Speculation and its Discontents

Ask an educated person for a definition of capitalism and you will probably get a recitation of how the desire to make money ensures unmet demand is met. This may lead to a gross state of inequality requiring governmental remedy – and even the creation of undreamt of wants – but the essential carrot of great wealth on the horizon means that someone, somewhere will provide for basic needs – albeit at a price not everyone can afford.

Here lies the system’s essential dynamism and why, whether you like it or not, it ‘delivers the goods’ as they say.

Given the vast array of products available to people with the means to buy them, that’s an understandable viewpoint.

However, as can be seen by the current staggering inflation affecting energy and food prices, it’s not an accurate one. Capital-ism – the investment of money in order to make more money – can in fact contradict the laws of supply and demand, creating perceived shortages where none actually exist.

It’s widely accepted that the huge rises in prices for oil, gas and food are behind the massive rises in inflation in western countries. Inflation, we are told, will reach 18% in the UK by early next year. Putin’s invasion of Ukraine is seen as the catalyst for these increases driven by creating war-induced shortages of basic goods. And shortages, a basic principle of economics tell us, equal spiralling prices.

Or not, as the case may be. Despite wild jumps in wholesale prices, oil, for example, did not stop flowing. Citi, the same bank that predicts 18% inflation in Britain at the start of 2023, believes the price of oil will fall to $45 a barrel by the year’s end, not indicative of a crisis of supply. Ukraine’s imperilled status as the ‘breadbasket of the world’ prompted huge increases in the price of cereals and wheat, surging past historic highs in February and March. But now, as the Economist magazine notes, food prices are tumbling, despite the fact that, as far as anyone is aware, the war in Ukraine has not come to an end.  As it turns out, agricultural corporations saw “substantial gains” and “were not negatively affected by Russia’s invasion of Ukraine”.

So much for the ‘unbuckable’ laws of supply and demand.

The one commodity where there has been a genuine disruption of supply is natural gas, with gas flowing from Russia to Germany through the Nord Stream 1 pipeline reduced by 60%. However, the current ‘global’ price is 9 to 11 times “higher than usual” which, I would suggest, is not commensurate with cut backs in one country’s supply. Before the Ukraine war, the price of gas was already rising and, according to Shell, the influx of hedge funds and other speculators into the market was a major factor. “Prices are becoming less determined by news about supply and demand because of the influence of new financial players moving money in and out of the market,” the company was reported as saying.

These booming ‘world’ prices have caused – and are causing – real suffering to millions, if not billions, of people. Essentially the perception of scarcity, fuelled by trillions of dollars of speculative money, created artificial scarcity by inflating the price of basic commodities like food and fuel beyond the reach of ordinary people. Around 71 million more people have already been pushed into extreme poverty and the UN secretary-general has warned of an “unprecedented global hunger crisis”.

Winter in Britain is looking bleak beyond imagining with millions unable to pay soaring energy bills and thousands dying from the cold.

And this suffering is directly attributable, not just to Putin’s ‘weaponisation’ of gas, but also to the ‘wall of money’ at the top of society which has an unquenchable thirst to accumulate more wealth. The speculators – hedge funds, fund management firms, investment banks, sovereign wealth funds and pension funds – all exist for the unceasing purpose of making money out of money. According to American socialist magazine Jacobin:

As with all speculative bubbles, once cash poured in and pushed up prices, the resulting higher prices ‘confirmed’ the initial story, eliciting fresh capital sending prices even higher … Commodity exchange trade funds received $4.5 billion in a single week as retail investors ploughed their savings into the latest get-rich-quick craze. Institutional investors likewise poured money into the commodity markets, not because of any belief about fundamental supply and demand but to diversify their portfolios with and ‘inflation hedge’.

This is probably the first time in recent memory the ‘rich world’ has been seriously affected by speculation-fuelled surges in the prices of basic goods. But it’s not the first time it has happened to the majority world in this century. In both 2008 and 2010, there were “global food crises”, in which hundreds of millions of people in the Global South were propelled into extreme poverty by rising bread prices, precipitating riots and revolution in countries around the world. Yet the problem wasn’t actual scarcity. Unlike during the French Revolution when a poor harvest did precede the cresting of popular unrest, in 2008 and 2010 prices doubled despite more food being produced in that year than at any other time in history (55.45).

