A Rough Economic History of the Last Century (with a lot left out)

 Reviewing Clara Mattei's The Capital Order (2nd part)

Austerity, as Clara Mattei points out in her book The Capital Order, was the norm in 20th century economic history – “a mainstay of modern capitalism”, as she phrases it. But it wasn’t omnipresent. Perhaps, therefore, if we want to plan a prison break from the shackles of 21st century perma-austerity we should look at the anomalies. 

The first, in terms of chronology, is Franklin Delano Roosevelt and the American response to the Great Depression of the 1930s. All the tenets of austerity were upended. Interest rates were slashed (the opposite of the ‘Dear Money’ policy of the 1920s), massive public spending projects were launched, and trade unions – negating Mattei’s 3rd austerity principle, industrial austerity – were liberated to begin a mass recruiting drive. The results were so positive that Roosevelt’s place as the most revered US President in history remains unshaken despite the principles behind his policies being totally rejected by officialdom. Mass unemployment was countered, and the rudiments of a welfare state laid down. Before 1936 nothing – including old age pensions – existed. Thus, in complete contradiction to today’s economic wisdom, FDR massively ramped up government spending in the midst of an economic downturn. Though it has to be said, economic depression did return in 1938 and was not decisively outrun until the Second World War. 

Hitler and anti-austerity 

If Roosevelt’s was the humanitarian response to the Great Depression, what happened in Europe was the opposite. But Hitler, though his aims were thoroughly malign, also upset the austerity applecart. Specifically, he rejected both (1) fiscal austerity (2) monetary austerity. The Nazis, through public works schemes and rearmament, successfully reduced unemployment in Germany from six million in 1932 to less than one million four years later. As I said in ‘The Nazis and capitalism: the reign of the unorthodox’: 

Nazi economic policy – cutting taxes, spending money and instituting public works schemes – could in fact be described as Keynesian except that it was before Keynes. He most certainly existed at the time but his most important work – The General Theory of Employment, Interest and Money – wasn’t published until 1936. As economist Joan Robinson put it, “Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred”. 

In fact, in this case, the people who – in the subtitle of Mattei’s book – ‘paved the way to Fascism’ were not the Nazis but the conventional politicians who preceded them. German Chancellor Heinrich Brüning of the (appropriately named) Centre party cut public spending by 15% in two years in response to economic depression, becoming affectionately known as ‘the hunger Chancellor’ and prompting the Nazis to successfully campaign on an ‘anti-austerity platform’. 

Only in one sense did the Nazis remain faithful to the original Fascist/austerity template. They ruthlessly destroyed independent trade unions and left-wing parties and carried out a programme of privatisation (they called it ‘reprivatisation’) in sectors such as banking, steel, and railways. That is, the Nazis were zealous proponents of (3) industrial austerity. This is not surprising. Hitler was bankrolled by leading German industrialists and the very first thing he did when he got into power – as a junior partner in a coalition with conservatives – was to smash the Left and the trade unions and put the leaders of the movement in concentration camps. 

So despite Mussolini coming into power extolling ‘thrift’ and ‘discipline’ and promising to cut ‘out of control’ public spending (or ‘fiscal lewdness’ as one of his advisers hilariously called it), and Hitler doing the opposite, they had an awful lot in common. They knew that the first and overriding priority of Fascism is to destroy the Left, an endeavour to which they were faultlessly obedient. 

However, despite the ‘austerity trinity’ being transgressed in important ways in the 1930s, the cataclysm was not avoided. The world was still plunged into the most destructive conflict in its history in 1939-45. What would have happened if America had succumbed to Fascism, rather than charting a relatively humanitarian route through the travails of the Great Depression, probably doesn’t bear thinking about. But it is undoubtedly the case that the contradictions of capitalism, playing out in the form of the Great Depression, created convulsions that no amount of deviation from the tenets of orthodox economics could constrain. 

Impure economics 

In the aftermath of the Second World War, the ‘pure economic’ austerity medicine of the early 1920s was thoroughly discredited, seen as ‘paving the way’ – to use Mattei’s words – to economic disaster and to Fascism and its attendant horrors. One result was that the stillborn reforms of the immediate post-First War World period in Britain became a reality. A National Health Service was created and a huge programme of public housing was instituted, lasting, in fact, several decades and pursued by governments of both the Left and Right. 

