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this the experience of the United States with the prohibition of alcohol (the Volstead Act) from 1919 until it was repealed in 1933 should provide a good illustration of what to expect.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.


The Failure of “Globalisation”

As noted in most recent postings on this blog, the world economy has been beset – at least since the start of the global financial crisis (GFC) of 2008 – with multiple problems at all levels and in virtually all countries. At the same time there have been widespread political upheavals and outbreaks of civil disorder, many of which are clearly linked to economic distress. Viewed as a whole, this state of affairs has seemed to justify the view that the world order is in a state of disintegration.

It should be observed that this disastrous conjuncture – which has prevented any meaningful recovery from economic stagnation, or consequently deepening social misery, over the past nine years – comes at the end of a period of some 40 years in which the so-called neo-liberal ideology (otherwise referred to as the Washington Consensus) has been increasingly dominant. This tendency has only been accentuated by the total collapse of the rival Soviet model of centralised state planning in the 1980s. Allied to this ideology – supposedly favouring maximum encouragement of private enterprise, low taxes and minimal state intervention in the economy – has been what is termed “globalisation”, which in official parlance is understood to mean enabling the maximum freedom of cross-border movement of goods, services, capital and labour.

In the early phase of neo-liberal dominance – reflected in the rise of Thatcherism and Reaganomics in the 1980s – official propaganda centred on the notion that lowering tax rates and “rolling back the frontiers of the state” would stimulate faster rates of economic growth and, ultimately, higher living standards overall. But already by around 1990 this belief could be said to have proved hollow as the only result of all the tax cuts and market liberalisation was a huge rise in public debt (doubling as a proportion of GDP from 1980 levels in the US) and a rise in speculative investment – while growth rates of GDP itself remained stuck at close to 1980 levels.

In this context the impact of so-called globalisation has been quite different – and arguably far more significant. This is because, while it has failed to have a net positive effect on the overall rate of output growth, it has facilitated important shifts in the shares of output and income as between different countries and interest groups. Thus it has enabled certain countries to secure a much greater share of overseas markets for their goods and services at the expense of previously dominant suppliers including domestic enterprises. The most conspicuous example of such a shift has been the success of China and other East Asian “tiger” economies in capturing a large share of the world market for manufactured goods since the 1980s.

It is important to note, however, that this trend has impacted not only on the already industrialised (OECD) countries which have traditionally accounted for most of the global productive capacity of the manufacturing sector but for most of the demand as well; it has also inflicted damage on the poorer countries of the Third World which have always struggled to establish their international competitiveness in this field. Such pressure is all the more intense in a period when rapid technological change – controlled by and for developed country interests – is putting them at a further disadvantage (as it is on workers and communities throughout the world that are suffering consequent destruction of jobs on an unprecedented scale). The result has been the weakening of basic industries such as textiles and garment manufacture in many low- or middle-income countries, which find themselves unable to compete either with China or countries having even lower labour costs such as Bangladesh.

At the same time many of these less developed countries (LDCs) have been exposed to greater competition from agricultural exports from the OECD countries, notably the US and western Europe, which has hit those countries – the majority in the developing world – where the rural sector comprises a high proportion of the population and of economic activity. The inevitable consequence has been the impoverishment of many rural communities in these countries where local producers are generally unable to compete with often heavily subsidised imports from industrialised countries. Their plight is often made even worse by the insistence of foreign donor organisations – which are invariably controlled by OECD country interests – that aid in support of local farmers’ efforts to compete (such as the creation of cooperatives or state-supported marketing boards) should be disallowed, even though such institutional assistance to the farming sector is commonplace in the developed countries.

A 19th Century Dogma

Enthusiasts for globalisation (and indeed for neo-liberalism) like to suggest that it is an expression of “modernisation” – a progressive alternative to the more controlled, statist economic order that was seen as having dominated Western economic policy in the post-war era but is now considered anathema by proponents of the “Washington consensus”. In reality, however, it clearly harks back to the laissez faire ideology expounded by the early classical economists who dominated economic thinking in the 19th century. Thus it encompasses the so-called theory of comparative advantage, first formulated by the British economist Ricardo 200 years ago, which seeks to justify maximum freedom of trade on the basis that it facilitates the most efficient utilisation of all productive factors. Since, however, it has long been recognised that in the real world full employment of such factors (particularly labour) can never be achieved – so that in practice a high proportion of the population would be condemned to impoverishment – it has always been hopelessly unrealistic to make such an abstract theory the basis of trade policy.

Despite this, and the reality that the game of international trade is and always must be played on an extremely uneven playing field, the powers that be (spearheaded by the World Trade Organisation, OECD, IMF etc.) continue to try and insist that any form of trade protection is inadmissible – even while turning a blind eye to the application of double standards by the industrialised countries, notably in respect of agriculture (as noted above). Rather than recognise reality these institutions and the major industrialised countries that effectively control them have sought to continue pursuing trade liberalisation on the traditional basis of a series of “rounds” of multilateral tariff reductions, much as they had done under the General Agreement on Tariffs and Trade (GATT – precursor of the WTO) throughout the post-war period. This might not have mattered if the world economy had continued to grow at the relatively rapid rates (3.5–4 percent a year in real terms) recorded prior to 1980 rather than averaging a mere 2-2.5 per cent achieved since then. As it is, this decline starkly reflects the gathering pressure on the economies of developed and developing countries alike to seek a greater share of world markets for themselves while resisting demands for other countries to have greater access to their own domestic markets. This explains why it has proved impossible to reach agreement on a further round of trade liberalisation since the conclusion of the Uruguay Round in 1994, leading to the ultimate abandonment of the Doha Round in 2015 after 14 years of fruitless negotiations.

Race to the bottom

This effective collapse of the system of multilateral trade negotiations amounts to a de facto admission that the ideal of non-discriminatory free trade supposedly created after World War II under the GATT is no longer seen as tenable. In truth this reality had already been recognised by the growing practice from the 1990s of establishing bilateral trade deals between countries, which are by definition discriminatory. As noted, however, this has not prevented the dominant economic forces (in the shape of the US, EU, other rich country governments and transnational corporations) from persisting with their efforts to break down any barrier to the free cross-border movement of goods, services, labour and capital as long as this appears desirable from the perspective of rich country governments and the corporate interests that they represent.

