Why growth?

Why growth​?

Ever since World War ll a central preoccupation of leading world governments has been to maintain as high a rate of economic growth as possible. At the same time it has been generally understood that the key indicator for which growth was being sought was Gross Domestic Product (GDP).

It is not widely understood that this figure is mereiy an expression of the total amount of financial transactions – or aggregate value added – during a particular year. The reason this is used as an indicator is that its purpose is to reflect the level of commercial and financial activity in the economy. Hence it is not necessarily to be seen as reflecting the general level of economic prosperity, although it is often treated as such by economic commentators, This is so despite the fact that it may result, for example, in the double counting (as positive additions to GDP) of the construction of a building and its subsequent demolition, while it also allows the inclusion in aggregate GDP of the net value added of sectors such as gambling, which are manifestly not positive for collective welfare and wealth .

It might be wondered why therefore policy makers place such emphasis on maximising GDP given that it does not represent any specific measure of economic welfare. The answer is that the ruling establishment is less concerned with the level of economic or social welfare than with that of aggregate financial transactions, since the latter is a reflection of the total value of commercial activity in the economy – and also of potentially taxable private sector revenues. Hence all transactions that can be seen as adding to this total are to be included in GDP.

The importance of this order of priorities in a capitalist market-based economy should seem quite normal and obvious, given that corporate decisions tend to be made based on appraisals of market trends and prospects, while at the same time government policy decisions need to take account of the general level of economic activity – including the impact on state finances. On the other hand no allowance is made for the fact that many transactions (such as in the above examples) do not represent a positive addition to collective output or wealth.

Equally there is no adjustment made for the fact that many transactions included in the aggregate are purely “paper” ones – i.e. adding to personal income and wealth but not necessarily to collective well-being or prosperity. This point was brought to light by a comment of a former head of the Confederation of British Industry, and subsequently of the Financial Services Authority, Adair (now Lord) Turner, who described – as long ago as 2010 (in the wake of the global financial crisis of 2008 – some of the speculative activity on financial markets as “socially useless”, a remark which unsurprisingly upset many in the City of London.

What is not shown by bare GDP statistics is the extent to which they reflect genuine net additions to output or wealth, whether national or global. To the extent that official policy has nevertheless been concerned to promote high GDP growth it has been a notable failure in recent decades, as shown in the figures below (based on World Bank data). This is all the more remarkable in that it covers the period since the 1970s, which had itself been seen as a decade of relative stagnation. Yet, so far from reviving global growth from this supposed stagnation global GDP has remained, on average, below the pre-1980 level in each subsequent decade.

Average annual rate of world GDP growth at constant prices (per cent)

1961-70 1970-79 1980-89 ¹ 1990-99 2000-09 2010-19

 4,72   3.80   1.9   2.52  2.79  2.94

It is not possible to determine what percentage of the recorded growth was “real ” – i.e. representing actual output of goods and services – rather than purely “paper” gains. However, in view of the progressively more enhanced importance of speculative investment – aided by a more permissive attitude to hitherto illegal share buybacks, which facilitate share price manipulation – it seems reasonable to infer from the above data that the real average growth of global GDP hardly exceeded 2 per cent a year in the 40 years after 1980.

Equally, however, it raises the question of what chance there may now be of reviving growth in face of the perceived need to reduce global carbon emissions and thus the pace of global warming. In fact this prospect must surely now seem more rather than less remote in view of probable future restrictions on activities such as air travel. This danger seems all the greater given that sectors offering apparent potential for growth – such as gambling and pornography – might increasingly be seen as socially undesirable and requiring contraction rather than expansion. This is mainly because such constraints:-

1. Would reduce justification for giving public support to private investments such as would tend to generate growth;
2. They would neutralise arguments against more equal distribution of income, which have hitherto been countered by claims that this could be better achieved by growing the economy – as in the familiar saying (beloved of “trickle-down” advocates) that “a rising tide lifts all boats “.

Hence it would seem self-evident that the pursuit of renewed rapid growth has been and will continue to be at best futile and in any event likely to be negative rather than positive for public welfare. Such a finding, it may be noted. is in line with predictions made by the author in his book The Trouble with Capitalism (published in 1998) even though at that time the threat of global warming was not yet seen as imminent.

In view of the growing evidence that this “growth ideology” is no longer tenable it may at one level seem surprising that there appears to be so little discussion among economists or political leaders of what this might imply for the future global economy. On the other hand, given what is at stake, it is hardly remarkable that the establishment should seek to cling to the status quo for as long as possible.

For, as indicated above, the global economy has been dogged by chronically low GDP growth for the last few decades despite strong political commitment to boost it. Perhaps unsurprisingly, however, there is little official enthusiasm for weakening a policy consensus that is already on its last legs.

While the future pattern of global economic development remains as hard to predict as ever, the likely progressive dissolution of what is still referred to as the capitalist system can be expected to proceed by default – albeit in very chaotic fashion. It would thus be following the example of the French and other revolutions of the modern era, albeit, as may be hoped, without a comparable degree of violence and misery.