If anyone claimed that, as with today’s deafening chorus, that ‘there’s no money left’, no-one was listening. In a landscape of bombed out cities and massively in debt, the British government nationalised important sectors of the economy (which to be fair doesn’t actually cost anything), abolished the means-tested welfare of the ’30s, introduced free health-care and rebuilt infrastructure. The maxim of the later Keynes* – ‘anything we can actually do we can afford’ – was taken to heart. 

In this endeavour they were helped, as with Roosevelt in America, by a willingness to tax the rich and corporations properly. This was a break with (1) fiscal austerity which holds that only regressive taxes hitting ordinary people, such as VAT, should rise. Taxes affecting investors and ‘wealth creators’ should be minimized. Trade unions were also seen as important social partners, and left free to negotiate the best deal for their members, a refutation of (3) industrial austerity. And real interest rates (interest rates taking account of inflation) were also kept low, contradicting the principle of (2) monetary austerity; a policy known as ‘financial repression’. 

Judged by prevailing notions of monetary wisdom circulating today, one might think that the results would be economically calamitous. But they were anything but. In Britain, the US and Europe, economic growth hit heights not seen before – or since – in thehistory of capitalism. Just by the criteria of performance alone, non-austerity beats austerity hands down. Which does beg the question of why the latter has been so enthusiastically adopted by elites (maybe they’ve got something other than economic performance at the front of their minds)? 

We need to be careful, though, to not succumb to a simplistic view of history and convict the austerity that followed in the 1980s for the crime of brutally slaying the non- or anti-austerity of the post-war period. The Keynesian consensus fell apart all by itself. In 1974, the first real recession of the post-war era struck, ushering in a period known as ‘stagflation’ – economic stagnation (and higher unemployment) combined with inflation. In fact, we’ve been suffering from a similarly malign cocktail in the last few years 

Return to the mumbling twenties 

The 1920s’ style austerity of Thatcher and Reagan was a response to the problems of non-austerity – in particular inflation, control over which was used to justify all manner of brutal policies – but it didn’t cause those problems. In fact, a left-wing alternative to the palpable problems of the 1970s, aside from the convenient myths, did appear. Harold Wilson’s Labour party won the 1974 election on the basis of a programme that aspired to a “fundamental and irreversible shift in the balance of poor and wealth in favour of working people”, although that never materialised. The Left alternative in Britain was actually led by dissident government minister Tony Benn (interestingly exactly the same age as Margaret Thatcher) who advocated greater state intervention, economic democracy and action against poverty. But, in a pre-echo of what happened to Jeremy Corbyn just recently, the English Left was outgunned by the English Right. 

A plausible argument can be made that all our economic problems have their roots in the travails of the 1970s which presaged the end of the post-war boom and have never been resolved. Nonetheless those problems sparked a full throated reaction from the powerful in the form of Mattei’s austerity trinity, the ripples from which are still dominating our lives today. 

On both sides of the Atlantic the first years of the 1980s were like a re-run of the early 1920s, only more so. All the elements of Mattei’s three-pronged austerity arsenal were deployed, with particular emphasis on (2) and (3), monetary and industrial austerity. Interest rates rose to above 17% for a prolonged period – in America this was known as the ‘Volcker shock’ after the chairman of the Federal Reserve, Paul Volcker. The result was unemployment and the decimation of industries where trade unions had traditionally been strong. This was seen as a ‘price worth paying’. Especially in Britain, deindustrialization, 4 million strong dole queues, and the dominance of finance followed. 

The conventional wisdom is that the Thatcherite/Reaganite medicine ‘worked’, after which the economy prospered. Chancellor Rachel Reeves, unsurprisingly, mimicked this argument before the 2024 election, saying she wanted to deliver ‘a decade of national renewal’ – like Thatcher. However, barring feeling the effects of an ephemeral world-wide boom in the mid-80s, Thatcher (and Reagan) did very little renewing. Their legacy is tepid economic growth though mushrooming debt, both personal and corporate. 