The net result of these developments is that the world economy, so far from being based on orderly, rules-based structures, increasingly resembles an anarchic jungle in which the big beasts seek to impose their will on the weaker entities (such as LDCs) by whatever means, irrespective of equity or legality. In the absence of anything like genuine democratic accountability or the rule of law in most countries competition for markets – which has never been free of non-commercial considerations – has become ever more distorted by factors that have nothing to do with genuine free markets based on common rules or criteria of cost-effectiveness. This phenomenon, widely referred to as a “race to the bottom”, is manifest in a competitive lowering of regulatory standards – often in contravention of internationally established norms and codes of conduct – concerning:-

  • Lowering of corporate tax rates in order to attract foreign investors;

  • Weak adherence to tax laws and financial regulations – e.g. restrictions barring payment of subsidies by host governments;

  • Labour terms and conditions – e.g. employment of children;

  • Environmental / health and safety standards – e.g. failure to prevent industrial or agricultural pollution levels which exceed established norms and threaten public health.

As might be expected, such tendencies have over time operated to the detriment of the weakest and most vulnerable economic players and strata of society while further enriching those already enjoying a disproportionately large share of wealth and power. The latter group, it should be stressed, includes the ruling élites of impoverished countries who corruptly enrich themselves at the expense of their fellow citizens, not to mention that of taxpayers of rich countries unwittingly co-opted to finance the corrupt transactions involved. Yet by far the biggest beneficiaries of such crimes are such “respectable” corporations as Siemens, Rolls Royce, Volkswagen and Wells Fargo, where the senior executives who are the chief perpetrators have enjoyed effective impunity while the huge cost of the fines imposed on their companies have been passed on to shareholders.

A telling illustration of the long-term impact of this downward spiral of abuse is the fact that, according to the independent US-based Tax Foundation, world-wide average corporate tax rates have declined from 30 per cent to 22.5 per cent since 2003 while at the same time the overall tax burden has stayed the same – which would obviously mean that the tax burden borne by the mass of the public has increased as a share of the total. The grotesque perversity of this outcome is apparent when seen in the context of the global trend recently revealed in an UNCTAD report that the share of profits in overall value added (GDP) has been steadily rising since 1980 at the same time as the corresponding share of fixed investment – for which the profits are supposedly required – has been in decline.

An inescapable choice

A striking conclusion to emerge from the above analysis is that the competitive forces unleashed or amplified by globalisation as the global struggle for markets intensifies often tend to create outcomes that are perverse and the very opposite of the enhanced cost-effectiveness and rising general prosperity which the theory tells us is supposed to result from the operation of competitive markets. The large-scale corruption practised by major transnational corporations referred to above is an obvious case in point. Equally exposure to brutal competitive forces in a world subject to accelerating technological change creates pressures to engage in market distortion made all the more damaging through being covert and non-transparent – which in turn can lead to a costly misallocation of resources to the creation of ever more excess industrial capacity or blatantly wasteful projects such as HS2 railway and the London Olympic Park. Yet where economic agents – such as small / medium enterprises and governments of poor countries – lack the strength or resources to defend themselves with similar non-market methods the results are typically still more dire, in the shape of intensifying mass poverty and economic and social breakdown.

Perhaps the most damning symptom of all the disastrous consequences of applying this bogus laissez-faire dogma is the quite sudden and catastrophic economic and social breakdown of so much of the “developing” world that has occurred since around 1990 – and particularly following the onset of the GFC in 2008. Defenders of the neo-liberal / globalisation model such as the World Bank are fond of claiming that it has “lifted a billion people out of poverty” in these countries over recent decades – although they are not surprisingly unable to substantiate this rather meaningless assertion with concrete evidence. Far more telling are the manifestations of breakdown in so many countries, particularly in the Middle East and Africa, leading to widespread civil disorder, revolution, war and the creation of record numbers of refugees fleeing their countries in desperation. In fact the President of the World Bank himself has now conceded that “if there’s no opportunity to achieve [their aspirations for a better life], frustration may well lead to fragility, conflict and violence and eventually migration.”

The “Arab Spring”, which erupted in 2010-11 and may be seen as the most concentrated expression of this discontent to date, has had a profoundly disruptive political, social and economic impact on the entire Mediterranean region and most of Europe. It has undoubtedly left European and other world leaders at a loss as to how to respond to a development that they never anticipated – particularly the seemingly unstoppable flood of refugees and other displaced persons into Europe.

What is most striking – and depressing – about this catastrophic failure of the globalised / neo-liberal economic order is that no mainstream voices have been allowed to express recognition of the obvious and profound flaws in the model that have been revealed or of the need for fundamental change. Thus in Britain even the trade unions, who might seem to have least natural affinity with neo-liberal ideology, have been silent over any inherent flaws in “the system”; indeed they have become the most die-hard supporters of one of the most conspicuously failed elements of the capitalist economy: the increasingly bankrupt funded pension schemes which have failed to deliver adequate pensions for millions of trade unionists and have only benefited the vastly overpaid fund managers of the City.

The only explanation for such a supine response to the manifestly terminal failure of the status quo would seem to be a perception that the kind of reforms that are needed would likely lead to the total extinction of the vested interests of the entire political establishment (not just the ruling élite) and that they would consider this too high a price to pay for achieving some semblance of global peace and stability. Whatever the reason, the continuing failure of any mainstream parties or interest groups to offer a fundamental challenge to the intolerable status quo has created an enormous vacuum. If this is not to be filled by ever more extreme outbreaks of violence – ultimately threatening the very survival of human civilisation – voices of reason, integrity and humanity must now be allowed to be heard amid the rising pandemonium. So far from this there appear to be no limits to the degree of misinformation, market manipulation and outright fraud that the authorities will resort to in order prevent this happening. This reality and its frightening consequences will be considered in more depth in our next posting.

The Phasing Out of Capitalism

A remarkable feature of the present state of the global economy – eight years on from the start of the Global Financial Crisis in 2008 – is the extreme disconnect currently exhibited by the main market indicators in the world’s major economies. These imbalances are particularly manifest, and increasingly acute, in respect of

  1. Record levels of debt vs. record low interest rates

Based on estimates made by McKinsey Global Institute in early 2015 total global debt of all sectors (public and private) was approximately $200 trillion – 40 per cent above the level at the start of the Global Financial Crisis (GFC) in 2008 – and has inevitably continued to rise since then as hopes of recovery have been repeatedly dashed. By now there is scarcely any pretence among either official spokespersons or serious analysts that more than a tiny fraction of this debt will ever be repaid.