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Taken together, recent postings on this blog have pointed to the conclusion that the long-term global survival of human civilisation requires that

1. global economic growth must be eliminated if not reversed, and
2. the growing problem of international mass migration must be dealt with by means of collective, international state intervention favouring the most disadvantaged communities which are the main source of migrant flows.

However, it is evident that under the existing world order the application of such ideological principles can scarcely be contemplated. This is because

1. The global economic system is based on capitalistic principles that demand both perpetual growth and unrelenting competition to assure its survival.
2. Power is disproportionately in the hands of a few wealthy Western countries, corporations and individuals who are most unlikely to share it voluntarily.

Presented thus starkly, the dilemma facing our species might seem beyond hope. Yet the purpose of thus dramatically posing the issues at stake is to highlight the necessity for a rapid ideological shift such as would surely be without historical precedent. On the other hand it is perhaps equally unprecedented for a society to get advance warning of impending disaster – based on science rather than primitive superstition – such as is now the case in respect of global heating, which on present trends is now clearly destined to render many communities in different parts of the world physically unsustainable in very short order..

Arguably the same could be said of the spread of mass poverty, which continues to plague the “Global South” despite several decades of “development aid”. Remarkably, the Western establishment continues to exude complacency, reflected in statements such as that, globally, 2 billion people (equal to around 25 per cent of the world’s population) were lifted out of extreme poverty between 1990 and 2015 (according to the UN Development Programme). Whatever the reality behind such unverifiable (and essentially meaningless) estimates, world leaders are actually confronted with “facts on the ground” that indicate a much less rosy reality – which in fact suggest the problem is getting even worse than when there was supposedly a concerted resolve to ”make poverty history” early in the century. This takes the form of a manifest total breakdown – economic, social and political – of order in many parts of the developing world.

While this has been ongoing for several decades, its worsening symptoms have only now forced governments and the public in the developed world tu pay attention. This is particularly the case with intensifying civil disorder in many countries – notably Afghanistan, Pakistan, Syria and other Arab countries as well as those in sub-Saharan Africa and Central and South America too numerous to mention. The most conspicuous manifestation of this malaise, particularly in Europe, is the exponential growth in the floods of refugees increasingly willing to risk everything in their desperate search for a better life – and escape from the utter hopelessness induced by endemic poverty, climate disaster and civil war.

This is a phenomenon which the developed countries that are the usual destination for such refugees have struggled tu come to terms with. In fact it may appear self-evident that there is ultimately no way of physically preventing such population flows altogether, particularly under a supposedly globalised economic order – especially where the pressures in the source countries are too powerful to resist, as demonstrated by the thousands of refugees now trying to cross the Mediterranean and the English Channel every summer – often at serious risk to their lives.

What would be a more rational approach to solving this very real problem and thereby alleviating the mounting chaos which otherwise seems bound to engulf so many countries, developed and developing alike? The weakness of virtually all suggested strategies to date has been that they depend, explicitly or implicitly, on an assumption of continued economic growth. This is considered necessary in order to accommodate the anticipated extra output of poor countries. Only if that assumption – now rendered totally implausible by pressures to minimise global carbon emissions – is removed does it become possible to envisage the kind of radical restructuring of the global economy and society that is needed.

This is something which may have hitherto been implicitly assumed to be the natural concomitant of global growth but which clearly can no longer be inferred to be so – if only because the very desirability or possibility of growth is no longer tenable in face of global warming. If that premise is accepted we may properly view the climate crisis as a positive catalyst for necessary change which it has not been possible to achieve by other political means.

This puts the spotlight more firmly on the need for income redistribution, something that will not be easily achieved, not least because of the difficulty of quantifying it over time and space. Measuring comparative income distribution levels in terms of GDP per head of population is fraught with difficulty.¹ Nevertheless available data appear sufficiently robust to allow comparisons at least between more industrialised (OECD) countries having broadly similar distribution profiles. This assumption justifies the comparisons made by Kate Pickett and Richard Wilkinson in their well known study The Spirit Level, in which they analyse the impact of inequality on the incidence of such social indicators as mental illness, teenage pregnancy, educational failure, crime or drug addiction, leading to the convincing conclusion that more equal societies – such as the Scandinavian countries – enjoy better, more stable outcomes than less equal ones such as the USA and UK.

How is redistribution to be achieved both within and between these countries, not to mention the scores of those comprising the “developing” world for which meaningful data on the existing pattern of distribution are not available?

Universal Basic Income

In light of the catastrophic failure of traditional approaches in developing countries, supposedly based on the principle of promoting economic growth, it must be concludedⁱ that only some mechanism akin to the welfare benefits provided to the more disadvantaged members of society in most industrialised countries would meet the requirement. However, in order to avoid the complexity and potentially massive scope for corruption associated with means testing that is inherent in such schemes – particularly in countries with a typically underdeveloped administrative capacity – it would be preferable to institute a form of Universal Basic Income (UBI). Such an approach, it may be noted, is in line with a growing number of trial / pilot schemes that have been initiated in different parts of the world – albeit hitherto none of them have been adopted at national level or for more than limited time periods (although Barbados and South Africa have both recently announced their intention to introduce national schemes shortly).