However, the medicine ‘stuck’ in a way it didn’t 60 years before. For example, the dominance of (1) fiscal austerity can be seen in the fiscal rules that Rachel Reeves is so determined not to contravene. Their precepts – that government debt should not exceed 3% of GDP – have their origin in the preparations for the creation of the euro and are the reason the first austerity variant has been pursued so zealously in Europe as well as in Britain. They also illustrate that the desire of the 1920s’ austerians to spread the gospel – English Treasury officials took the ‘good news’ to India and Brazil for example – remains just as potent though it has been far more successful the second time around. 

The echoes from the ’20s are all around us. Welfare now is highly conditional. Disabled claimants now have to prove their incapacity for work to private companies. Hundreds, possibly thousands, of claimants have diedas a consequence of the Work Capability Assessment. This has a chilling effect on possible strike action and general disobedience to, in the title of Mattei’s book, ‘the capital order’. By contrast, the welfare state rolled out in the aftermath of World War Two and then extended in the decades that followed, though not generous, was not means-tested (in other words it was universal) and came with far less conditionality. 

Since the 1980s, the British elite has also favoured regressive taxes on consumption at the expense of taxes on the wealthy and companies. VAT stood at 8% before Margaret Thatcher came to power. Now it is 21%. Duties on popular ‘vices’ like beer and tobacco – ‘the bad habits of the British people’ as one of Thatcher’s chancellors Nigel Lawson dubbed them – have also been prodigiously and regularly hiked. Corporation tax, meanwhile, has gone in the other direction. In 1981, it reached 51%. It is now 25% though it was as low as 19% a year ago. This mirrors exactly the predilections of the original British and Italian austerians of a century ago. 

Bad austerians 

But though it may seem like we are living permanently amidst the economic presumptions of the 1920s (unknowingly awaiting our Great Depression?), that is not quite accurate. Though few have noticed, our elites have happily transgressed the common sense of the original austerians. One of Mattei’s trinity is (2) Monetary Austerity, which involves hiking interest rates, known a century ago as the policy of ‘Dear Money’. As noted above, in the early 1980s Britain and America experienced Monetary Austerity with a vengeance. 

But the official reaction to the financial crisis of 2008 involved precisely the opposite approach. Interest rates were slashed all over the world – for years in Britain they were lower than at any time in the 400 year history of the Bank of England. Certain reckless people – i.e. banks – needed to be saved and this was no time for dogmatism. Hence we had, not Dear, but Cheap (as chips) money. As American economist Michael Hudson has said a zero interest rate policy “was designed to bail out the banks that were insolvent after 2008 and 2009 … by flooding the economy with credit”. It’s enough to make Ralph Hawtrey or Alberto De Stefano – two stellar cast members of the first austerity tour – turn in their graves. 

Of course, post-Covid interest rates are high (or higher) now. The conviction among the world’s central bankers is that after a decade of rock bottom rates, the economy can now ‘take it’. Whether that’s true is a moot point. There have been contained banking crises and a major part of the economy – private equity – bases its whole businessmodel on being in debt and so is particularly susceptible to high interest rates. 

But the point is no-one wants rates to stay high (Monetary Austerity) because the damage is so palpable. In Britain, house prices have risen by over 1,000% since the early ’80s and, as result, the rise in interest rates has seriously inconvenienced mortgage holders whose mortgages are now so much more expensive. This is a prime reason for the unprecedented collapse in Conservative party support in Britain. Unlike in the 1920s and 1980s, Monetary austerity is impacting people that elites don’t want to alienate. 

By contrast, the thirst among elites for (1) Fiscal Austerity is seemingly unquenchable. In 2010 and again in 2015 George Osborne ordered swingeing cuts to government departments and the dose is likely to be repeated by Rachel Reeves. Revealingly, the only time the British elite lost its yen for spending cuts – when Johnson’s Chancellor Rishi Sunak promised “a decisive end to austerity” in 2020 – the implacably anti-austerity Jeremy Corbyn was still leader of the Labour party (and his successor Sir Kier was making anti-austerity noises). 