At the same time official interest rates set by the world’s central banks (such as the US Fed Funds Rate) have been held at or below 1 per cent ever since 2008. To put this in perspective, in the UK – where the Bank of England’s base rate has been held at 0.5 per cent or less since 2008 – the rate had never previously been set below 2.0 per cent since the foundation of the Bank in 1694 – not even in war time or in the Great Depression of the 1930s.

Given that these extreme phenomena have now co-existed for eight years in succession, it is at first sight astounding that hardly any mainstream analysts have pointed out that this obviously could not happen in anything resembling a free market. For it is a truism that in a climate of what amounts to generalised bankruptcy (in public and private sectors alike) the normal market reaction to increasing levels of unpayable debt is to mark down the value of such debt (non-performing loans) – thereby pushing effective interest rates up rather than down (the price of a debt-based security being inversely related to the rate of interest). The fact that not only has this not happened since 2008 but that interest rates have plunged to record low levels is an anomaly apparently not found worthy of comment by most “public” economists.

The uncomfortable truth which the global establishment refuses to face is that their collective decision – in the wake of the 2008 banking crisis – to “do whatever it takes” to save the financial system (and indeed the entire world economy) from imminent meltdown has only succeeded in postponing disaster for a few more years. In fact their resulting commitment to holding interest rates down by whatever means, even if this meant breaching the most fundamental principles of the market economy, was clearly a desperate gamble from the outset. The chosen mechanism has involved increasingly indiscriminate official buying of debt securities (i.e. bonds, public and private) – a practice officially referred to as Quantitative Easing (QE) – so as to avert the mass market panic which would otherwise have ensued from open recognition of systemic insolvency. But in order to prevent just such a panic – as well as a total loss of any remaining public confidence in the integrity of governments – it has been necessary to pretend that the actual purpose of QE is to stimulate investment and higher output. Predictably, however, any hope that this might indeed have been the result of this unorthodox policy has proved vain (see below).

  1. Rock-bottom growth rates vs. sky-high stock markets

Alongside the paradox of record low interest rates against a universal background of unpayable debt economic actors and analysts have had to contend with another extreme anomaly. This is the fact that the key indicator of capitalist economic activity – the growth rate of real Gross Domestic Product (GDP) – has averaged only 1.2 per cent a year in the industrialised (OECD) countries in the period 2008-16, barely half the average rate recorded in the previous 25 years – while at the same time most stock market indices have risen to all-time high levels, whereas the normal market reaction to such conditions would be to mark equities down.

Yet just as this dismal growth performance – which would certainly have appeared even worse if the statistics had not been deliberately distorted – has not been allowed to be reflected in falling bond prices, the powers that be have been determined to prevent a corresponding slump in share prices (equities) of the kind that would normally be expected under such conditions. (Indeed an important benefit of keeping bond yields artificially low is that it has made them relatively unattractive assets for investors to hold, thereby enhancing the relative attractiveness of equities.) As a result global stock markets – as reflected in the MSCI all-country World Equity Index – have risen from their 2008 low to a peak of around double that level in 2014. Since then they have remained at or just below these record levels even as economic growth (GDP) has remained stagnant and corporate earnings weak, whereas normally such a high level of stock prices (with US price / earnings ratio at 24.7, the highest since the start of the GFC, even though earnings peaked in 2014) would go along with a boom in output and investment and correspondingly rising profits and interest rates.

The complete absence of such boom conditions is another obvious symptom of the generalised distortion of financial markets resulting from the official intervention which has been applied with growing intensity since 2008 in order to prevent or conceal their total collapse. Such is the desperation of the authorities to prop up the markets in order to avert this catastrophe that they are now starting to deploy officially “printed” money via QE to buy up corporate equities as well as debt. In Japan, which has been afflicted by chronic stagnation ever since 1989 and was the first country to deploy QE, this tendency has already led to a situation where over half of listed equities are now effectively in the hands of the state. At the same time, against a background of chronic low growth and low returns on capital investment, corporate management and investors (including pension funds) have been desperately seeking “yield” from high risk assets such as “junk” bonds, while purely speculative investing and market manipulation has been officially encouraged by enabling companies to buy back their own shares – which was illegal until about 1980.

What stands out from these contradictory manifestations is that they could only have occurred as a result of officially inspired intervention – i.e. de facto authorised market rigging. Equally, however, given the degree of distortion entailed, it is hard to believe that those driving the policy could have imagined that it would necessarily be sustainable in the long run. In short, it must be seen as a desperate gamble based on a flimsy hope that the laws of gravity could be defied, at least in the short term, in an improbable triumph of what President George Bush senior once called “voodoo economics”.

By now in fact it is becoming daily more obvious that the gamble has failed. For all the best efforts of official propaganda and despite the extraordinary capacity of the public to suspend disbelief it is clear that the laws of the market economy have not been repealed. Rather the damaging impact of QE and other tools of market manipulation and distortion are finally starting to become manifest and thus to call in question the validity of such “extraordinary measures”. These symptoms of dysfunction include:

Depressed levels of activity and investment. By imposing artificially low rates of return on the market, the authorities have been stifling the enterprise and investment they claim to be trying to promote, since in a fragile and uncertain economic climate investors and entrepreneurs are not inclined to take big risks for little reward. This in turn forces them to resort to even greater levels of asset price manipulation and speculation – rather than productive investment – in order to attain their profit targets (see below). The policy is thus imposing an extra handicap on enterprises already struggling to find profitable outlets for their shareholders’ funds in an era when, as suggested in an earlier posting, demand for investment capital is in long-term decline and competition is growing from start-up enterprises with a limited and dwindling need for funds from the capital markets.

Disappearing savings and pension funds. The compulsive need since 2008 to hold down interest rates – for the reasons given above – has imposed an increasingly heavy burden on those dependent on their savings for income. This includes hundreds of millions of members of pension funds in OECD countries, the viability of which has been put at risk by shrinking interest income. The threat to the survival of these schemes has in turn put pressure on the finances of many sponsoring companies, which in the UK face the prospect of having to call on their shareholders and / or the government to stump up hundreds of billions of pounds in total to make good the shortfall in their pension funds’ assets – while in the US state and municipal authorities are also facing consequent fiscal disaster. Meanwhile fund managers are forced to resort to unproductive and high-risk speculation – i.e. gambling – just to survive.

