Devil's Pact or Doom Loop. Do we need economic growth?

To misappropriate an early song-title by a semi-famous Scottish indie band, everything flows – from economics.

What may seem on the surface a dry and technical subject actually reveals the beating heart of the political philosophy behind it.

The economics behind Starmerism consists of massively increasing spending on weapons, to be paid for by renewed austerity, and propelling the most vulnerable in society further into destitution and misery.

While, at the same time, asset-stripping the rest of the economy by selling it off to American vulture capitalists.

What flows from this will not be pleasant. It involves entrenching the rule of profit-extracting corporations while impoverishing swathes of the population. Though it will go by a far more benevolent name, this – necessarily buttressed by authoritarian means – amounts to corporate fascism. This kind of fascism will likely creep up on us gradually rather being proclaimed by a march on the capital, an Act of Parliament, or even a general election result.

In such circumstances, the Left doesn’t merely need to get its shit together politically but also economically.

In fact, economics, traditionally the weak point of a Left more concerned with the equities of distribution than the production of wealth, can actually become its strength. This is because though the Starmer government is rhetorically obsessed with achieving economic growth, it is very bad at actually achieving it.

The Doom Loop

Growth expectations from the Office of National Statistics are terrible, and as socialist economist Michael Burke says, without higher growth, living standards will not rise.

Sustainable growth, he says “is an appropriate aim for all economic policy”. The problem for Starmer is that his avowed method – austerity and taxes rises on ordinary people in the context of ramped up state spending on weapons (military Keynesianism) – is, in reality, anti-growth.

The British economy, says Burke, is trapped in a “doom loop” of deteriorating public services, rising government debt ‘necessitating’ more spending cuts which depresses the economy even more. We need to break out of this ruinous cycle and actually achieve growth rather than merely talking it up.

The fundamental question is whether pursing growth by other means is possible, and if it is possible, whether it is desirable.

The economics of the socialist case rest on first of all not massively hiking spending in a drive to war. Money, buttressed by a wealth tax on billionaires, will instead be diverted to public investment in areas like public transport, council housing, infrastructure. At present, under the ‘Labour’ government’s Spending Review, non-defence public investment is set to fall in real terms over the coming years.

But ironically for a political ideology invariably condemned for being ‘anti-business’, socialists aim to reverse the pervasive, and long-term, weak growth of the economy. This will be attempted through methods like the above-mentioned public investment but also through ‘innovations’ like a national investment bank.  The aim here is to revive private investment which is at anaemic levels, and has been for a long time. RMT trade union leader Eddie Dempsey recently told the TUC conference: “Corbyn had the right idea — we need a public investment bank funded by seed capital that can drive strategic investment in parts of the economy, where we will build proper unionised jobs, good work that will take the country forward instead of leaving us at the mercy of the money markets”.

Socialist Pro-Capitalism

If it is accurate to estimate, as is frequently done, that capitalists need annual economic growth of 3 per cent to make a decent profit, then ‘socialism’, in attempting to resuscitate growth in the economy, is not anti-capitalist at all, rather the opposite. But I don’t expect enlightened self-interest to become the fashion any time soon.

However, merely correctly understanding the aspiration is no guarantee it will be successful. Many other countries and blocs have public investment banks, but their recent growth record is nothing to write home about. In fact, the Eurozone boasts a worse growth performance than Britain despite the existence of the European Investment Bank.

Even where a public investment bank does have a tangible impact, as seems the case with Brazil’s BNDES, the remaining commercial banks are left free to concentrate on speculation and mortgage lending, which is extremely profitable but merely exacerbates the inherent flaws of the extractive economy where small minorities make huge profits but many people struggle to make ends meet.

That is why some Marxists advocate taking control, as the British Labour party once aspired to do, of the “commanding heights” of the economy which includes nationalising the big, private banks (properly nationalising not merely assuming ‘hands-off’ ownership as the government did with RBS after the financial crisis). This will direct private, now public, investment into desirable areas.

Should we aim for growth?

But we are still left with the basic assumption that economic growth is a good and necessary thing – “an appropriate aim for all economic policy” – even if, in an historical irony, only the Left or radical Left seem serious about attaining it.

