This is a continuation of an earlier post
The economist John Maynard Keynes, hugely influential in the
20th century, is now seen as a sort of ghostly admonisher, berating
us – or rather the elite – for the gross errors that never seem to be corrected
by experience. For example, his adage that “you don’t balance a nation’s books
by cutting its income” is widely seen as a pithy riposte to the
circular austerity logic that we seemed destined to repeat until the end of
time.
But it’s seldom noticed how wrong Keynes’ predictions could
be. For example, he claimed in 1930 that in a hundred years’ time – i.e. around
now – economic progress would mean that we’d all be working
15 hour weeks and three hour days, and our main dilemma would be how to
spend our abundant leisure time. In reality, we are busier than ever and the
major source of that immersion is the need to work to earn enough to live on, which
in many cases still isn’t enough.
Similarly, he thought the major economic problem of the
future would stem from the fact that increasing prosperity would lead people to
save so much that they wouldn’t spend enough on consumption, thus impeding the
‘circular flow’ of money so vital for economic health. In reality, despite (or
perhaps because of) mass consumerism, everyone nowadays – individuals,
governments, and corporations alike – is massively in debt. The parent company
of the insolvent Thames Water, Kemble, is £18 billion in the red for
example. And that’s just one company. Owing money to someone else and having to
make regular interest payments to them – rather than saving too much – is the
defining characteristic of our age, contrary to what Keynes imagined. Although
I suppose you could say that many corporations seem to bring off the
counter-intuitive trick of hoarding money and
being in debt at the same time.
This leads to the rather disturbing insight that virtually
no-one – including followers of esteemed critics like Keynes – really knows
what capitalism, as it exists now, really is. If they did, their predictions
and remedies wouldn’t be so wide of the mark.
Puff the
Magic Dragon
Take for example the explanation of why “capitalism is good”
by German theoretical physicist and science explainer Sabine Hossenfelder. She
is a world away from the conspiracy dwelling, propagandising populists who
justify current economic arrangements while blaming others – usually immigrants
and ‘cultural Marxists’ – for why things are going wrong. But her vindication of
capitalism seems to emerge from an alternative universe.
Capitalism, she says, is all about people “sitting on a big
pile of money” they “don’t know what to do with”. Seeing that other people need
finance to make their business idea a reality (she gives the example of someone
with thousands of apples who needs a juice press to turn them into apple
juice), the capitalist lends them the money, while expecting “something on top”
for the risk they are taking.
“The capitalist is a person or institution who provides
capital to those who want to launch a new business, someone who’s able and
willing to take the risk that this capital will never have a return on
investment,” she says.
This system is “pure genius” and is responsible for the huge
social progress that has occurred over the past two centuries although it needs
to be set up and regulated properly.
Hossenfelder’s apologia has been justly criticised in the
American socialist magazine Jacobin for being “a compendium of common arguments people make in defense
of capitalism when they haven’t taken the time to actually hear out any of the
system’s critics.” The writer, Ben Burgis, says that in reality capitalism is a
system of exploitation “disguised by the legal form of a voluntary agreement
between equal parties”.
Social
Regress
I completely agree, I’ve even written
a book about how the voluntariness of capitalism is a mask that shields its
essential compulsion. However, I also think that Hossenfelder’s defence of
capitalism ignores something else rather important – that modern capitalism is
largely nothing to do with providing finance so that people’s business ideas
can be transformed into reality. It is simply a system of using money to make
more money in ways that are entirely unrelated to improving production or
enabling social progress, and are in fact often harmful to these processes.
The economist Michael
Hudson, for example, has pointed out that since the mid-eighties in the USA
– the archetypal ‘free market’ system – the number of company shares “retired”
has exceeded those created. What this means in plainer English is that
companies have bought back more shares than they have issued. The purpose of
buying back shares is to raise their price while reducing their overall
quantity so that dividends increase for the existing shareholders. The point of
issuing new shares is to raise capital investment to expand your business.
Companies have been pressured by their shareholders to amass huge debts (IBM is
the classic example) in order to buy back (or retire) their shares, thus
sacrificing the capital investment that capitalism is supposed to be all about.
So in the heartland of the ‘free market’ over the past 30 years
there’s actually been a net reduction in
capital funding new business ideas or just plain business expansion. The Dragons’ Den image of
capitalism that Hossenfelder takes for reality – and most people share – is revealed
to be just propaganda. Although it’s a fascinating insight into the nature of
propaganda that this fiction has achieved mass penetration just as the reality
it hides has definitively effaced the fantasy.
There are many ways in which really existing capitalism – the
compulsion to make more money from the investment of money – is actually
detrimental to the creation of wealth and social progress. The 2008 Financial
Crisis, the after-effects of which we are still experiencing, was based on
capital flooding into pooled mortgages and related ‘insurance’ schemes, which
exploded after the real-world US housing market nosedived. This resulted in a
huge destruction of wealth and productive capacity, exacerbated by an austerity
mania that shows no sign of abating.
Twenty-first century capitalism, by virtue of the huge volume
of money seeking returns, also creates shortages of the basic necessities of
life where they don’t really exist. In the past 15 years there have been two global
food crises, based on betting by hedge funds etc. that the amount of wheat and
other foodstuffs available in the world would fall when in fact it didn’t. But
the effects on prices were all too real, pushing millions into extreme poverty
and even famine.
And then we have private equity, which involves taking over
companies by borrowing money, dumping that debt on the company, and maximising
pay-outs to investors. As shown in part
one, private equity is on the march throughout the Western world despite
the fact that the indebted companies it creates, such as Thames
Water which may well go bankrupt soon, are incredibly vulnerable to rises
in interest rates.