All these phenomena point to what could be defined as the greatest imbalance of all affecting global capitalism, though one that still dare not speak its name in mainstream policy circles: the mismatch between burgeoning corporate profits and the long-term decline in demand for investment capital. A recent UNCTAD report points out that between 1980 and 2015 the share of fixed investment in GDP in the leading developed economies fell from around 20 per cent to below 16 per cent while in the same period the share of profit rose from 14.6 per cent to 18 per cent. The UNCTAD authors attribute these trends to thefinancialization of corporate strategies, linked to the rise of so-called ‘shareholder primacy’ and a focus on short-term decision-making, cost management and financial engineering”. What they evidently have not considered is the possibility that they may be confusing cause and effect, in that the process of financialisation has rather been the consequence of the inadequate returns on traditional fixed investment, and that this has led to the pressure for financial liberalisation (starting in the 1980s) with a view to facilitating speculative profit-making.

If this is indeed the case it is remarkable that mainstream analysts and commentators, including UNCTAD economists, have hitherto ignored the possibility that the decline in the share of fixed investment in GDP might actually reflect long-term, fundamental changes in the pattern of economic development, not least because of changing technology. Yet given that the inference of such a hypothesis – that the need for capital and hence its importance to the economy is in long-term decline – would spell disaster for the ruling vested interests who sponsor them, their refusal to consider its importance is perhaps understandable.

For the wider community the implications of these contrary trends in aggregate profits and investment are profound. In particular they point powerfully to the conclusion that the market economy as currently designed is generating seriously excessive profits in relation to the dwindling need for fixed investment. Thus if the share of profits in GDP, instead of rising since 1980, had fallen at the same rate as the share of investment it would have declined to under 12 per cent instead of rising to 18 per cent, implying the possible diversion of as much as 6 per cent of global value added ($3.6 trillion a year at current levels) to essentially wasteful economic purposes when they are desperately needed for more benign ones – see below.

The beginning of wisdom?

The present writer is perhaps entitled to claim to have been one of the first to identify – in a book written 20 years ago this long-term tendency, starting in the 1970s, towards a decline in the need for capital in market economies – as well as the damaging consequences of the attempts on the part of the ruling vested interests to resist this trend by perverse distortions of markets or the legal framework. Among the many examples of these that could be cited (some of which, such as legalisation of company share buybacks, have already been mentioned) are:

  • The privatisation of public services and assets which – contrary to the official hype – has only benefited owners of capital in search of new investment outlets while mostly resulting in net losses rather than benefits to consumers and taxpayers;

  • Incentivisation (through tax breaks) of saving through funded pension schemes, which have ultimately only benefited asset managers while leaving more and more pensioners facing poverty and insecurity in retirement (see above);

  • Over-investment in publicly funded infrastructure, from useless airports to the London Olympic Park;

  • Encouragement of social dysfunction through liberalisation of dangerous activities such as gambling and pornography, to the sole benefit of investors in these industries.

While some critics of contemporary capitalism have deplored such abusive expressions of the profit motive, most of these have suggested that the remedy lies in somehow channelling the available funds to less harmful investments or ones more conducive to the public good. It seemingly has not yet occurred to them that in a profit-based, competitive system where corporate management is structurally incentivised (by company law) to maximise the returns to shareholders there is an in-built tendency to accumulate excessive profits (surplus value) – i.e. beyond what can be usefully absorbed by the market – and to reinvest them according to the same principle. It is part of this intrinsically capitalist mindset that GDP growth is viewed as a supreme public good – even though it should by now be apparent that the only logical purpose of such growth must be to reabsorb profits in new capital formation. A more sane analysis would surely conclude that if this can only be done through the promotion of wasteful or harmful activities such as those mentioned above the community would benefit from the abandonment of growth as a policy priority, particularly if high growth can only be attained by diverting resources from more socially advantageous uses. Equally it follows that it would be more rational to restrict the size of the excess in the first place, including by higher corporate taxation.

In fact there are signs of a dawning recognition that such a structural issue may indeed be what is now confronting the present market economy model, as reflected in statements from leading establishment figures indicating that since 2008 they have abandoned their earlier belief in a cyclical recovery of the global economy. Rather they are suggesting that the world may have entered a prolonged period of minimal growth – or what the head of the IMF, Christine Lagarde, has referred to as the “new mediocre” and Larry Summers, Harvard professor and former US Treasury Secretary, has termed “secular stagnation”.

Such hints coincide with far more widespread recognition that it will not be possible to absorb most of the world’s available capital – or indeed its labour force – in an economy transformed by the digital revolution. As noted previously, this constraint is most dramatically illustrated by the energy sector, where the capital-intensive model of supply and distribution which has been so dominant for over a century – based on large-scale extraction and burning of fossil fuels – is set to disappear in favour of one that is far more fragmented and employs far less capital. This arguably heralds the emergence across all sectors of an economy of super-abundance – or a “zero marginal cost society– in which capital will be terminally devalued and the only supply-side constraints will be environmental. The corresponding devaluation of labour – involving the disappearance of vast swathes of paid human employment globally – is also now widely understood to be inevitable in the foreseeable future.

The implications of these tendencies are of course revolutionary – in relation to the existing order based on profit-maximising capitalist accumulation – and hence will continue to be fiercely resisted by the ruling élite. The path to a new equilibrium based on a more humane and rational order will accordingly be far from smooth and will probably involve even more violent conflict than the world is already witnessing. A more hopeful sign is that ideas such as the need for a Universal Basic Income, in response to the vanishing demand for paid labour, are starting to be taken seriously by many mainstream opinion formers. While predictably this remedy to the present maldistribution of income is dismissed by many as hopelessly unaffordable, even most of its supporters have yet to grasp that this objection might be easily overcome if the present diversion of excess value added into pointless private profits – as highlighted by the figures from the UNCTAD report referred to above – were redirected to more benign ends.

There is no painless way of achieving a transition to such an economic model. However, as it becomes ever more inescapable to ever more of the élite that the present model based on the principle of exploiting scarcity for private profit is being left behind by history, there is reason to hope that certain fundamental modifications to mainstream assumptions regarding the future course of economic development will likely come to be accepted:

  • Genuinely free markets are neither attainable nor desirable, given that they invariably lead very quickly to unacceptable levels of market instability and social injustice, as demonstrated once again by the “neo-liberal” order that has predominated since around 1980 and has ended in the present global chaos.

  • Maximising growth must be jettisoned as a primary policy objective (see above).

  • The right of private enterprises to limit their liability (as under existing company law) must be severely curtailed and made conditional on de facto public right of veto over key corporate decisions. This should severely limit the scope for management to pursue anti-social corporate objectives – other than at their own risk – with a view to maximising their profits, a goal which has already ceased to have any social purpose in view of the structural abundance of capital.