However, is growth the goal we should be striving towards? Growth, as the word implies means getting bigger, over time much bigger. Economic growth of 3 per cent a year, a sweet spot for corporate profits, government finances, and personal livelihoods, means the economy doubles in size every 24 years. A little over a decade ago geographer, and Marxist, David Harvey wrote that compound growth means the result will be even more extreme.

Imagined physically, the enormous expansions in physical infrastructures, in urbanisation, in workforces, in consumption and in production capacities that have occurred since the 1970s until now will have to be dwarfed into insignificance over the coming generation if the compound rate of capital accumulation is to be maintained. Take a look at a map of the city nearest you in 1970 and contrast it with today and then imagine what it will look like when quadrupled in size and density over the next twenty years.

 It is worth noting that, in Britain, the rate of capital accumulation has not been maintained – an economic malaise that has produced various maladies – but that cities and towns have nonetheless grown “in size and density”. In the context of the government’s huge housebuilding targets, totally reliant on the private sector, they are predicted to do so even more in the coming years. Many British urban areas are anticipated to have virtually whole new towns tacked onto them over the next decade, even if a sputtering housing market means that improbable government targets will not be met. Presumably had the ‘rate of capital accumulation’ been sustained, these urban conglomerations would have expanded even more.

Supporters of the idea that economic growth can be sustainable would counter that it can be directed by the state into beneficial and necessary things, such as public transport and public housing. Futurologist Jeremy Rifkin who predicts the end of capitalism in a ‘zero marginal cost’ society where copies of products can be produced for virtually nothing, believes transitioning economies from fossil fuels and nuclear power to renewable energy “will require millions of workers and spawn thousands of new businesses” (note however that that he thinks this will involve “one last surge” of wage labour and thus growth).

The Chinese Way

But it is stretching credulity to believe that all economic growth can be funnelled towards socially beneficial ends. China, the bête noire of America and the faltering West, presents an example. On the back of high public investment in infrastructure, China has achieved GDP growth rates the West can only dream about and lifted millions out of poverty. But, it was believed, this was bought at a price – exponential carbon emissions and falling life expectancy because of unbreathable air. At the Beijing Olympics in 2008, the Chinese authorities famously manipulated clouds to disperse smog, while life expectancy in northern China was five years below that of the south of the country because of air pollution.

Now, reportedly, such problems have been significantly assuaged because of the Chinese government’s war on pollution – pollution has declined by 42% in nine years, while air quality correspondingly enjoyed a massive improvement. In the face of climate change, China has also made huge investments in solar energy was a result of which the cost of generating electricity from solar has plummeted.

But pollution has not been vanquished. It is still six times higher than the World Health Organisation’s guidelines and in Beijing at about the level of Europe’s most polluted city Sarajevo. And air pollution-related deaths in China are projected to continue to rise despite the improvements.

China also features heavily in the UN’s Red List of endangered species, a fact clearly not unrelated to its high rate of economic growth.

Devil’s Pact

And in the West, where over two-thirds of economic growth can be attributed to consumption, the Left will face an additional problem. If it is to distinguish itself from the corporate automatons in government and opposition, it will not only want to encourage growth in some areas, but restrict it in others. A Left government, if it is worth its salt, will want, for example, to place restrictions on gambling or marketing to children.

It is unquestionable that the health of the UK economy has been significantly impaired by the fact that wages have been held down for years and incomes depleted. ‘Britain needs a pay rise’ as the slogan goes. But should it get one, part of that will inevitably go into becoming the willing prey of profit-driven market forces to an even greater extent. The exploitation of “culturally generated pseudo needs”, though clearly anti-social, has been a crucial element of the economic growth that has been achieved in the West (and elsewhere) in recent years, a chink of light, if you will, in an otherwise gloomy picture. Toxic consumption is a mainstay of the modern economy.

We face a quandary we seem only dimly aware of. In the corporate capitalist economy that we live in, if you don’t achieve economic growth – or only very anaemic growth – the result is misery, poverty, inequality, racism (probably in time fascism), rising public and private debt, and global conflict.

But if you do have growth, while, if it proceeds are equitably distributed, you relieve some of the pressure on individuals and government finances, you just accelerate global warming and environmental degradation, the relentless swallowing up of what’s left of the countryside, and acquiesce in the exploitation of our psychological vulnerabilities to the benefit of obscene corporate profits.