Perverse and unnecessary suffering like this is the consequence of a little appreciated aspect of the huge inequality bestriding the world. Inequality on this scale is not only unjust in that the billions of poor people in the developing and developed world don’t have the resources to live decent lives. Inequality on this scale generates baleful outcomes by virtue of the simple fact that immensely rich people have too much. The world’s largest fund manager, Black Rock, for example, has over $10 trillion under management. And that $10 trillion will be invested in profit-promising opportunities that, over time, will grow and grow in a never-ending process.

Fatal social problems like financial crises, the continued exploitation of fossil fuels, the undermining of democracy, the gutting of the public sector, and the recasting of housing as simply a means to amass wealth (to name a few) have their roots in this perpetual search for new sources of profit for this towering ‘wall of money’. Such activities aren’t merely “socially useless”, in the words of Adair Turner, the former chairman of the UK Financial Services Authority. They’re socially destructive.

Long ago, the economic historian, Karl Polanyi, singled out the “scarcity of Capital” as the factor which crippled “potentially rich countries from developing their natural wealth”. Now, after periodic economic crises smoothed away with bail-outs and capital-creating ‘Quantitative Easing’ schemes, we have the opposite problem. In the description of one economist, we have a glut of capital.

If, on the rare occasions that the chaos caused by commodity price speculation is squarely faced, the answer is invariably presented in terms of the imposition of World War Two-style price controls and the return of regulations that hem in the speculators. Just over 20 years ago the passing of the Commodity Futures Modernization Act in the US (signed into law by ‘New Democrat’ Bill Clinton) ended Roosevelt-era regulation in which speculation was confined to 20% of a given market.

But we are facing a very different world to the one that existed when these regulations were put into effect. According to one assessment, the volume of capital in the world tripled between 1990 and 2010, reaching $600 trillion. This figure was nearly ten times the value of global goods and services, ensuring that the vast majority of it inevitably went into some form of speculation, i.e. betting on an increase in the value of an asset, such as the global price of wheat.  And this was in 2012. It was predicted, then, that global capital would hit $900 trillion by 2020.

The pressure exerted by this mass of money was a pivotal reason for the dismantling of regulation towards the end of the last century – the Commodity Futures Modernization Act was famous for exempting derivatives such as Credit Default Swaps from regulation, which many believe created a direct path to the Global Financial Crisis of 2008. Theoretically, it should be possible to re-regulate; if the hurdle of political systems being dominated by the uber-rich can be overcome. However, where would these trillions of now redundant capital go to? It wouldn’t be invested in the expansion of physical production because the demand for ‘fixed capital investment’, as it’s known, is nowhere near strong enough. It also won’t just cease to exist because there is no (legal) purpose for it.

Re-regulation and the overthrow of the market fundamentalist dogma of the last forty years may be abundantly necessary but they won’t save us from what the capitalist system has become.

 

 

 

 

 

Re-post: How capitalism has become too successful for its own good

Given that the Guardian newspaper has belatedly cottoned on to the idea that stagnating wages, rather than reckless banks, are the ultimate cause of our never- ending economic troubles (and started quoting David Schweickart), I thought I'd repost an article from January 2012.

I think it encapsulates an integral part of the impasse we are now facing. Good that other people are now catching up, albeit two years late ....

"There are many kinds of capitalism. Free market capitalism, which easily morphs into the dominance of corporations. Or social market capitalism, in which there is a larger role for the state and workers are represented on company boards. There is even state capitalism, in which everybody works for state enterprises, which pass themselves off as socialist, but exploit people just the same.

But now perhaps there are only two kinds of capitalism which count. Successful capitalism and capitalism which is too successful for its own good. The consequences of each are different but equally horrible in their own way.