Perhaps the most important lesson to be derived from these experiments is that cash transfers to individuals in poor communities are a much more effective way of enhancing living standards than loans or technical assistance targeted at specific programmes or projects rather than individuals. In this context is encouraging to note that this point is evidently starting to be grasped by UN agencies such as the Office for the Coordination of Humanitarian Affairs (OCHA), which is increasingly applying the principle in its interventions, such as (for example) relief following a typhoon in the Philippines. However, clearly there can be no guarantee of transition to a long-term UBI in such cases, given that UN agencies currently lack the substantial fiscal resources that would be needed to finance such a scheme on any scale over the long term.

The merit of UBI in such conditions is that it is a flat-rate weekly / monthly payment to every adult regardless of other sources of income. This means that it can be included in total taxable pay, and thus largely clawed back from the more affluent who have less need of it. This should help to ensure that post-tax income of the highest paid corporate employees would be less than 100 times that of the lowest paid – in contrast to many current instances where it is found to be closer to 150 times, albeit still far above the ratio of 20:1 once supposedly recommended by Henry Ford (no social radical). It would perhaps be fanciful, at the present stage of world social evolution, to suggest what might be an appropriate global target ratio. Yet it surely behoves the UNDP, World Bank and other institutions concerned with enhancing living standards among the still swelling ranks of the world’s poor majority to focus on efforts to harmonise income levels through a mechanism such as UBI – rather than on “global development indicators” such as lowering the incidence of perinatal mortality (important as that is).

Moreover, it should be obvious that in a world with diminished scope for growth it is only rational for countries to move towards more equal distribution of income and living standards if the danger of conflict – both within and between communities – is to be reduced rather than intensified. Hence, notwithstanding the difficulties, it would be desirable for the United Nations to adopt a target ratio of highest-to-lowest paid workers of, say, 25:1 on the understanding that the aim would be progressively to reduce it over time.

Thus a two-pronged strategy for reducing global inequality – combining establishment of a UBI with restraint on excessively high pay – appears the optimal approach to reducing inequality. To many this may seem unrealistically utopian in the world as it presently exists. On the other hand, given the intensifying global disorder, there may seem to be few alternatives.

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1The most commonly used indicator – known as the Gini coefficient or ratio – is supposed to reflect the spread orf incomes as between the highest and lowest paid members of society in a given community or country, with a high ratio (on a scale of 0 to 100) signifying relatively unequal distribution. However, given the weaknesses of the data, it is not surprising that comparative estimates appear highly questionable. Indeed the only trans-national estimates of Gini coefficients that are available (from the World Bank) are clearly too irregular and incomplete to form the basis of any general conclusions.

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Inflation embedded?

In our post of February 2021 it was pointed out that most economic commentators had apparently failed to recognise that the primary, if unspoken, purpose of so-called Quantitative Easing (QE) was to facilitate the artificial holding down of interest rates by allowing the monetary authorities to bid up the market price of financial assets to a very high level regardless of what it would be in the absence of such distortion. As a result the official Bank of England base rate has, from about 2010 until very recently, stood at 2 per cent or less – equal to the lowest rate ever recorded since the Bank was founded in 1694.

As noted in numerous earlier posts, this ultra-loose monetary policy has remained in force for most of the last decade, during most of which time the rate of inflation has stayed consistently quite low – even though such low interest rates would normally be expected to result in higher inflation. This anomaly has been explained as due to the deliberate channelling of the excess liquidity generated by QE into financial assets or markets, which did indeed rise considerably in value during the period, rather than higher prices of goods and services – although it is not clear whether or how this might have resulted from official policy.

Against this background the recent sharp rise in the inflation rate seems like a reversion to normal, though it leaves

unexplained the previous deviation from the norm. If it is really the case that it stemmed from an unusually strong vogue for investment in financial assets other than those yielding the very low fixed interest rates then prevailing – as well as equities – that would suggest investor sentiment is now turning bearish and that significant stock market falls are to be anticipated.

At the time of writing (August 2023) the British authorities, led by the supposedly independent Bank of England, seem committed to a policy combining higher interest rates – now raised to 5.25 per cent – with public sector pay restraint (see below) They are evidently alarmed, however, as well as mystified to find that prices are continuing to rise in spite of tighter monetary policy. Yet it is perhaps not hard to see that it could be the cumulative effect of excessive monetary expansion in recent years, particularly since the start of the Covid pandemic.

At that time, faced with the imminent prospect of a widespread collapse of economic activity, the government declared itself prepared to do “whatever it takes” to avert such an eventuality. Yet seemingly virtually noone reckoned on the impact that the massive public borrowing required to support this policy would have on the overall fiscal balance and thus on the rate of inflation.

It is not known whether any attempt was made at that time, by either the Treasury or the Bank of England, to estimate what the likely impact of such fiscal profligacy might be. In fact official data show that UK public debt rose by £112 billion in 2022 – to £2.516 trillion. At this level it is equal to around 100 per cent of Gross Domestic Product – more than double the ratio recorded in 2009.