Eventually, actually probably quite soon, you hit a society that may be economically successful but that nobody wants to live in.

In the short-term this devil’s pact is, to varying degrees, in virtually everyone’s rational self-interest. But from a wider perspective it plainly isn’t in anyone’s, barring maybe that of a small, and insulted, ultra-rich elite.

Explaining Donald Trump

But then there is the problem of whether reviving economic growth is even possible – that the Left, if it by some miracle achieves power, will discredit itself in a futile drive to “save capitalism from itself”.

Looked at historically, the only time the capitalist system, in advanced countries, attained sustained healthy economic growth was in the period from 1950 until the mid-1970s – the so-called “thirty glorious years”.

In fact, according to a research group at the University of Manitoba in Canada, the reality may be even worse. Growth in Northern industrialised economies, they argue, has been falling, “with only brief and limited interruptions”, since the early 1960s.  If so, economic problems cannot be placed solely at the door of bad policy, such as neoliberalism, or economic trends, like financialisation. The findings, according to the report’s author, Alan Freeman, “shed light” on seismic political developments such as the rise of Donald Trump and the far-right, the implosion of the centre and centre-left, the growth of social unrest, and rising geo-political tensions across the world. But they also indicate that:

… limited measures, whether of a left character such as fiscal and monetary stimuli unaccompanied by state-led investment in new production, or of a right character, notably austerity, but also the free-market economic nationalism of Donald Trump and other such figures, are unlikely to resolve these problems.

Why should this be so? Although, there is no consensus on what led to the post WW2 economic boom, part of the explanation must surely lie in the fact that it was preceded by the most destructive conflict in human history. The Second World War was not only physically devastating, it also vaporized capital value – the mass of money that can be deployed to build up infrastructure or enterprises. Society could, so to speak, begin again.

However, that option is no longer available. In subsequent decades, economic downturns were dissipated by the soothing balm of state intervention and subsidy because, quite rationally, nobody wanted a return to the miseries of the Great Depression of the 1930s. Meanwhile, in the West, the forces leading to war (and thus destruction of capital) were consciously repressed.  

As a result, the ‘wall of money’ (capital) seeking profitable outlets, steadily grew, reaching astronomical levels. The other option, war among advanced countries, will likely lead to the end of human civilisation and the death of millions, though, astoundingly, western elites seem willing to toy with this possibility.

Such are the choices that the capitalist system, at this stage in history, presents us with.

Facing the Truth

In this 1998 book The Trouble with Capitalism, economist Harry Shutt argued against forever taking refuge in “limited measures”, against the comforting notion that capitalism could always be ‘rewired’ to work in more equitable, ‘greener’, and less amoral ways:

The truth must at last be faced that there is no realistic hope of expanding demand (and hence aggregate global output) fast enough to 1) Absorb the ever-accumulating capital surpluses generated by the private sector 2) Contain, let alone reduce, the rising burden of public-sector deficits and debt under the existing pattern of income distribution and taxation 3) reduce the huge gap between the super-rich and most other people.

And, given by now obvious environmental limits which place necessary restrictions on the expansion of the economy, the “traditional policy of seeking indiscriminately to maximise GDP will have to be jettisoned”.

In other words, growth is neither possible nor desirable.

The consequences of not striving to maximise GDP are two-fold: 1) that government finances will no longer depend, as they do now, on how much tax revenue can be squeezed out of the economy. And 2) that people’s living standards will no longer hinge, as they do now, on what they can extract from the economy from wage-labour or, if they are fortunate, from the ownership of property.

This might seem a frightening, in fact, unthinkable prospect, such are these two notions seared into our consciousness as just the way things are and always will be. However, it is important also to appreciate how much of a liberation a post-capitalist society will be. Society will be freed from the necessity to find profitable outlets for the huge wall of money seeking. At present this pathology manifests in profoundly anti-social ways such as speculation in food prices, which causes hunger around the world based on artificial, not genuine, scarcity, the privatisation mania, the hunt for profitable companies and public services that can be taken over using borrowed money and milked for returns, the vast weapons and security industry, the compulsion to seek more and more debt as a means to dabble on the stock and bond market, and the corporate juggernaut that looks on our psychological make-up as something to be exploited for profit.