  • Given the equally serious structural oversupply of labour a form of Universal Basic Income (UBI) would need to be established at an adequate level. In that event official policies aimed at job creation would be pointless.

Given the vested interests at stake, resistance to the advance of such radical thinking will remain powerful, as exemplified by the well financed campaign of climate change denial, which is obviously designed to maintain the wealth and power of the fossil fuel industries in defiance of the overwhelming evidence of the harm they are causing. Significantly, however, corporations promoting new technologies leading to ever more robotisation of work are actually starting to lend support to the idea of UBI, even though it would clearly involve state action to redistribute income and curb labour exploitation. While such a stance may seem counter-intuitive from a traditional capitalist standpoint, it could also be viewed as an expression of enlightened self-interest on the part of businesses that see it as helping to reduce political resistance to mass redundancy, while it may also appear helpful to those needing the cooperation of official regulators to facilitate the introduction of revolutionary new products such as driverless cars.

Seen from this perspective it seems plausible to suppose that private enterprises across the economy could be drawn to the idea of trading their unfettered right to limited liability for a guarantee of government support on mutually advantageous terms. Indeed this has long been happening to the extent that corporations in most if not all sectors (e.g. energy, housing, health care, manufacturing, agriculture, transport and above all banking) have for decades enjoyed subsidies, tax breaks and other forms of support from government while still retaining full autonomy and all the privileges associated with limited liability. While conditions have sometimes been imposed on the favoured corporations requiring them to provide certain public benefits in return, in too many cases such conditions have been informal and lacking in transparency. Under a more publicly accountable régime such “crony capitalism” would need to be replaced with more formal contracts between private entities and the state in which the interests of private shareholders would be explicitly subordinated to those of the public through representative institutions. (It would of course remain open to private-sector companies to retain their autonomy to conduct business without the protection of limited liability).

If such a model of corporate governance could be implemented – based on a rational balancing of the interests of individual enterprises and the community in an economy where profit maximisation and economic growth were no longer viewed as public goods – it should be feasible to construct an economic model in which the public interest as a whole would be paramount without stifling the potential for the enterprise of individuals or communities. Identifying the appropriate way (or ways) forward into this new technological age will call for as high a degree of creativity and open-mindedness as the human race has ever been required to display. In this context the election of Donald Trump as US president may actually be a more hopeful sign than it appears at first sight. This is because his programme – typified by his climate change denial – is clearly centred on a hopeless yearning to turn the clock back to some supposed American golden age. Once this fantasy runs up against the harsh realities of the real world and national – indeed global – bankruptcy, the only conceivable escape from which is hyperinflation, we may hope that more rational visions of the future will find favour.

Basic Income in a transformed economic order

Those of us who have long been preaching the unavoidable necessity of establishing a universal (unconditional) basic income (UBI) as the primary mechanism of income distribution in the emerging modern economy – often in the teeth of either mass indifference or ridicule – have recently been gratified to notice that the idea has started to gain significant traction in the political mainstream. This is reflected in official moves in a number of European countries to initiate research or pilot projects (notably Finland, the Netherlands and Switzerland) as well as Canada to determine the viability and/or public acceptability of introducing a UBI.

It seems fairly clear that this apparent shift in mainstream opinion, at least in the industrial (OECD) countries, is due to a combination of two specific factors:

a) the progressive collapse of established social welfare systems in face of an increasingly fragmented labour market, and
b) growing recognition of the irreversible disappearance of stable employment opportunities driven mainly by accelerating technological change.

Such cracks in the edifice of the current global order may easily be seen as symptoms of a broader disintegration manifest in uncontrollable flows of mass migration across borders and the demonstrable failure of conventional tools of macroeconomic management.

Thus whether supporters of UBI see it primarily as a mechanism for achieving greater social justice or simply as a rational route to greater economic efficiency they will probably all view these ideological developments as a welcome, if belated, recognition of trends that have been gathering momentum for many years – indeed decades. In order for the idea to take hold, however, it is clear that its supporters will need to formulate realistic proposals for implementing it on a much wider scale (ultimately covering virtually all countries in the world) than has been envisaged so far. In doing so, moreover, they will need to take account of a broad range of factors that are leading to a profound – and accelerating – transformation of the global economy and society which is rendering existing economic and political institutions ever more unsustainable.

This broader socio-economic context to be considered will need to encompass developments such as:

1) The ending of scarcity

Just as technological change (mainly stemming from the development of steam power) transformed the economics of manufacturing – notably textiles – and transport 200 years ago, leading to the first Industrial Revolution and the emergence of capitalism as the dominant form of economic organisation, so in the present period we are witnessing even more profound transformation resulting from contemporary technological advances which will likely lead to the virtual extinction of capitalism in its turn. This would be the result of what seems to be our emerging capacity to supply almost infinite quantities of goods and services (beyond the capacity or desire of the population to consume) at very low cost.

A striking example of such disruptive change is provided by the supply and use of energy. Throughout the 19th and 20th centuries this has been based primarily upon fossil fuels (coal and hydrocarbons), a dependency which has acted as a significant economic constraint to those states with little or no domestic sources of supply, while equally conferring a corresponding advantage on those with abundant supplies of their own. However, there is ample evidence that this pattern is changing dramatically, not least due to pressure to switch to renewable energy sources in the interests of limiting global warming. This has led not only to the development of progressively more cost-effective alternative sources of electricity such as solar and wind power (hitherto found to be too expensive) rather than traditional large thermal power stations, but to advances in power storage (battery technology) and more efficient small-scale distribution (facilitating local networks in place of traditional dependence on large-scale and often inefficient grid systems). At the same time demand is being quite rapidly reduced thanks to improvements in the energy efficiency of buildings and machinery – including automobiles, where the industry is being forced by regulation not only to improve their fuel efficiency but progressively to adapt them to run on electricity rather than petroleum.

Leaving aside the dire implications of such change for the vast fossil fuel empires (dominated by OPEC and the major oil companies) that have held the world economy in thrall for so long, the far more positive conclusion to draw is that these developments could hugely empower local communities to manage and control their economies independently of large corporations which have hitherto been able to monopolise power supply via the huge infrastructure networks that they control. As a result such communities will be able not only to secure much greater ownership and control of the economic assets on which they depend but also greatly to improve their living standards by accessing much lower cost energy.