What policy actions can be envisaged to remedy this evident disaster? The most obvious one would appear to be a reversal of QE (or “Quantitative Tightening”). However, since this would entail selling back to the market the debt built up by the central bank in the process of QE this would require raising interest rates to levels high enough to be attractive to market investors. The predictable problem now is that a) there is no telling how high these rates might need to rise before they might fall again and b) they would apply also to the stock of existing public sector debt, which is already seen to be at an unsustainable level.

Faced with this impasse the British authorities are attempting to put the burden of curbing inflation on those least responsible for creating it. This is reflected in the government’s steadfast refusal to entertain claims for public sector pay increases that compensate for past rises in inflation – precisely on the grounds that they would be inflationary. Unsurprisingly this has provoked a wave of highly disruptive industrial action in public transport, education and other public services.

It is hard to see a possible dénouement to this manifest crisis. The only conceivable ones that could be viable would involve massive increases in direct taxation, mainly on wealthy individuals and the corporate sector, which would be anathema to the ruling Conservative party, committed as it is to lowering taxes rather than increasing them, while the Labour party – as the presumptive alternative government – is clearly anxious to avoid provoking the overwhelmingly right-wing tabloid press by proposing any radical tax increases – particularly ahead of the imminent general election which they are desperate to win.

Although the above description relates to Britain, which perhaps represents a “worst-case” scenario among developed economies, it must be stressed that most, if not all, others are likely to confront similar difficulties in the near future. Ultimately this may prove to be a cause of significant civil unrest, particularly in countries other than Britain (given the latter’s tradition of rather slow reaction to social repression), which may in turn compel fundamental systemic change, given the lack of policy options compatible with the continued functioning of the “free” market.

It is, as always, impossible to foresee how the situation will unfold in response to such conflicting forces, other than to make the rather trite observation that “the status quo is not an option”. It needs to be clear, however, that any emerging alternative to the existing order will of necessity have to tend towards abandoning the idea that economic growth and prioritising of the profit motive should continue to be central to any viable model of economic organisation. In the light of past experience and bearing in mind the continuing power and inflexibility of the ruling vested interests it is impossible to be optimistic.

A strong vogue for the privatisation of publicly owned enterprises and assets has been a prominent feature of the “neo-liberal” economic ideology prevalent from the 1980s. The justification for it – to the extent this was ever really considered necessary – may be said to have lain in the perception that, as part of the “mixed economy” model widely adopted in the West after World War II, public ownership was readily viewed as a failure. It was also suggested, based on little hard evidence, that private-sector ownership acted in principle as a spur to greater efficiency, with potential benefits to consumers as well as the public purse.

Such simplistic beliefs could in fact be shown to be no more than a manifestation of the narrowest ideological bigotry. Any examination of capitalist economic history – before or since the Industrial Revolution – shows it to be full of examples of state enterprises, of which arguably the most notable was the East India Company (incorporated by royal charter in 1600), in key positions, usually acting as vehicles for subsidising private enterprises. Hence it is necessary to ask what was the real motivation for the large-scale privatisations beginning in the 1980s.

In fact the answer to this question seems quite obvious in the context of the latter-day evolution / dynamics of the global market (capitalist) economy – if only with the benefit of hindsight. For a cursory study of developments in this area indicates a chronic and intensifying shortage of new outlets for profitable productive investment (as opposed to speculation) – a shortage that would ultimately threaten the stability or even survival of the capitalist system. Abundant state-owned assets could obviously provide a significant contribution to filling this gap, even though it was clearly not politically expedient to give this as the reason for privatising them.

Instead it was felt necessary to claim that private-sector ownership would tend to induce greater efficiency in their operations, theoretically (it may be supposed) great enough to offset the cost of distributing extra value added to private shareholders. This despite the fact that in Britain, where the Thatcher government eagerly assumed the role of global pioneer of privatisation in the 1980s, many of the soon to be privatised public utilities had actually been established – often by Conservative governments and as long ago as the 19^th century – for what had been perceived to be very practical reasons. Chief among these was that most such utilities were effectively natural monopolies whose private-sector customers did not wish to find themselves at the mercy of monopolistic private-sector suppliers – a realisation reflected in the creation of regulators for each sector (such as Ofwat, Ofgem etc) following privatisation. It is in fact a little remarked truth that the cost of creating and operating such regulators has added an extra layer of cost to the entire business (borne by the taxpayer) , so that a full reckoning of the costs and benefits of privatisation in Britain would almost certainly show a negative result – even if it could be shown that the regulators were effective in protecting consumers. On top of this the privatised companies have been allowed to load their balance sheets with substantial

amounts of debt, the sole purpose of which has often been to finance higher dividends, although naturally the costs of servicing this debt are ultimately borne by consumers.

The failure of this ideologically driven theory to deliver in practice the benefits promised by its advocates can be illustrated from the record of three sectors that have been subject to privatisation in Britain.