Individuals, too, will be relieved from the necessity to secure their livelihood in the market and to suffer if they fail to. This has to mean that, for the first time in history, a person’s income will be unconditionally guaranteed.

All this may seems like a pipedream that will never happen except that it flows from two inescapable facts about the modern world – in Harry Shutt’s phraseology the “decline in demand” for both capital and labour.

Nature of the Problem

In Britain, the latter problem may seem belied by the eclipsing of the 4 million strong dole queues of the 1980s by high rates of employment. But the solving of the unemployment problem is in many ways illusory in that it is based on zero hour contracts, the dramatic rise of the ‘solo self-employed’ and the stifling of the healthy wage growth of previous decades. Certainly, wresting some kind of income from the economy – mimicking the huge “informal sectors” of the Global South – is not the same as the secure, decently-paid, and full-time jobs of the past.

And that is not getting into the contention of the late David Graeber that many white-collar jobs, while decently paid, are not only socially useless but economically pointless too. They are a form of “pretend work”.

But certainly, with demand for capital “fixed investment” (big things like factories and offices) in decline, there is no hope of reviving the benign equilibrium – where capital outlay and effective demand existed in a kind of symbiosis – of the post-WW2 years. And this mismatch cannot be nullified by abolishing zero-hour contracts, reinstituting collective bargaining, and welcoming back trade unions into the fold.

But there is no hope of understanding the need for a solution unless, first, the problem is recognised.

The Truth about Capitalism

 

 This is a continuation of an earlier post

The economist John Maynard Keynes, hugely influential in the 20^th 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 19^th 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 19^th 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.

The Trouble with Wealth

Living in a World with too much capital

Inequality is usually pictured as the obscene contrast between grinding poverty and unmerited opulence, between mile-long queues at food banks and corporate CEOs buying gold wrapped steaks with their £5 million annual salaries. Hunger in the midst of unbelievable plenty.

Or, in economic terms, through the irrationality of a system that blocks the flow of money to the mass of people, thus creating a demand problem as the poor – or not wealthy – are far more likely to spend their income than the rich.

There is nothing wrong with viewing inequality in these ways but in my opinion they leave something important out. What they overlook is that great wealth is a problem in itself, not just in relation to poverty. This is because wealth is invariably transmuted into capital – money invested in order to make money which is then reinvested again in a never-ending process. And capital which is not directed to a palpable collective need, inevitably distorts society and makes solving urgent problems such as climate change all but impossible.

A Tale of Two Factors

Economists often refer to capital and labour as “factors” in production, i.e. inputs that enable goods or services to be produced and turn a profit. As shown by heterodox economist Harry Shutt, western economies hit a benign equilibrium during the post-war boom (1950-73) in that there was strong demand for both factors – capital and labour. The result was extremely low unemployment (around 3% in Britain) and buoyant growth in fixed investment (capital investment in physical assets such as factories, buildings, equipment, vehicles etc.) that actually exceeded GDP growth.

However, after stagnation set in the mid-70s, the rate of fixed investment fell below GDP and unemployment began to rise. The decline in fixed investment has continued over the ensuing decades, dropping from 20% of GDP in France, Germany, Britain, Japan and the US in 1980 to 14% in 2015. Unemployment spiked in the 1980s and ‘90s. Its subsequent official decline has much to do with compelling individuals to take any available work – Germany introduced ‘mini-jobs’, for example, and on-demand labour and self-employment have mushroomed everywhere. In Britain, if you work for one hour a week, you’re counted as employed. And in order to “make work pay” it is subsidised by the state in the form of tax credits.

In essence, intensified by technological advancement, the demand for both factors of production – capital and labour – waned significantly. However, the way they were treated could not have been more different. Labour, if organised, was denigrated as a pariah and a self-interested impediment to the production of goods and wealth. Unions were ensnared by legal restrictions and the unemployed compelled to retrain and make themselves attractive to employers.

Capital, by contrast, – despite facing, in Shutt’s words, “a demand-supply imbalance comparable to that of labour” – was fêted as the essential ingredient of wealth creation. Entrepreneurs were lauded, profitability seen as a desideratum that benefited all, and the rate of return demanded on capital was intensified. In addition, the “wall of money” at the top of society was augmented by an influx of pension funds into financial markets which naturally demanded a healthy return in order to pay their beneficiaries.