Nothing here involves financing new business ideas or
spurring social progress, unless you have a rather strange concept of social
progress which entails pumping sewage into rivers or increasing world hunger.
The Wolves
of Wall Street (and the City of London and Frankfurt etc.)
The ultimate question is why is this happening? In the past
the defenders of capitalism could point to the fact that despite its downsides,
the system did increase overall affluence. Today, once you take China out of
the equation – which pursues a very different variant of capitalism – that
isn’t the case.
Some say that the problem is financialisation. Banks and asset managers, who invariably run private
equity funds, aim to devour the lion’s share of society’s income by placing
everyone in debt (thus compelling them to pay tribute in the form of interest
payments). Their intention is to own, and thus gain a steady income from,
assets like corporations, housing or privatised public infrastructure such as water
or health services.
The hollowing out of formerly publicly owned health systems,
like the National Health Service in Britain, can be directly attributed to the growing
and malign influence of private equity ‘investors’. Similarly, the
divestment of the major oil companies from fossil fuel extraction is fatally
undercut by the fact that these activities are usually
sold to PE groups who merrily continue them out of public view.
What these asset managers are not interested in, however, is
the longer-term practice of funding capital investment in businesses because
it’s too risky and doesn’t produce enough yield in the moment. Hence the term
‘financialisation’ because it involves establishing very profitable, but usually
short-term, claims on companies or privatised public assets without stumping up
the investment to improve them. The result is astronomic levels of inequality, increased
vulnerability to economic crises, unmitigated global warming, and moribund
economic growth.
Thus someone like Carolyn Sissoko, who we met in part
one, can say that when capital was funnelled into projects like building
railways or laying undersea cables (or in today’s world investing in renewable
energy we might say), there was a tangible benefit to society. Now, however,
when the dominant trend is to place companies in debt and make money from the
interest payments and through soaking their customers that mutual benefit has
disappeared.
The solution – evinced by people like Michael Hudson – is to
radically change public policy. Tax policy needs to be overhauled to, for
example, tax interest more than equity investment to return the system to its
former purpose of funding growth-enhancing activity. Additionally private banks
need to be replaced by publicly-owned ones which can provide basic services at minimum
and support capital investment in businesses.
All this is about returning capitalism to its original
purpose, much as in its infancy in the 19th century the system
needed to be prised away from the power of predatory, unproductive, landowners.
Speculate
to Accumulate
However, there is an alternative explanation for our economic
tribulations. This position doesn’t dispute the trends highlighted above but
says they are a symptom rather than a cause. The cause is the capitalist system
itself which is eternally driven by profit making opportunities and thus, given prior technological progress, is
more attracted to speculation than tangible investment in making things. This
gold mine has been augmented by the investment of pension funds and state
sovereign wealth funds.
Heterodox economist Harry
Shutt, for example, argues that there has been a
drastic decline in the West in the demand for both capital and labour. This
has resulted in a “chronic surplus of capital”. In 2012 private equity firm Bain Capital
(co-founded by Mitt Romney) estimated that the volume of “global capital” had
tripled over the previous two decades to stand at $600 trillion, nearly ten
times the value of all the goods and services in the world. They projected that by 2020, this “capital
superabundance” would grow by another third to $900 trillion.
According to Brett Christophers,
author of the private equity exposé Our
Lives in Their Portfolios, “the simple reason why [asset managers] are so
important today … is that they have so much capital at their disposal. In
recent decades, the amount of surplus capital in the world has increased
dramatically.” And, it might be added, the amount of surplus capital in the
world will go on multiplying.
The figures are stupendous. For instance, leading asset
manager Black Rock has over $9 trillion under management. Among its partners in
crime, Vanguard boasts nearly $8 trillion, Blackstone around $1 trillion, and
Macquarie (the former owner of Thames Water) $590 billion. This unimaginable
wealth has been acquired at the same time as what in economics-speak is called “fixed capital” investment – i.e. investment
to expand businesses as opposed to simply making money – has fallen
dramatically in Western countries, especially in the US.
The nature of capital, as opposed to mere money you might
spend on buying groceries, is that it is on an eternal search for investment
opportunities. What this means is that, with fewer outlets in things like new
factories or offices, the rapidly growing mass of capital has inevitably
migrated into making money from privatised assets, from speculation in bank
‘products’ or from pressuring corporations to buy back their shares rather than
expand their businesses.
And this is not a process that is ever satiated. There is no
golden mean of capital. As shown by the Bain Capital estimates, the amount of
capital in the world is destined to increase exponentially. The one thing that
could arrest this process is an economic downturn that is allowed to take its
natural course but
this has never actually happened since the Great Depression of the 1930s.
Feed me
Seymour
Looked at another way, under this economic system, society is
forced to accommodate the appetites of the monster of capital. But the more it
is fed, the hungrier the monster gets.
According to Shutt, capital is now objectively “redundant”.
The conditions which precipitated, and justified, the rise of the system in the
19th century – innovations demanding “large concentrations of
capital which could only be raised under a capitalist economic structure” – no
longer exist. However, the compulsion to seek profit, buttressed by legal
abetments like limited liability and a eulogisation of wealth creation, is, if
anything, stronger than ever. Hence society seems destined to celebrate the
very process that undermines its basic habitability without ever realising what
the root problem is.
It follows that blaming private equity for the ills of
society is like blaming clouds for rainfall. Capital will do what it is born to
do. And doubtless it’s possible to interest venture capital groups in funding
your nifty new business idea (though I would read the small print carefully
first). But to label that process “pure genius” and misconstrue it for what
capital-ism is today is just to knit yet more wool to pull over people’s eyes.