This trend towards diminishing scarcity – which is affecting most other productive sectors as well as energy – has been accompanied over the last 30-40 years by one of reduced need for physical inputs relative to the value of output or commodities consumed – or “de-materialisation”. While this is partly a result of the higher growth in global demand for services relative to physical goods – a function of rising affluence among the wealthier minority of the world’s consumers – it is also to a large extent the consequence of advances in the efficiency of production techniques. The latter have also permitted the manufacture of products on a small scale without any loss of cost-effectiveness, using such techniques as 3D printing. This has not only enhanced competition by lowering barriers to market entry by small and medium enterprises; it has also improved overall efficiency by reducing the need to hold large stocks of both inputs and finished goods, thereby lowering costs of working capital.

2) The increasing redundancy of capital

As a consequence of such technological change the futility of continuing to base our economic system on the perpetual expansion of investment and output mediated by a financial sector driven by the principle of profit maximisation is becoming ever more glaring . For where investment capital is still needed as part of the productive process it will increasingly be in such small quantities that it should be readily available to enterprises either from their retained earnings or from local financial institutions (including community, cooperative or other mutual organisations) or even “crowd funding”. At the same time, because in a relatively static economy (see below) capital investment is unlikely to be needed to finance significant expansion beyond predictable existing markets, the attractiveness to private investors of participating in such markets – where competition is bound to ensure that return on capital remains low relative to risk – is likely to be very limited. By the same token large corporations following business plans based on the prospect of perpetual expansion will become a thing of the past; rather such organisations will be forced progressively to downsize and shed more and more of their permanent workforces and other overheads. The implications of such trends for both the structure of economies and asset values – as corporations’ physical assets shrink and urban landscapes and infrastructure are transformed – are evidently huge, if hard to quantify.

3) Dwindling impetus for economic growth

As the demand for capital for fixed investment grows progressively weaker, the dynamics of capitalism itself can be expected to lead to a weakening of political pressure for maximising growth – particularly once the present global debt bubble that has been crippling economic activity since 2008 has finally imploded. In fact it is sobering to recall that the adoption of the maximisation of growth as the primary objective of macro-economic policy in the industrialised West only really started around the end of World War II, following the development of generally accepted measures of national income (Gross Domestic Product or GDP) in the 1930s. The significance of this indicator is that it quantifies total market value added and thus acts as a proxy for the aggregate output of the commercial sectors of the economy – i.e. those supplying tradable goods and services. It thus has come to serve as an indicator of market prospects for enterprises seeking to determine the appropriate strategy for their businesses. For policy makers it also represents a key indicator of the tax base available to a given economic entity.

However, once the meaning of the exponential rise in the productivity of both labour and capital occasioned by the digital revolution is more widely understood, it is bound also to be recognised that attempting to grow GDP at a rate sufficient to absorb ever mounting surpluses of capital and manpower in profitable new investment is futile. Hence it must follow that the imperative of growth will inevitably cease, over time, to be a public policy priority.

4) Changing pattern of global trade and competition

As described above, the declining need for physical capital relative to the level of output and the progressive dematerialisation of production is increasingly making it possible to produce manufactured goods (as well as energy) on a relatively small scale with no loss of cost-effectiveness – thus reversing the pattern that was ushered in by the first Industrial Revolution. In parallel with this trend there are signs that technological change is tending to transform the pattern of trade beyond all recognition. For not only is technology now enabling the superabundant production of goods and services at very low cost; it is also heralding the day when production may be undertaken almost anywhere, subject only to the ability to gain access to the relevant know-how. The increasing importance of such know-how in determining the capacity of enterprises and communities to survive and prosper doubtless helps to explain the rise in importance of “intellectual property” (IP) as a factor in trade negotiations and disputes. It may be doubted, however, whether it will be possible for corporations such as Apple or Monsanto to enforce their claimed IP rights over specific technological breakthroughs so as to extract sustained profit flows (royalties) – let alone control how they they may be adapted or developed by others in future.

The net result will be that the competitive advantage of the purported “owners” of given technological innovations will be increasingly short-lived, as both fixed and marginal costs of production dwindle to insignificance. Hence productive activities will cease to be a magnet for profit-seeking, large-scale investment, so that decisions on the allocation of resources will be left to enterprises or communities based on priorities other than maximum profit. All in all, the assumptions of classical trade theory, based on Ricardo’s law of comparative advantage, will be terminally undermined.

By the same token the traditional competitive struggle among countries to secure a greater share of global markets for themselves – a preoccupation of national policy makers since long before the capitalist era – will become ever more futile. This in turn should ultimately end the “race to the bottom” – or competitive lowering of standards in areas such as labour, environment and tax – which has been such a ruinous consequence of “globalisation”. (It will nevertheless still be important to guard against attempts by different states or communities to use predatory practices such as dumping of products at below-cost prices in order to impose their will on others).

5) Failure of the global order based on “sovereign” nation states

The inequity and instability induced by “globalisation” – compounded by that of market capitalism – as well as growing threats to the biosphere in a finite planet, have exposed the non-sustainability of a world order based on a structure of supposedly sovereign independent states, none of which have more than limited control over the forces determining their own well-being, while at the same time none have any formal / legal responsibility for the welfare of those in other countries. Obviously the problem is further exacerbated by the fact that the supposed sovereignty of nations (communities) is undermined by corporate interests which often conflict with the public interest. The result is dysfunctional outcomes such as:

  • abuses of power by authoritarian national governments against their own people’s rights (as defined in the Universal Declaration of Human Rights) without any possibility of legal redress;

  • impotence of smaller and weaker states to deal with disasters, whether natural or man-made (e.g. Nepal after the recent earthquake, Haiti and other small island states);

  • abuse of the “global commons” (oceans, atmosphere etc);

  • refugee crises resulting from the above.

6) Redundancy of the financial industry

The dramatic collapse in demand for capital investment and the disappearance of the growth imperative indicated by the developments described above points to another major disruption to the present capitalist model which should both strengthen the case for introduction of UBI and render it much more feasible. This is the gradual implosion of the financial sector whose prosperity – and ultimately its very survival – depends on the continuation of expanding demand. For if the demand for capital flows into new investment is disappearing, so will the possibility of maintaining pension or other funds channelling the contributions of workers and employers into assets whose ability to yield an adequate income stream to meet the cost of pensions is being fatally impaired.