The result has been an immense surplus of capital which cannot be sated by purely physical innovation but is nonetheless perpetually in search of profitable opportunities. This state of affairs distorts society in multiple ways. One way has been a turn to debt-based speculation entirely unrelated to material assets. This path caused the 2008 financial crisis. But there are many other examples.

Gimme Shelter

The environment is one. Oil companies have responded to looming climate catastrophe by transforming their rhetoric but little else. They proclaim a commitment to a ‘green transition’ but still try to “optimise” their oil and gas portfolios and prioritise new exploration. Investment in renewable energy is so low it doesn’t warrant a distinct category in their accounts. Many institutional investors, such as pension funds, charities, and universities, under pressure from climate activists, are committed to divesting from such companies and investing in renewables. However, hedge funds – pooled investment funds patronised by extremely rich individuals that aim to beat average market returns – have stepped into the breach. They are buying large stakes in oil companies, pushing up their share price. “People don’t understand how much money you can make in things that people hate,” commented one manager.

Thus the surplus of capital is ensuring that any progress made on climate change is, under this economic system, instantly reversed.

The financialisation of housing is another way capital is perverting a basic social need. In countless cities around the world, rents have shot up after investors – invariably an unholy combination of hedge funds, private equity funds, and Real Estate Investment Funds (REITS) – have bought up whole blocks of rental properties, viewing them as lucrative income streams. Alternatively, housing is demolished to make way for luxury apartments. Berlin presents an extreme case. €42 billion was spent on large-scale real estate investment between 2007 and 2020.  According to one analyst, after the 2008 financial crisis, investors were looking for a place to put their money and set their sights on Berlin. In a city where 85% of the residents are renters, rents have increased by 70% in nine years. Despite the existence of a strong cooperative sector and state-owned housing companies, over four in 10 rental properties in the German capital are owned by either financial market investors or big, private landlords.

Unsurprisingly, given the city’s culture, there is resistance. In September, a referendum in favour of expropriating Berlin’s largest corporate landlords, who collectively own 11% of apartments in the city, was passed. Whether the result will be carried through, however, remains doubtful.

One way of looking at the frenzy for privatisation which has taken hold throughout the world since the 1980s is not just in terms of corporate capture or ideological monomania, but as an outlet for an ever-growing mass of surplus capital. Privatisation is a longing that can never be quenched. In the first stage of privatisation state-owned industries were hived off to the market in one-off sales. But that was just the appetizer. Now private capital is guaranteed an income stream by running, on a contract basis, public services funded by taxation. In Britain, railways and buses, even spy planes, are operated in this fashion, while the state-funded National Health Service is gradually being hollowed out by private provision. In 2010, the NHS spent £4.1 billion on private sector contracts. Nine years later, this figure had more than doubled.

‘Exiled’ former Labour party leader Jeremy Corbyn posed a genuine threat to these vested interests – through for example a pledge to “renationalise” the NHS. He jeopardised an extremely fruitful, and necessary, income stream and thus had to be destroyed.

Globally, a kindred process has occurred. Where public services have not been gutted, the state serves as a convenient shield behind which public funds are directed into private hands. Under the guise of attaining universal health coverage, the Kenyan government has subsidised access to private care, given private providers higher reimbursement rates and formed public-private partnerships with international companies at great expense. All this has been done at the behest of international agencies such as the World Bank and billionaire charities like the Bill and Melinda Gates Foundation.

“More and more people have been priced out of health care because of their socioeconomic situation and inability to access private care either because of the expenses involved or because the type of help they are looking for is not available, because it's not profitable”, says an author of a report on the subject.

There are numerous other instances of the pernicious effects of surplus capital scouring the globe to meet its unquenchable appetites. A partial list must include the warping of democracy and the media, the money laundering role of football, and the targeting of children by consumer giants. The problem of inequality – and thus contemporary capitalism – is apparent not just in too little money at the bottom of society, but too much at the top.

