at such vast expense – no doubt for the very good reason that they know the counterparties (debtors) will never be able to repay them (i.e. repurchase the bonds bought from them by the central bank). The cluelessness and dishonesty of the authorities is exemplified by the confident announcement in mid-2015 by Mark Carney – highly paid Governor of the Bank of England – that the Bank would probably be raising interest rates from the record low of 0.5 per cent (held since 2009) by early 2016, only to lower them still further (to 0.25 per cent) by mid-2016 (following the surprise Brexit vote), where they have since remained with little indication that they could be raised any time soon.

An untenable position

It is thus apparent that the common strategy for global economic recovery adopted by the leading powers is a) based on a gigantic fraud and b) inherently doomed to fail. History may well conclude that the success of the establishment propaganda machine in largely concealing this reality from the public as a whole for so long amounts to the greatest confidence trick of all time.

However, the grim reality of systemic failure, which has gradually become clearer to all, including the ruling élite themselves, over the past 9 years, means that we have surely now passed the point where the position has become untenable. On the other hand, given the evident impossibility of any collective decision on the part of the different authorities to change course – and their awareness that catastrophe will ensue in any case – it remains difficult to determine how or when a “tipping point” will be reached, as it is now clear that they will resort to any manipulative trick at their disposal to “keep the show on the road” as long as they can.

While many market players are aware of such tendencies there is an understandable desire among them not to publicise what is going on. Clearly this is because the ruling élite are anxious a) not to draw attention to the fact that market competition has become a complete sham, rigged in favour of a privileged few, and b) to delay the inevitable deluge for as long as possible.


Rotting from the head

The epidemic of official irresponsibility and malfeasance described above has, it seems, all too readily given rise to the gradual spread of a culture of permissiveness in most areas of economic activity. It must be stressed that, as noted in another recent posting – Dethroning the Profit Motive – this tendency is of long standing in the (relatively brief) history of market capitalism, particularly since the British Companies Acts of the 1850s gave companies the right to claim limited liability and thereby ensured the primacy of maximising shareholder value in corporate strategy. Hence the inevitable tendency for enterprises of all kinds (financial and non-financial) to prioritise the pursuit of higher profits above all other goals, particularly among publicly quoted companies competing for investor funds.

But, as noted in another recent posting – The Phasing Out of Capitalism  – the demand for capital investment is steadily dwindling over time in response to technological change (on top of the usual cyclical downturns associated with the capitalist system), so that outlets for such profit-seeking funds are increasingly hard to find. Hence there are powerful pressures in all sectors of the economy to find new outlets for excess investible funds and at the same time minimise the chance of losing money on both new and existing investments.

In a situation of generalised bankruptcy, where asset values have been inflated to unrealistic levels, it becomes ever more impossible to make genuinely profitable investments or sales without engaging in some form of market distortion or dishonesty. This explains why there is unrelenting pressure on a) governments both to approve large-scale “white elephant” projects such as the London Olympic Park, the Hinkley Point C nuclear reactor or the HS2 railway (on which there is no chance whatever of a genuine positive return on investment) and to underwrite them with public subsidies, and b) on economic agents to lie, cheat and steal on an ever greater scale.

Unsurprisingly the collapse in ethical standards resulting from these tendencies has not been confined to the banks and traditional big business (Libor, Rolls Royce, Volkswagen). It is easy to see why the failure of those at the top to lead by example – while enjoying de facto impunity from legal sanction – should lead those lower down the scale to believe they can help themselves to illicit gains in whatever field of activity they may be engaged, especially where the financial temptations may be hard to resist. A particularly pernicious example of this is the business of professional sport, which has attracted large amounts of investment – notably in payment for TV rights – in recent decades. The result has been not only growing ruthlessness among competitors in pursuit of the millions on offer for the winners but distortion of results related to gambling activities where large sums are wagered. Thus major sports such as cycling, football, athletics and cricket have been significantly affected by such practices as doping (now known to have occurred on an epic scale at the London Olympics in 2012) and match fixing – to the point where there is a risk that public confidence in their integrity may be undermined.

Thus does the moral hazard stemming from elevation of the profit motive to the level of a supreme public good threaten to poison every part of our commercial life. It should therefore be seen as a matter of the highest priority to reverse this tendency. Unfortunately, however, there is little sign that those in authority or with the power to enforce the law are willing to challenge the prevailing culture of impunity. This may be partly because any serious action to punish the guilty would ensnare most members of the global élite – as suggested by the revelations in the Panama Papers. But more likely the powers that be are only too aware that a serious attempt to restore morality to public life by eliminating such practices would not only entail a wipe-out of virtually all their own wealth but would signal the end of the capitalist profits system in any recognisable form – given that in the aftermath of the crash it would have to be recognised that a) in the modern-day economy there is far less need for capital for fixed investment and b) speculative investment is just as useless and dangerous from a public-interest perspective as it was when it was last subjected to severe restriction in the 1930s after the Great Crash.