1. Energy (electricity and gas) supply.

This has been largely in the hands of six large companies since privatisation in 1990. Each has been set up as a de facto regional monopoly, even though in theory the process was supposed to stimulate competition. Investment in infrastructure, which is supposed to be monitored by the regulator, Ofgem, is meant to maintain cost-effective distribution to consumers. In fact because some infrastructure, such as cabling and pylons, is common to more than one regional monopoly there has been significant neglect of maintenance due to divided responsibility and inadequate intervention by the regulator. Hence an Ofgem report into Storm Arwen, which left a trail of destruction in parts of Scotland and northern England in November 2021, found that local electricity network providers had failed to carry out routine maintenance such as cutting trees, and that between 50 and 75 per cent of poles damaged in the storm were more than 40 years old, suggesting a lack of investment had contributed to the blackouts. At the same time much of the sector’s cabling has not been renewed for several decades, so that it has become old and inefficient, leading to leakage of power on a scale analogous to that in the water industry (see below).

Another adverse effect of privatisation in the sector has stemmed from the attempt to encourage competition from new entrants to the market. In fact, since the beginning of 2021, 31 energy companies have gone bust due to soaring wholesale gas prices, leaving over two million customers dependent on the safety net provided by the market regulator, Ofgem, to maintain their supplies and protect their credit balances while it moves them to a new supplier. The costs of this process will ultimately have to be met by the rest of the industry and their customers.

2. Water.

The pattern of privatisation has been quite similar to that of the power industry, having occurred about the same time in 1990, except that there has never been any pretence that competition in the sector is possible. For that reason it might perhaps have been expected that the regulator (Ofwat) would be more diligent in holding the privatised water companies to account for maintaining adequate levels of investment and quality control.

In fact the companies have been permitted to extract £72 billion in dividends in the 30 years since they were privatised while at the same time investment has fallen by 15 per cent since the 1990s to £4.8 billion a year. The consequence may be seen in repeated discharges of raw sewage and storm water

into domestic water systems, rivers and the sea – to the detriment of public sanitation and health, not to mention the tourism industry. Yet to date the only penalty to have been imposed on the industry by Ofwat is a £90 million fine of Southern Water for raw sewage discharges, a trivial amount relative to the company’s operating profit of £212.3 mn in 2020 alone. The situation is such that there are increasing public protests and calls for renationalisation.

3. Public Housing.

At the time it was initiated in the early 1980s there is no doubt the Thatcher government’s Right to Buy scheme – enabling council tenants to purchase their council houses at market prices (heavily discounted) – was politically very successful. Taken together with the privatisation of public utilities that was initiated about the same time – in which millions of consumers were offered free shares to encourage them to participate – it no doubt served to persuade many voters to buy into the Conservative vision of a “property-owning democracy”.

What was scarcely apparent at the time was that the real purpose of the exercise was progressively to marginalise public sector (municipal) housing to the point where private developers and landlords were totally dominant. This should have been clear from the fact that the terms of the scheme forbade councils to recycle the sale proceeds into new council house construction. This meant that the policy had the effect of progressively reducing the stock of social housing in England and Wales, so that it fell from nearly 6.5 million units in 1979 to approximately a mere 2 million units in 2017. At the same time private landlords were encouraged by strengthening their rights relative to tenants through the Housing Act of 1988. The trend in favour of the private rented sector was further bolstered by the expansion of Housing Benefit, designed to subsidise rents for those on low incomes. The amount spent on this rose from less than £2 billion in 1978 to over £24 billion in 2015-6, since when it has gradually declined by around 25 per cent. Meanwhile, however, house ownership has been further incentivised since 2013 via the government’s “Help to Buy” scheme subsidising borrowers’ deposits, which has also given an extra boost to already inflated house prices. At the same time little has been done to alleviate the widespread problems of homelessness and sub-standard housing, on which statistics are unreliable.

Taken together, the policies of Conservative governments in these three sectors since the 1980s – which were in no way modified by the relatively brief period of Labour government (1997-2010) – display a determined effort to favour the interests of organised capital – by artificially promoting private-sector investment opportunities – at the expense of wider society based on, at best, a spurious rationale. In the process they led the British and much of the world economy down a ruinous blind alley from which it can now only escape at considerable cost to society as a whole.***

This blog has long been replete with repetitions of increasingly obvious truths concerning global economic development which yet remain unacknowledged by the vast majority of economists – at least in their public expressions of opinion. Of these none is more conspicuous than that concerning the ever more desperate efforts to prop up inevitably weakening economic (GDP) growth rates and the consequential decline in the market value of assets.

Numerous postings have noted that this tendency dates from the 1970s, although it has become ever more frantic as its futility has been progressively exposed over time. At the same time these postings have revealed the enormous damage wreaked on global society by many of the supposedly growth-promoting policies that have been pursued, from boosting armaments production to permissiveness towards pornography.

By now, however, the over-riding threat of world environmental catastrophe such as might result from a continuation of economic growth even at the relatively modest rates of recent decades has become apparent – even if the precise correlation between the two cannot be established. Yet even though this danger has been widely exposed and revealed through such phenomena as melting ice-caps, rising sea levels and ever more deadly floods – as well as officially acknowledged by most major governments (as at the COP-26 summit held in November 2021) there has as yet been little sign of willingness (e.g.) drastically to cut dependence on fossil fuels. Whether a few more disasters such as the outbreak of wildfires across Europe in the unprecedented heatwaves of 2022 will be enough to provoke a more vigorous response remains to be seen.