Back in the roaring nineties successful capitalism was thought to be the only game in town. In Britain, Tony Blair’s New Labour exemplified the social democratic acceptance of capitalism. The “market” would hum along unmolested in the background and the government would skim off the tax revenue. Labour spokespeople waxed lyrical about the wealth-creating genius of the private sector and spent the proceeds on tax credits for the working poor, the National Health Service – health spending went up by 30 per cent – and relieving child poverty. It was, in essence, a deal.

But, said Left and green critics of capitalism, this was a myopic accommodation, trading short-term advantages for long-term disaster. Growth – the social ecologist Murray Bookchin said expecting capitalism not to grow was like expecting a lion to become vegetarian – might support enlarged public spending but would eventually make the planet unliveable.

In 2007, a British professor of engineering worked out that, based on an economy growing at three per cent a year, we would consume resources equivalent to all those we have consumed since humanity began as a species by 2040. In 33 years. I think the word you are grasping for is unsustainable.

As the writer Mark Fisher has said, successful capitalism was based on a fantasy: “A presupposition that resources are infinite, that the earth itself is merely a husk which capital can at a certain point slough off like a used skin, and that any problem can be solved by the market”.

To believe in successful capitalism you had to stick your index fingers in your ears and sing “la, la, la” very loudly. But both celebrators and critics agreed that capitalism worked.

Oh shit

But just as capitalism was swaggering around the globe, assured in its invincibility, disaster struck.

The global economic meltdown happened, the worst economic contraction since the Great Depression. $14.5 trillion of value was wiped from global companies.

The former masters of the universe, who meet at Davos, now speak of a “dystopian future” destroying the gains of globalization.“For the first time in generations, many people no longer believe that their children will grow up to enjoy a higher standard of living than theirs,” they warn.

Something had gone badly wrong.

The conventional explanation was that investment banks were too reckless, financial speculation overreached itself and the economy became dangerously skewed. But, in truth, capitalism had become too successful for its own good.

In the US, where the crisis was hatched, wages had stagnated since the mid-70s, while productivity – worker ouput that the employer benefits from – raced ahead. The result was not only spiralling inequality (the US was actually more equal than many western European countries in early ‘70s) and burgeoning corporate profits, but an orgy of personal borrowing so that consumption could be maintained despite the fact that earnings weren’t going up.

A cursory look at recent US economic history shows a series of bubbles. A massive stock market crash struck in 2000. The price of shares is dependent on the expectation of future corporate profits so crashes occur when there is a realisation of total over-optimism about profits. The crash was stopped from turning into a recession by reducing interest rates to below the rate of inflation for three years. Borrowing doubled – the house price and house building bubble ensued – but when that burst so spectacularly in 2007 there were no more bubbles left. Reality – the reality of stagnating earnings – could be evaded no longer.

A dusty old critique of capitalism suddenly became remarkably persuasive. That held that capitalism was inherently self-destructive. Each employer tries to keep wages, which are just another cost, as low as possible. But if they are too successful in that endeavour, the same workers with the low wages won’t be able to play their other vital role in capitalism, that of consumers of goods. Economic health depends upon the employer impulse to keep wages down being frustrated by another countervailing power. Capitalism can be too successful for its own good.

Flatliners

Worryingly for economic health, the US capacity for stagnating earnings has proved a very effective export. In the UK, earnings grew strongly throughout the ’80s and ‘90s but have flat-lined since 2003, four years before the onset of the ‘great recession’. Worker productivity, meanwhile, has kept on steaming ahead. Post-downturn wages rises in Britain are currently half the rate of inflation. Average wages are forecast to be no higher in 2015 than they were in 2001. France and Germany have followed a similar trajectory. Researchers describe an acute “decoupling”of earnings from growth.

The UK Resolution Foundation, which has produced a series of reports on living standards, worries that a return to growth won’t necessarily mean rising wages. Stagnating earnings also ensure burgeoning inequality (yes, it can get worse).