Generalised anomie

The evident decay of the moral climate in the economic and financial sphere has manifestly been extended to the wider political field. Whereas once the West were the champions of human rights and the rule of law, we have now allowed our rulers to drag us into a “war on terror” in which we have become a party to crimes such as Guantanamo and the Iraq invasion, while proclaiming that our supposed enemies are showing their hatred for our values. The reality, of course, is that the West has effectively trashed its own values – supposedly including democracy, respect for human rights and the rule of law, as enshrined in the Universal Declaration of Human Rights. The most conspicuous examples of this betrayal of these values lies in the conduct of Western governments and corporations towards

a) China. At the time of the Tienanmen Square massacre of Chinese dissidents seeking greater democratic freedom in 1989 Western governments led by the US imposed limited economic and political sanctions on China. Subsequently, however, any attempt to censure it or impose restrictions on Western dealing with China in face of its continued repression and abuse of human rights has been progressively abandoned, most notably in respect of the dissident campaigner for democracy Liu Xiao Bo.
b) Russia. Although sanctions have been imposed on it following its annexation of Crimea and other violations of Ukrainian sovereignty, the Putin regime has otherwise been allowed to continue a murderous campaign of repression at home – and abroad with its support for the monstrous Assad regime that has brought terminal ruin to Syria – with scant objection from the US (notably under the Trump administration) or EU members which look on Russia as an important trading partner. The ludicrously contradictory position of the Western nations is demonstrated by the fact that Russia was ejected from the G8 group of countries (now G7) after its occupation of Crimea in 2014 but remains a member of the larger G20 (established in 1999), as does China.
c) Saudi Arabia (also a G20 member). This country has long been a by-word for extreme denial of human rights and as an exponent of medieval tyranny. Yet it has remained largely protected from any pressure to reform by its position as the world’s major exporter of petroleum and the dominant force within OPEC (now under threat from domestic political pressure – notably since 9/11– and market forces gradually heralding the end of the petroleum era). It is also a major market for the Western armaments industry.

What these examples illustrate is the age-old problem of financial interests conflicting with moral values – a phenomenon obviously exacerbated by “globalisation” under a capitalist market economy where, as demonstrated in previous postings of this blog, an extreme incentive is provided to the maximisation of private profit. Arguably an important lesson to be drawn is that adherence to a code of moral values – such as the Universal Declaration of Human Rights – in any given society is made easier if trade with societies adhering to different values is minimised. Therefore in the absence of such a genuinely universal code we should consider overturning the conventional wisdom that maximising international trade is a good thing in favour of maximising self-sufficiency within a given jurisdiction (a perception that may also fit with the changing pattern of production under emerging advanced technology – a possibility that we shall explore in a forthcoming post).

So far from trying to move international relations towards a common vision of equity or the rule of law we now find that the world order has sunk to the level of the law of the jungle. What is truly astonishing is the failure of the global establishment to recognise the blatant application of double standards as between the more and less powerful players in the world. Thus for example the EU has lately been making great play of its insistence that Poland should apply what the Union declares to be the rule of law in relation to abuse by the Polish government of its national constitution, while at the same time ignoring the shameless refusal of the German authorities to bring to justice the management of Volkswagen and other car manufacturers for their criminal flouting of safety standards. Equally striking is the failure of the developed world as a whole to recognise the huge resentment among the more marginalised nations at the West’s monumental hypocrisy in applying the “rule of law” – including through the International Criminal Court – in ways that manifestly discriminate against the black and poor while white Western criminals such as Bush and Blair get off scot-free over their war crimes – or that such hypocrisy inevitably breeds violence and terrorism.

It can thus be said that the world has descended into a state of generalised anomie – or total absence of ethical standards in public life – after some 40 years in which the dominant ideology has been typified by such phrases as “greed is good” and “there is no such thing as society”. Such moral degeneracy is far from universal, however, as demonstrated by the remarkable display of community solidarity and humanity shown by the people of North Kensington following the horrendous Grenfell Tower fire in June 2017 – in stark contrast to the response of the right-wing political leadership.

As the world order now collapses into total chaos, there is huge irony in Western leaders’ desperate insistence that the escalating terrorist atrocities perpetrated in response to successive disasters, social and economic, are attributable to “extremism”, particularly of the Islamist variety. For this propaganda is seemingly uttered without any thought that each new intervention by Western governments against poor or marginalised peoples – such as for example recent initiatives by Britain and France against insurgents in West Africa – serve as a provocation to potential terrorists. Yet it is hard to believe that it has not occurred to some Western leaders that, instead of devising futile programmes of “deradicalisation” and ever harsher laws and prison sentences aimed at those plotting or carrying out terrorist acts, it would be more constructive to end Western aggression against “the wretched of the earth” and enter a dialogue with them on how to alleviate their plight and give them hope for the future in place of the endless misery which now seems their only prospect. What this might entail – in terms of a new dispensation for the “developing” countries that still comprise the vast majority of the world’s population – will require another posting to consider in detail. Yet one thing is certain: it must mean an end to their subjection to the anarchic forces of neo-liberalism and their unrestrained exploitation by international capital. This will in turn inevitably have fatal implications for the entire ideology of profit-maximising capitalism.