Check Your Privilege

But curiously one could argue this is contrary to the original purpose of capitalism. Defenders of the system are fond of pointing out its modernizing character in contrast to atavistic socialism. However, the myriad anti-social effects of surplus capital serve to illustrate how we in the 21^st century are living according to the dictates of a 19^th century system. Modern capitalism and its attendant institutions were born at the height of the Victorian age. Stock markets and joint-stock companies (later known as corporations) were created to facilitate outside investment – capital – in economic enterprises and limited liability laws introduced to protect investors by ensuring that if their chosen enterprise failed, they would lose nothing more than the original sum they ventured. Shutt calls “the privilege of limited liability”– which still exists – “the bedrock of capitalism”.

In the description of Canadian law professor Joel Bakan, “the modern corporation was invented in the mid-nineteenth century to help create pools in investment capital needed to finance new and growing industrial ventures, like railways, steamship lines, and factories.” Corporate law, he says, was “designed to incentivize and thereby produce the fuel, capital, that the system needs to operate.” Without it, “the whole system, not just the corporation but capitalism itself, would grind to a halt.”

Arguably, at the time, incentivizing the “fuel” did produce immense dynamism and social benefit in the form of railways, steamship lines etc. Even Karl Marx was impressed, paying tribute to the “colossal productive forces” unleashed by the bourgeoisie. But now this “fuel” is primarily engaged in a compulsive and blind search for profit, no matter whether this adds to social welfare, or more likely, degrades it. To stretch Bakan’s metaphor, the van is now full but the pump is still spewing out more petrol which is spilling all over the station forecourt and running down the street.

The capital imperative is now not merely anachronistic and anti-social but positively deadly. We now know that order to stand some chance of staying within the limit of no more than 1.5 degrees of global warming by 2050 – and thus potentially dodging catastrophic climate tipping points – the vast majority of fossil fuel reserves must remain in the ground. However, such a philosophy of abstention is utterly alien to the nature of capital which is myopically impelled to exploit short-term profit. And in a world of boundless surplus capital – with each fragment on an eternal search for profitable opportunities – such an endeavour is doomed from the start.

In 2014, geographer David Harvey estimated that capital had to find profitable opportunities worth $2 trillion in order to satisfy the requisite ‘return on investment’. By 2030, he gauges, that need will have increased to around $3 trillion. “Thereafter the numbers become astronomical,” he writes. “Imagined physically, the enormous expansions in physical infrastructures, in urbanisation, in workforces, in consumption and in production capacities that have occurred since the 1970s until now will have to be dwarfed into insignificance over the coming generation if the compound rate of capital accumulation is to be maintained.”

And we also have to imagine what non-physical – i.e. speculative – investment will do to the world in the coming years.

Bending the Knee

But, perversely, rather than face up to this literally unsustainable situation, the world’s governments have chosen to artificially turbo-charge capital creation. Through the central bank policy of Quantitative Easing, the quantity of money in the financial system has been massively expanded – by an estimated $13.9 million a minute since 2020. As a result, developed economies have largely weathered the Covid outbreak but at the cost of hugely increased inequality. The combined wealth of US billionaires has risen by 70% since the start of the pandemic, a period of a little more than 18 months. In Britain, the number of billionaires has jumped by a quarter while globally billionaire fortunes have increased by 27% in the context of an expected rise in extreme poverty for the first time this century. For reference a billion is a thousand million.

But those are merely the personal effects. QE has also instituted fake stock market booms, facilitated the lucrative practice of companies taking over their rivals (to no-one’s benefit bar senior executives and bankers), produced skyrocketing property prices in the UK, and swelled the resolutely short-termist venture capital industry. In short, rather than – heaven forbid – standing up to the immensely powerful vested interests around capital enrichment, governments have chosen to bend the knee and grant their every wish. Contrast this with the way defenceless benefit claimants are treated and you have an insight into the mentality of most politicians.

There is a current in left-wing thought that is indifferent to wealth inequality, viewing it as far less pernicious than income inequality despite the fact that it is more extreme. Before the pandemic, wealth inequality was rising in 49 countries. Its enormous increase in the brief time since Covid struck has prompted calls for a tax on wealth. But if wealth inequality has spiralled in such a short period, what will happen in the years to come when many of its causes will likely remain untouched? A wealth tax will be a mere drop in the ocean.

Great wealth is profoundly undemocratic, concentrating economic decision-making in fewer and fewer hands. But it also ensures that capital enrichment, a process which profoundly hurts and perverts society, is set in stone and will intensify year by year. The time is coming when we will find what it does intolerable.