Against this background, since the start of 2022 a more immediate threat to the global economic and political order has quite suddenly appeared in the shape of Russian President Vladimir Putin’s attack on Ukraine as part of a seeming bid to revive the Soviet empire that collapsed in 1991. Whatever Putin’s real purpose may be, this démarche has obviously come as an unwelcome surprise to Western countries, particularly those in Europe. For it has evidently disturbed a web of relationships between West European nations and Russia, built up over decades, which the Europeans – Germany in particular – will find it painful to dismantle, as demonstrated by the difficulties involved in a concerted imposition of sanctions by EU member states and the UK.

As noted in previous postings – e.g. The Perversions of Latter-day Capitalism (February 2019) – the development of these links goes back decades – at least to the “ostpolitik” initiated by West German Chancellor Willi Brandt around 1970. It can also be shown that this tendency to do business with non-market, centrally planned economies such as those of the Soviet Union and its satellites has been driven by an increasing need to find new markets to supplement the ever more saturated ones of the market economies in order to sustain the growth rates of the latter.

This approach naturally also involved disregarding the scant respect for democracy and human rights (by supposed Western standards) shown by the non-market economies. It contrasts with the pattern of the earlier post-war period (pre-1970), when trade and investment relations with non-market economies were strongly discouraged – e.g. by their exclusion from membership of the Organisation for Economic Cooperation and Development (OECD).

Similar motivation seems to have been behind the Western opening to the People’s Republic of China, spearheaded by the Nixon administration, which also dates from the early 1970s. For whatever the undoubted benefits of political and military détente may have been, US commercial interests must surely have been conscious of the potential offered by a market comprising a quarter of the world’s population.

On the other hand such initiatives required earlier ideological constraints to dealing with totalitarian Communist states to be overlooked. This has, however, proved to be a recurring source of tension with China, notably over Tiananmen repression (1989) and Hong Kong pro-democracy protests (2019 et seq.), and to a lesser extent (hitherto) with Russia over its annexation of Crimea (2014). At the same time laundering of Russian money through London and other Western financial centres has continued unabated despite a number of evidently Kremlin-inspired murders of Russian dissidents in exile in the UK. Yet the Western sanctions resulting from these disturbances have been largely tokenistic and have not been permitted significantly to interrupt trade or investment – until Russia’s brutal and unprovoked attack on Ukraine in February 2022.

Seen in the light of the preceding events referred to above – and of Russia’s particularly close economic relations with Germany under the administration of Chancellor Angela Merkel (2005-22) – the assault on Ukraine may appear to have been undertaken based on a calculation that Western nations would find it too economically inconvenient to mount a full-hearted retaliation, not to mention a misplaced assumption that any Ukrainian resistance would be easily overcome. There is in any case no doubt that Germany and several other EU member states have been – and still are – reluctant to commit themselves to full sanctions against Russia, particularly in respect of oil and gas imports.

The picture that emerges from the pattern of events recounted above is clearly one of an ideologically, if not morally, conflicted West (OECD countries) pursuing a strategy based largely on commercial opportunism. Yet just as clearly the Russian attack on Ukraine demonstrates the risks of such an approach for nations claiming – however inconsistently – to uphold the values of human rights, the rule of law and the United Nations charter established after World War II.

Put simply, it can be concluded that the Western countries and corporations proclaiming their adherence to such “liberal values” have too readily subordinated them to the pursuit of their own perceived national economic advantage and of higher corporate profits. Hence it may also be concluded that an ideology based on the primacy of profit maximisation is not only socially damaging but ultimately incompatible with harmonious international relations. In the final analysis the West must accept that such an ideology ultimately demands a commitment to the pursuit of national or corporate advantage almost as zealous as that demonstrated by the rulers of Russia and China.

Furthermore, as the problem of global warming grows more acute by the year (not to mention other symptoms of excessive output in relation to the resources and capacity of a finite planet) so the need to address it by curbing economic growth – or preferably halting it entirely – becomes more compelling than ever. Such a need, it may be readily recognised, can hardly be overcome in the context of a competitive struggle between nations, particularly as competition obviously implies a continued requirement for market growth – even assuming such “free” markets cannot in any case be rigged.

Indeed this serves to emphasise the more general dangers of competition – notwithstanding its theoretical merits, as expounded by classical economists such as Adam Smith and Ricardo.

1. Competition between either states or corporations to maximise their share of markets is dangerous – and probably self-defeating – in a world suffering from increasingly chronic overproduction such as may threaten the survival of the human and other species on this planet;
2. Hence in order to avoid such potentially ruinous competition and unsustainably high levels of output it is vital that the world’s great powers, including China and Russia as well as the “liberal market” economies of the West , proclaim a global Charter of Cooperation based as far as possible on the principle of the more or less equal sharing of global resources and incomes – both between nations and individuals;
3. Economic models based on the prioritisation of maximum profit must be phased out – ideally by progressively restricting access to limited liability.