The Liz Truss debacle, or ‘bloodless coup’ as one writer has called it, was caused by ‘the markets’ taking fright at not merely tax cuts but two-year subsidies for heating bills based on deficit spending. Thus, (1) fiscal austerity, taking the form of cuts to the Winter Fuel Allowance for example, were effectively ordained by Mattei’s technocrats who essentially run society, all appearances to the contrary notwithstanding. 

Don’t stop shopping 

The mantra of 1920s’ austerity, as Mattei illustrates time and again, was ‘consume less and produce more’. This was achieved, at the expense of inducing a recession, by a careful combination of the austerity trinity – fiscal, monetary, and industrial. And in this mix monetary austerity was absolutely essential.

 In contrast, modern, primarily fiscal, austerity may have the effect of reducing wage levels – we are still in the midst of the biggest stagnation of wages in Britain since Napoleonic times – but the forlorn hope is that people will still consume at the cost of getting more and more in debt, or that their wealth will be boosted by rising house prices. In other words, consumer spending, which accounts for around 2/3rds ofGDP, is now so fundamental to the economy that nobody wants to kill the goose that lays the, admittedly a lot less golden, egg. Aggregate demand, irrelevant to 1920s’ policymakers but crucial to post-war Keynesians, is still important though concocted in a different way. The mantra is now ‘produce more and carry on consuming, somehow’. Some have called this policy – which would have been utterly mystifying to the original austerians – privatised Keynesianism. 

There is another way in which the situation of the 1920s is vastly different from the one we are now faced with. That concerns the capital of Mattei’s ‘capital order’. Capital is money held by those at the top of society who invest it in order to make more money, thus replenishing, or growing, the original stock. This is in contrast to money for consumption which just instantly disappears the moment it is spent. As Mattei relates, the austerians of the 1920s were perpetually anxious about the scarcity of capital, dissipated in the destruction of the Great War. In their minds, other people – the working class conveniently – would have to make sacrifices so that capital could be accumulated. As a famous economist of the age, Arthur Pigou, said in The Times: “The country is in tremendous need for new capital. It is imperative, therefore, that people should save. Cheap money does not encourage them to do this. Dear money does.” 

We are now confronted by the diametrically opposite problem. Rather than scarcity, there is now an abundance, if not a glut, of capital. In 2010, American Private Equity company, Bain Capital, estimated that global capital amounted to a massive $600 trillion, ten times bigger than global GDP, and predicted that figure would rise to $900 trillion by 2020. In the past, and certainly the 1920s, apologists for capitalism always resorted to the defence that the system, whatever its drawbacks and exploitative nature, produced things people needed and added value using the finite and scarce resource of capital. 

But in the 21st century the relationship has been reversed. Rather than capitalism producing things needed by society, society is tasked with generating profit opportunities for the ever-expanding mass of capital. In past decades, and especially so in Mattei’s 1920s, capitalism had to tussle with rivals to establish its dominance. Now it towers over society like some movie monster emerged from the deep. 

This can be seen in the way Britain’s ‘Labour’ government is trying to enlist capital to bolster, and profit from, its investment plans. Private house-builders are to build new homes, banks are to finance the green transition and carbon storage, and pension funds will ‘fire up the UK economy’, by investing in infrastructure. In the past, the state would have taken this role. Not anymore. 

I’ve written before about how we live under a system of ‘bastardised Thatcherism’. Thatcher came to power promising a laissez faire approach and initially ‘failing’ industries were privatised and the money supply controlled through a policy of monetarism. Pretty soon, however, the Conservatives began contracting out state monopolies for the private sector to deliver and presiding over a huge system of subsidies to favoured corporations. 

Likewise, austerity has become tainted. Parts (1) and (2) – fiscal and industrial austerity are as potent as ever. The governing class is addicted to continually paring back state provision, to privatisation, and to finding new ways to stop strikes. But (3) – monetary austerity – ‘the queen of all austerity policies in the UK’ in Mattei’s words, is subject to more inhibitions, with the fear of doing permanent damage to the lifeblood of the economy, consumerism, lurking in the background. But though, just like Thatcherism, austerity has been bastardised, the bastards are sitting secure in the saddle and that was always the point. 