But there is another larger, elephant in the room, problem. The US experience demonstrates that you can’t, to use the economists’ elegant term, “decouple” growth from earnings forever, without eventually destroying growth as well (in industrialised, western countries at least, the experience of developing, exporting countries like India seems to be different). Earnings are purchasing power, in economics-speak ‘demand’, and growth cannot survive indefinitely without purchasing power.

The economic vista in front of us is that of a tsunami of bank debt inexorably making its way to shore. At the same time, earnings power which could lift countries out of recession, is exhausted. The level of personal borrowing is huge and, as we have seen, earnings stagnated or declined even before the recession.

That last factor cannot be wished away, or undone by governments even if they were inclined to. The reasons for stagnating earnings are analysed by a Resolution Foundation report. Technological change has obviated the need for low-skilled workers, firms have given precedence to share dividends over the pay of ordinary workers, outsourcing has increased, and the bargaining position of workers has been diluted. None of these factors will be reversed given current trends and the balance of power politically and economically.

The globe stops warming

It doesn’t have to be this way, you cry. And you’d be right. The Resolution Foundation report, Painful Separation, finds that in some European countries, namely Finland, Sweden and Denmark, there has been only mild divergence between economic growth and median pay. It is no accident that in Scandinavian countries, they say, “Recession? What recession?”

They haven’t killed the goose that lays the golden egg. They, if it isn’t stretching the metaphor too far, nurture their goose. They have effective countervailing powers like strong trade unions. They haven’t left successful capitalism behind. But there is a catch.

Amid all the deleterious social effects of the great recession – the homelessness, the riots, the suicides, the divorces – there was one undoubtedly progressive, though unintended, result. The sudden drop in economic activity achieved something international protocols and protesters invading airport runways had failed to. The rate of global warming was arrested. For only the fourth time in 50 years, carbon emissions fell.

It is clear that the kind of capitalism that Anglo-Saxon societies have been living through for the past 30 years is an ineffective form of capitalism. Growth rates have been unimpressive, financial crises have become more frequent and earnings have been held down. Too much power has been given to or taken by corporations and the rich. Capitalism has become too successful for its own good.

The South Korean economist, Ha-Joon Chang, in his book 23 Things They Don’t Tell You About Capitalism, argues convincingly that what we call “free market economics” has been shown to fail spectacularly. He puts the case for more assertive government control, different forms of ownership, the outlawing of financial products like derivatives, and the rebalancing of the economy away from finance and into the long-term production of manufactured goods. Capitalism can work if the harnesses are placed back on and it is guided in the public interest.

In other words, a return to successful capitalism, a capitalism that is in rude health. Chang eulogises the “miraculous” performance of South Korea in the ‘80s and ‘90s, which grew at an average of six per cent year. China today, he says, illustrates what can be done if free market prescriptions aren’t followed.

The problem isn’t the economic reasoning. The problem is that the world, ecologically, cannot cope with the replication of the Chinese or South Korean economic success stories. If earnings in the US had continued to track GDP growth, as they had done from 1945 to 1973, the average household would have earned $80,000 a year, not $50,000 as they in fact do. Even accounting for the spike in borrowing, consumption has been suppressed in US as capitalism has become too successful for its own good. It is revealing that Chang mentions the word “environment” just once in his entire book.

Chang, like John Maynard Keynes seventy years ago, wants to save capitalism from itself. 

Post-capitalism

But the truth is that neither successful capitalism, nor capitalism that is too successful for its own good, presents a remotely desirable prospect.

The latter leads, in Ann Pettifor’s words, to “dramatically higher levels of unemployment, the loss of savings, home foreclosures, bankruptcies, emigration, suicides, divorce, social unrest and political upheaval – to name but a few of the consequences.”  The former provides a swifter route to the dystopian future of global warming.

Awareness of the awful consequences of both alternatives leads to the realisation that the only rational option left is some form of post-capitalism. It doesn’t mean, in the caricature of one British government minister, everyone running around in Maoist boiler suits, but it does entail an end to the growth fetish and ensuring a secure standard of living for everyone. What “post-capitalism” is like in detail is what we should be concentrating on now.