Of course it would be easy to dismiss such a proposition as a utopian fantasy. Indeed it is arguably only possible to advance it now we have arrived at a point where the human race manifestly stands on the brink of environmental self-destruction. In any case it is hardly possible to imagine such a scenario of global détente in the absence of major political upheavals in both East and West. The outcome of such a process would necessarily mean the emergence of a US régime that had definitively repudiated such quasi-fascist dreams as the Project for a New American Century and a post-Putin Russia that had abandoned the fantasy of reconstituting the Soviet empire.

At the same time (and scarcely easier to imagine) there would need to be an explicit resolve on the part of all the major powers – including the EU, UK, Japan, Russia and China – to redistribute the world’s finite resources far more equally than at present. By the same token a global authority should be empowered and held responsible for ensuring that all individuals on the planet have unconditional access, preferably through mechanisms such as a universal basic income, to food and shelter of minimum survivable standard. Likewise, it should go without saying that all laws against humanitarian or war crimes past and future (as per the Universal Declaration of Human Rights) should be enforced under the aegis of the International Criminal Court, to which all countries would be required to belong.

As indicated, it only makes sense to advance such a radical vision in the context of a looming existential catastrophe such as now threatens to engulf the world before the end of the present century unless drastic action is taken to reverse course. It behoves those of us who will not in any case live to see the outcome to bend every effort to try and avert such a dénouement.

Stock markets, and financial markets in general, have often been compared to gambling casinos – even by those on the Right who defend their existence and personally profit from them. Hence it may not at first sight be especially surprising or shocking to find that the level and intensity of overtly speculative investment – as distinct from investment in support of production or service provision – on global financial markets has markedly increased in the last few years. It may nevertheless seem remarkable how far forms of naked speculation – with no obvious distinction from pure gambling – have developed in recent years. Two of the most conspicuous symptoms of this tendency are:

Cryptocurrencies

The emergence of cryptocurrencies as vehicles for investment is a phenomenon of the 21^st century. Their history and rationale is long and complex as well as beyond the scope of a relatively brief blogpost and perhaps, it must be admitted, beyond the competence of the present writer fully to describe or explain. Their origin is generally dated from – and attributed to – the onset of the Global Financial Crisis (GFC) in 2007-8, when the best known cryptocurrency, Bitcoin, first appeared. In fact it seems their emergence was justified by the perceived need to provide an alternative form of money to the US dollar and other fiat currencies issued by governments (or central banks), particularly as they started to be printed in great profusion with the wide adoption of Quantitative Easing (QE).

In principle the merit of cryptocurrencies compared with fiat ones is that a) they are not issued by governments and cannot be manipulated by them and b) they cannot be printed by the issuers and thus easily subject to price distortion. Yet the mechanisms by which cryptocurrencies are in fact created, although they remain opaque, are such as to permit their quantity to be arbitrarily expanded, even without the ready resort to the printing press available to traditional fiat currencies. Hence it is not clear that there is any essential difference between cryptocurrencies – of which there are now hundreds in existence – and the traditional fiat variety, at least in this crucial respect of their capacity to be expanded in volume.

Other main attractions of cryptocurrencies include their potential for rapid and clandestine transfer of payments, which makes them attractive to drug dealers, money launderers and other criminals. This also raises concerns as to their potential to defraud ordinary investors and ultimately threaten the health of the financial system overall. However, there should be no doubt that the main appeal of cryptocurrencies to investors lies in their being a speculative store of value. In the case of Bitcoin, the most widely traded of them, its exponential rise in price – from under $1,000 in 2016 to over $60,000 in late 2021 – bespeaks an obvious attraction for fortune hunters, although some of these may have been rendered rather queasy by its subsequent rapid fall to under $40,000 in early 2022.

Altogether, it is clear that cryptocurrencies as an asset class should be viewed, primarily if not exclusively, as a vehicle for pure speculation.

This is reflected in the fact that a recent survey found that hedge funds expected to expand their holdings of so-called cryptoassets substantially. Instruments linked to cryptocurrencies, such as derivatives, are likely to proliferate: many traders use options to bet on bitcoin’s value. Fidelity, one of the world’s biggest asset managers, has also recently launched a bitcoin exchangetraded fund. Crypto’s move out of the shadows increases the risk that a sharp drop in price could shake confidence among major players, especially those that have funded their exposure through borrowing.

Special Purpose Acquisition Companies

Among the numerous indicators of growing financial fragility in global markets perhaps none is more telling than the massive upsurge in the volume and value of Special Purpose Acquisition Companies (SPACs) created since around 2017. These entities, also known as “blank cheque companies”, have no assets other than funds accumulated from different investors which are intended to be combined in eventual takeover bids for businesses yet to be formed or identified. According to the rules established in the US and other markets a SPAC must provide at its launch for an initial public offering (IPO) to take place within a given time frame (typically 2 years).

Although such SPACs have been around for many years, according to industry sources, from 2004 through 2018 approximately $49.14 billion was raised across 332 SPAC IPOs (an average of around 22 a year) in the United States, which then as now accounted for the overwhelming majority of SPACs. However in 2019-2020 alone a total of as many as 210 SPAC IPOs raised no less than $68 billion (over 30 per cent more than the whole 2004-2018 period), almost entirely by SPACs listed in the US, while provisional figures indicate this figure will have doubled again in 2021.