This tendency is reflected in the fact that many funded pension schemes in both public and private sectors are already threatened with insolvency, thus acting as a drag on the profitability of sponsoring corporations (such as General Motors and British Telecommunications) and pushing state and municipal authorities (such as Detroit and Chicago) to – or over – the brink of bankruptcy. Taken together with the flows channelled to other funds – including so-called Sovereign Wealth Funds supposedly intended to enhance the long-term economic security of those countries that have established them, but actually benefiting few besides the overpaid fund managers hired to administer them – these funds are still diverting 10 per cent or more of developed countries’ GDP annually into assets that are not only increasingly failing to deliver for the supposed beneficiaries but are having a net negative impact on their wealth. Likewise it is obvious that the huge resources committed to these ever more wasteful outlets could be better spent on providing a basic income (including pensions) or other socially useful purposes

7) End of the policy imperative to create employment

Introducing a truly universal, unconditional basic income at an adequate level (at or above subsistence) will serve to break the link between work and entitlement to a minimum survivable income. Thus it will cease to be necessary to have a public policy objective of maintaining paid employment at a given level or to support relevant training programmes beyond what is needed to meet the anticipated demand for manpower. Hence it will not be possible to use the number of jobs that would be created by a particular project or policy as a justification for supporting it – or, conversely, for the retention of one that is no longer needed on strictly economic grounds. Consequently public investment projects will need to be justified on a broader rationale of their economic or social utility, so that support for “white elephant” schemes such as infrastructure or housing projects for which there is no real demand will no longer be tenable just because they may generate jobs.

8) Inescapable need for greater equality in income and wealth distribution

Because of limited growth and employment opportunities large differences in income will be less tolerable than they have been hitherto. Arguably this tendency is already apparent in stronger reaction in the West against exorbitant pay awards to top management (which have often resulted in ratios of 100:1 or more between highest and lowest paid company employees), suggesting that “trickle-down” arguments in favour of high pay for top executives no longer convince.

We may hope that in such a political climate belief will grow in the need to create a society and economy giving importance to stability and cooperation rather than growth and competition. Despite the reduced impetus for growth there will still be a continued desire of certain individuals or groups to secure a higher share of value added for themselves at the expense of others. While to some extent this may be inevitable, it will be important to find ways to discourage this tendency, not least by maintaining highly progressive taxes on income and profits.


Taken together, the developments described above must surely be viewed as amounting to irresistible pressure for radical change in the global economic and social order. Only such a context, it could be argued, could create both the necessity and the possibility of introducing such a transformational measure as UBI. Its full implications, in terms of the changes to our institutions and way of life that will flow from it, are hard to foresee in detail. It would, however, be realistic to expect that they could encompass:

a) A reversal of the pressures for greater centralisation that have long been evident under industrial capitalism. This will result from

  • The greater possibility of meeting demand for goods and services based on local, small-scale production units
  • The reduced need for workers to move long distances (whether within or beyond national borders) from their homes in order to secure a livelihood – thereby avoiding the socially damaging consequences of family separation that typically results from such disruption.

b) An end to competitive overproduction;
c) Marginalistion of private profit as the main determinant of resource allocation, price determination and income distribution;
d) The ultimate redesign of the whole institutional basis for determining the allocation and distribution of resources and value added – whether on a local, national or international basis.

Clearly neither national governments nor the leadership of supposedly key international agencies such as the United Nations, IMF and OECD have even begun to recognise the significance of such trends, let alone consider how to address them. It may be claimed by their apologists that, as with their failure to anticipate the Global Financial Crisis in 2007-8, their inability to do so stems from incompetence or cognitive incapacity. However, it is striking that the implications of such dramatic changes in the dynamics of the world economic and social order are potentially highly disruptive and inimical to the existing pattern of wealth and power relationships. Hence we should hardly expect the existing powers that be to do anything to facilitate such dramatic change even though the benefits to humanity as a whole may obviously be huge. But since such revolutionary tendencies are not only potentially benign for most of humanity but manifestly inevitable we may hope that more enlightened forces will ultimately prevail.

Capitalists are the Luddites now

Traditionally resistance to inevitable technological change has been viewed as the typical reaction of workers who find their jobs threatened by innovation. The original Luddites were English textile workers who sought to destroy steam-powered spinning and weaving machinery introduced as a result of the Industrial Revolution in the early 19th century, which they correctly saw as a threat to their livelihood as handloom operatives. Ever since then the term has been used to describe those who resist the advance of new techniques in any sector of the economy where this appears likely to result in loss of jobs or earnings to the concerned sections of the workforce.

A famous more recent example of this syndrome in Britain was the resistance (for long successful) of print workers in the newspaper industry to any attempt to replace traditional manual typesetting with more automated techniques. This resistance – which enabled the workers to delay the inevitable until the mid-1980s – was only possible thanks to supine newspaper proprietors prepared to run their papers at a loss because of the political influence they believed this gave them – and to well organised unions who were also able to maintain their position as the best paid manual workers in the country.

Less extreme cases of such resistance to change have been common in societies where people’s living standards have depended heavily on their access to paid employment. There is no doubt that increasing recognition of this obvious reality after World War II prompted governments in the industrialised West to try and design labour laws and welfare regimes that would cushion redundant workers against the hardship of unemployment – and also enhance their ability to find new employment – and thus lessen resistance to technological change which might otherwise hold back advances in productivity that could be beneficial to the development of the economy as a whole. Since around 1980, however, such protection has progressively disappeared in the face of an accelerating decline in the traditional demand for both manual and “white-collar” labour in the industrialised world.

The resulting progressive “devaluation” of labour has naturally had a profound impact on socio-economic trends in the developed world, particularly in altering the pattern of income distribution – to the disadvantage of those workers not endowed with skills that are scarce enough to enable them to command high, or even in some cases minimally adequate, salaries. This has been mirrored in the decline in the industrial power of trade unions, whose bargaining position vis-à-vis employers has been progressively eroded by such technological change.

This decline in the market power of labour has been widely recognised by mainstream economists and has led some – such as the widely acclaimed Thomas Piketty – to identify (correctly) recent technological advances as a cause of growing inequality in the contemporary global market economy. However, what very few have been willing to accept is that this trend in the labour market may signify a move towards a permanent, structural surplus of manpower, even though it is obvious to all outside the charmed circle of those with a vested interest in preservation of the existing economic order (who are also the main beneficiaries of this trend). Rather the ruling establishment clings to the deterministic assumption that market forces will somehow – against all the evidence – eventually permit the absorption of this labour surplus in a more or less spontaneous renewed expansion of the economy.

Capital devalued

What mainstream analysts and their political masters are even less willing to recognise is that this world-wide structural surplus of labour is now matched by a similarly permanent and growing surplus of capital, which is also largely a function of technological change. The present writer can claim to be one of the few to have consistently drawn attention to this phenomenon since first identifying it nearly 20 years ago as well as in more recent blog posts.

