Thursday, February 07, 2013

Is This the Terminal Phase of Global Capitalism 1.0?


We turn to cycles--business, solar, Kondratieff, etc.--to understand current events. But what if this era is not just a cycle but the terminal phase of Global Capitalism 1.0?

This heretical thought arises from the school of economic history pursued by Fernand Braudel and those he inspired. I have long recommended Braudel's three volume history of early capitalism as essential reading for anyone seeking to understand modern global capitalism: Civilization & Capitalism, 15th to 18th Centuries:

Of those continuing this "long duration" analysis, I find much of interest in the work of Giovanni Arrighi (The Long Twentieth Century: Money, Power and the Origins of Our Times) and Immanuel Wallerstein (recommended to me by correspondent Lew G.) (World-Systems Analysis: An Introduction).

This school sets the current iteration of world capitalism as beginning in the 1450s. Everything that characterizes modern global capitalism was already operational by 1500: stock and bond exchanges, hedging with derivatives and insurance, joint stock ventures, highly profitable global trade, commercial credit/paper, central States funding their wars with privately provided credit, etc.

In Wallerstein's analysis, the current form of global capitalism is running out of road. He identifies three long-term forces that are undermining capitalism's key function, the accumulation of more capital:

1. Urbanization, which has increased the cost of labor.

Wallerstein is one of the few who clearly understands the State's role as enabler and enforcer of monopolies and cartels. High profit margins are most easily maintained by persuading politicians to create and then regulate quasi-monopolies and cartels.

The State has two core mandates: enable and enforce quasi-monopolies and cartels for private capital, and satisfy enough of the citizenry's unlimited demands for more services and economic security to provide political stability and thus maintain State/cadre/Aristocratic power.


If the State fails to satisfy enough of the citizenry's unlimited demands for more of everything, it risks social instability.

That is the nation-state's quandary everywhere. With growth slowing and parasitic monopolies increasingly difficult to maintain and justify, the State has less tax income to fund its ever-expanding social spending.


In the conventional view, global capital lowers its costs and therefore increases its profits by shifting production to locales with lower labor costs, few environmental restrictions and low taxes (or an affordable bribe structure).

Thus the opening of China was simply the latest opportunity for global capital to shift production to lower-cost areas. Restless capital is now leaving China as its population has moved en masse to urban zones and the cost of labor has risen, and those in the traditional camp are forecasting global capital will decamp to Africa and the remaining low-labor-cost nations in Asia such as Myanmar and Cambodia.

When global capital runs out of low-cost labor opportunities, profit margins decline and the jig is up.

The rapid progress of robotics and automated, networked software is upending this conventional view of capital running into a brick wall as labor costs rise globally. It is increasingly cheaper and less risky to replace human labor with machine and computational capital, for a reason that Wallerstein does not mention: labor does not just demand more services and benefits from the State, it also demands more benefits from employers.

Global capital is thus finding its input costs rising on virtually every front: energy and resources cost more, externalized costs are coming home to roost, urbanized labor demands higher wages and benefits, and the State is raising taxes to fulfill its ever-expanding promises of more services and security.

Investing in robotics and software offers temporary respite by cutting labor costs, but as everything that can be produced by machines or software becomes abundant, margins vanish.

Reducing labor's share of production costs (and of value created) also has the consequence of reducing the total sum of wages available for consumption and taxes. This feeds the stagnation of the consumer-based economy and severely restricts the State's ability to raise wage-based and consumption-based taxes.

As this low-growth, lower-profit margin cycle tightens, there is less capital available to invest in future production, and the "highest return investment" is increasingly political lobbying/bribery to enhance or solidify profits gained from quasi-monopolies and cartels.

But the State is also running out of air: parasitic cartels skim huge sums from the economy, diverting it to the very class (the financial Aristocracy, the Party leadership, etc.) to whom the State is beholden. Since it cannot cut social spending without risking insurrection, the State is forced to borrow increasingly monumental sums to fund its dual mandate.

States that print their own currency are looking longingly at the printing press, tempted to fill the widening gap between their promised social spending and their tax revenues with phantom money. But like funding consumption with debt, this too is an end-game that leads to the same result: the destruction of the State and both its enforcement of profitable cartels and its vast social spending.

The road for both global capital and the State is narrowing to a rocky trail that leads to a cliff. Two sides of the same expansionist coin, neither can continue to expand in a world of diminishing return, shrinking margins, surplus labor, declining wages and tax base, higher input costs and a restive, entitled/high-expectations, urbanized and under-employed workforce.

The standard business cycle has no answer to these structural quandries, and even the credit expansion/renunciation Kondratieff cycle does not provide a model for the next global system, or perhaps non-system. Technology cannot provide the "solution" because technology replaces labor-intensive business models with new low-labor models of production and service.

There will be no labor-intensive technological revolutions, there will only be technological revolutions that radically reduce the need for human labor. Just as profit margins approach zero in a world of over-capacity and over-supply, so too does the the value of most labor decline.

These are not issues that are unique to capitalism; the same dynamics are pressing socialist states that own key industries and control the markets in their nations. The old ideological models of the 19th and 20th centuries are increasingly disconnected from the new realities of capital, State and labor.

We need a new model, and a re-hash of the old broken models will no longer do.

Regarding yesterday's math faux pas in which the percentages presented added up to 110%. Yikes! I took these directly from the article America’s misguided approach to social welfare (Foreign Affairs Jan./Feb. 2013, page 157). (It's behind the CFR paywall, so you'll have to find a print copy.) This shows that you cannot blindly take numbers from mainstream media sources without doing a bit of addition. My apologies for the error.


go to print edition1. Debt and financialization
2. Crony capitalism and the elimination of accountability
3. Diminishing returns
4. Centralization
5. Technological, financial and demographic changes in our economy



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