What accounts for such a sudden huge expansion of this hitherto marginal asset type? In fact a moment’s reflection might suggest that the obvious explanation is the massive acceleration in monetary growth thanks mainly to quantitative easing (QE), which caused roughly a quadrupling in the balance sheets of the central banks of the major developed economies between 2008 and 2020, while GDP rose less than 50 per cent in the same period. Against such a background what seems astonishing is that there was barely any inflation – at least according to official data.

A recent article in the Financial Times has drawn a comparison between this kind of evidently wild speculation and the South Sea mania of the early 1700s, when the public was encouraged to buy stock in a venture at prices far beyond what the profits of the business could ever justify, while a number of ‘bubble companies’ sprung up around the South Sea Company to capitalise on the frenzy. Famously these included one offering investors “an undertaking of great advantage, but nobody to know what it is”.

The acceptance, and indeed promotion, of such vehicles for what can only be seen as gambling pure and simple – with no economic or social benefit whatsoever, but carrying risk of serious loss to ordinary investors – is clearly an example of the ever more degenerate state of the global market economy. The only possible justification for them in the eyes of the authorities can be that they facilitate the growth in activity and of asset values in the financial sector. This calls to mind the remark of a former head of the Confederation of British Industry, and subsequently of the Financial Services Authority, Adair (now Lord) Turner, who described – as long ago as 2010 – some of the activity on financial markets as “socially useless”, much to the understandable fury of many City traders.

Such developments are perhaps sufficient evidence to demonstrate that contemporary capitalism has come to resemble a casino more truly than any of its earlier incarnations. Likewise, any idea that it can be regarded as providing a vehicle for the collective enhancement of public welfare is to be viewed as obsolete – to the extent that it has ever been valid.

What is more pertinent to note in the present conjuncture is that financial markets are more fragile than they have been since the outbreak of the GFC in 2007-8. While we may find it strange that they have remained so stable – with interest rates at historically low levels – for much of the intervening period despite the massive money printing that has taken place (QE), it now seems clear that this bonanza is coming to an end as interest rates start to rise and bond prices correspondingly fall. This seems likely to cut off the demand for SPACS rather abruptly as investors look to deleverage in the face of rising rates.

Unfortunately for all concerned, however, the likely continued inability of the authorities to prevent further interest rate rises threatens generalised bankruptcy for public and private sectors alike, bearing in mind the unsustainably high level of debt prevailing in both – a reality now recognised by a growing number of market analysts. As always, it is hard to foresee the likely response of the authorities and the markets to this emerging scenario, especially given their proven capacity to engage in effective market distorting techniques.

As for investors, we may expect the more intelligent ones to hedge their bets, at least until they get a clear indication of how the markets are reacting to an initial modest rise in interest rates – to, say, 2-3 per cent. If this can be made to appear consistent with a reversal of the recent surge in inflation, even if only with the benefit of some judicious market rigging, both bond and equity markets may stabilise or even resume their upward trajectory. Equally, it may reasonably be perceived that the authorities will readily respond to any undue investor nervousness by resorting to further bouts of QE. Ultimately, however, at some point in the near future, reality must surely assert itself in the shape of higher inflation and a corresponding sharp fall in asset markets.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These dis-benefits include:-

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

2. Support for armaments / war production.

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

3. Speculation / gambling.

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

4. Pornography

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

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

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

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

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

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

6. Environmental damage / wasteful over-production.

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

7. Drugs criminalisation.

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

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

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

8. Dangers to public health. This stems naturally from the tendency to see health care (or the lack of it) as a profit-making opportunity, particularly in the United States, rather than a primary necessity for human welfare. Symptoms of this perverse attitude can be seen not only in over-charging for routine healthcare procedures but even in the performing of unnecessary operations. Likewise it is reflected in the failure to report the negative impact of products such as cigarettes even when this is well known to those in the producer industries concerned. This obviously explains the systematic suppression by the tobacco industry from the 1950s of clear evidence of the dangers of smoking, while the same applies to the impact of fossil fuels on aerial pollution and global warming. At the same time the ability of pharmaceutical companies to impose patent restrictions on the use of new drugs they have developed – even where this been heavily supported with public money – adds needless billions to the cost of treating life-threatening conditions.

9. Growing inequality. This results from the continuing process of asset accumulation and holding in relatively few hands that inevitably occurs under the capitalist model, especially if profits are lightly taxed. It also stems from the compulsion, under capitalism, to promote individual selfishness – encapsulated in the phrase “greed is good” proclaimed in the movie Wall Street (1987). This in itself is sufficient grounds for rejecting capitalism, since prioritising maximum equality should now be central – and always should have been. The malign impact of inequality on society as a whole was well spelt out by Pickett and Wilkinson in the best-selling The Spirit Level (2009), the irrefutable conclusions of which were studiously if predictably ignored by the Western establishment.

10. Chronic and increasing underdevelopment of most of the world.

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

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

A more benign alternative

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

These principles should certainly comprise the following:-

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

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

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

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

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

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

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

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

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

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

Obtuseness of mainstream commentators

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

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

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

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

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

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

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

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

Nowhere to go but down

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

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

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

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

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

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

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

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