For defenders of the status quo the inescapable conclusion, that capital is becoming progressively as redundant as labour – not simply, as in earlier periods, on a cyclical basis in line with the traditional fluctuations of the market, but on a long-term, structural basis – is one that hitherto has met with ferocious and virtually unanimous denial. Such a reaction may hardly be thought surprising. For if, in a world of chronically, and perhaps increasingly, weak growth in final demand, it can be demonstrated that capital has permanently ceased to be a scarce factor of production, not only is the market value of capital assets bound to decline over the long term; so is the market and political power of their owners.

As in other instances of decaying power structures throughout history, the ruling élite is not willing to surrender its existing dominant position without a struggle. Hence, in the effort to hide the reality of their dwindling market power and economic relevance corporate entities are resorting to ever more extreme forms of fraud and misinformation. As noted in my last blogpost, the structures of Western corporate law and governance have evolved in such a way as to incentivise serial misconduct – to the point where enterprises feel little restraint from committing criminal acts such as (for example) fraudulent manipulation of markets.

Short of such blatant breaches of the law the corporate sector increasingly demonstrates its fundamental market weakness by its shameless – but perfectly legal – lobbying of governments to support manifestly wasteful and uneconomic investment projects, obviously on the understanding that the same governments will a) subsidise or directly finance the necessary costs, and b) largely indemnify participating private companies or investors against potential losses. For clearly without such official guarantees, explicit or implicit, most if not all of these schemes would be neither commercially nor economically viable and hence would not attract private investment.

White elephants

As it is, big corporations feel able to pressurise government to underwrite the most blatantly unviable investment projects. Examples of what we may term “capitalist Luddism” range from the building of roads and bridges to nowhere in Japan, “ghost cities” of empty apartment blocks in China, airports in Spain that have never opened and nuclear power stations in numerous countries that will probably never be allowed to open (if they are ever built).

In the UK alone there is a long list of such white elephants for which private corporations have been lobbying, calling for the injection of hundreds of billions of public money even as essential public services are being decimated while corporate taxes are being cut and evaded as never before. These include:

  • The London Olympic Park – the most fitting epitaph on which is the fate of the Don Valley Stadium in Sheffield, built for the World Student Games of 1991 and finally demolished by the cash-strapped city council in 2014;

  • The High Speed 2 rail project intended to link London and Birmingham and ultimately points beyond at a cost of scores of billions of pounds – which no economist has been found willing to declare capable of making a positive return on investment;

  • The London “super sewer” – costing at least £4.5 billion – on which work has just started but which many experts judge to be unnecessary;

  • An extra runway for London’s airports (likely to cost at least £20 billion) – despite the fact that air pollution in SE England is already at dangerous levels and spare capacity exists at regional airports;

  • Hinkley Point C nuclear power station, Somerset, over which potential investors are hesitating despite the promise of an extraordinary public subsidy equivalent to 100 per cent of the market price for electricity..

Perhaps the biggest single black hole of all into which British public funds could be wastefully poured is the renewal of the Trident nuclear submarine fleet at a projected cost of £100 billion or more. Although the case for this expenditure is more than ever discredited in terms of defence needs – especially given indications that it may soon be technologically outmoded – there is a powerful lobby in favour of renewal which is likely to carry the day in Parliament. Yet as with all armaments expenditure, which by definition does not need to show any direct financial or economic return, the cheerleaders for this project may be suspected of links, if only indirectly, with what President Eisenhower famously denounced as the “military-industrial complex” at the height of the Cold War over 50 years ago.

Regular readers of this blog may have noticed that the symptoms of systemic dysfunction described above fit with our recurring theme of the growing redundancy of capital and the consequently inevitable slow fading away of the capitalist profits system which has dominated the world for at least the last 200 years. As has been made clear, the ultimate manifestation of this tendency is the slow demise of the huge financial sector itself, reflected also in the Global Financial Crisis (GFC) which, so far from abating after nearly nine years, is now predictably intensifying.

Another major sector where the phenomenon of capitalist Luddism is strikingly manifest is the still enormous petroleum industry. Not only has it, like big finance, exploited its huge political power – aided by inherently corrupt structures of political “democracy” in the industrialised world – to procure unduly favourable tax and legislative treatment for itself; it has also used its market power, particularly through the media, to distort public perceptions of its continued economic and political value to the community. Thus it has been able to

  1. delay public acceptance of the disastrous environmental impact of both global warming and aerial and other pollution resulting from excessive reliance on fossil fuels;

  2. prevent or delay adoption of new technologies (including renewable energy sources), which are less harmful and ultimately cheaper.

Such efforts – combined with those of the increasingly corrupt motor industry (so shockingly revealed by the recent Volkswagen emissions scandal) – have tended to obscure the fact that the age of the internal combustion engine (and thus of petroleum) will likely soon be over, bringing to an end a technological era which has roughly spanned the 20th century.

For true believers in the efficacy of market capitalism – and in Joseph Schumpeter’s famous concept of “creative destruction” – such a drastic transformation of the economic landscape may seem healthy, and no more threatening than was the first industrial revolution ushered in by steam power in the early 19th century. It may even be thought that with the vastly greater resources, both public and private (physical and social capital), that has been accumulated over the last 200 years, it should be relatively easy to cope with economic and social upheavals similar to those that caused such distress in the 1830s and 40s. Yet if they were to consider realistically how the mass of the population in the industrialised world has now become far more deeply entangled with the institutions of the capitalist economy than in previous major downturns they might be far less sanguine.

For not only do many millions stand to lose their jobs as such major sectors as finance and petroleum are faced with massive and possibly terminal contraction. Equally, given the trillions of dollars that have been, and continue to be, invested in discovering and developing new oil and gas deposits across the world, millions more who have been officially induced (often via tax-incentivised pension schemes) to put their life savings into such potentially “stranded assets” – not to mention other unviable investment projects – now face financial ruin on an unimaginable scale.

As suggested earlier, it is precisely because the global ruling élite know all too well that such a cataclysmic upheaval will spell the end of the world order that sustains their power and privileges that they are seemingly prepared to resort to any expedient to prevent or postpone it. Hence the growing incidence of open fraud, including the blatant rigging of financial markets for which virtually none of the perpetrators have been brought to justice, safe in the knowledge that any fines imposed on their institutions can be passed on to the shareholders while the executives responsible continue to award themselves huge bonuses. Yet all the while, as those responsible skate on increasingly thin ice, the risk of an accident triggering an uncontrollable financial holocaust becomes ever greater.