*As Mattei reveals Keynes went through something of an intellectual conversion. In 1920 he was a ‘Dear Money’ man, in fact writing to the Chancellor of Exchequer to urge that interest rates be hiked to a higher level than even the government could get away with. By the 1930s, he was advocating the opposite. Maybe the facts changed.

The Mystery of the Post-War Boom – or why has economic growth been falling for over half a century?

According to a recent study, economic growth among the industrialised countries of the world has been declining for around sixty years.

“… contrary to what is widely believed,” the report from Geopolitical Economy Research Group (GERG) at the University of Manitoba in Canada states, “this [post-war economic growth of the industrialised North] has fallen continuously, with only brief and limited interruptions, since at least the early 1960s.” The trend includes all major Northern economies “without exception” and shows no sign of ending.

The study includes the usual suspects – the US, Germany, the UK, Japan and France – as well Australia (which isn’t in the Northern hemisphere admittedly) and 10 other countries.

Today’s “meagre” growth rates of 3 per cent are treated as evidence of economic success, but fifty years ago – when rates of 6 per cent or more were common – such an economic performance would have been greeted with “alarm and despondency”, the report’s author, economist Alan Freeman points out.

The erroneous widespread belief the report aims to counter is that either economic growth started falling after 1973 (i.e. a decade later than the reality) or – as in common on the Right – that the nadir of the strike-ridden 1970s was banished by the successful attempts of Thatcher, Reagan and others to revitalise Western economies.

And although the report doesn’t speculate as to why economic growth has fallen so drastically it does affirm the original cause – “an historical event, the Second World War, which brought in its wake one of the greatest and most prolonged economic expansions since the Industrial Revolution”.

The post-war enigma

As can be seen below, there are various explanations for the post Second World War boom, an economic expansion which few sentient people deny occurred. The US economy more than doubled in size between 1948 and 1973, while the UK, West Germany and Italy grew fourfold in the same period and the Japanese economy swelled tenfold.

However, the boom is treated very differently on the Left and the Right. For the mainstream Left, it was the consequence of a peculiarly benign set of economic policies, or in the words of the late economist Andrew Glyn, “a unique economic regime”. The so-called Golden Age of capitalism was built on collective bargaining with strong trade unions resulting in wage growth and rising effective demand, restrictions on finance which funnelled investment away from speculation and into physical assets (resulting in rising productivity) and an international economic architecture (the Bretton Woods system) that fixed exchange rates, stopped currency speculation and ensured global economic stability.

For the Right – or those elements on the Right willing to deal with the facts – the post-war boom had nothing to do with correct policies or regulations. Indeed those policies – for example high corporate and personal levels of taxation – may have ‘worked’ in spite of themselves and were exposed as impediments to growth in the stagnation years of the 1970s.

Rather the post-war boom was the result of an inherent, and frequently unnamed, economic vitality that gradually evaporated as the second half of the 20^th century wore on. This perspective can be seen in reactions to the inconvenient fact that, although Margaret Thatcher radically changed British society in innumerable ways, she left the rate of economic growth virtually untouched. Or in scepticism towards the advocates of a Basic income.

However, the debate about the post-war boom usually takes as it as read that it concerns capitalist economies only – GERG’s 16 country list solely comprises industrialised capitalist economies. But, there are, in fact, good reasons for including the communist Eastern bloc and the former Soviet Union. Although reliable economic statistics for the Soviet years are hard to come by, the broad outlines are widely accepted – the Soviet Union enjoyed strong economic growth for two decades after World War Two but this growth petered out in the mid-1960s.

Such was the economic optimism, Soviet leader Nikita Khrushchev boasted in 1961 about leaving the United States far behind in industrial and agricultural output – and was taken seriously. This boasting was based on the fact that output had shot up, towns and cities had been rebuilt, life expectancy had doubled and many infectious diseases conquered. And the ‘socialist’ system was responsible.

Unfortunately, from the mid-1960s all this went into reverse. Health spending was cut, mortality started rising (by the end of the 1980s the USSR had the worst mortality rates of any industrialised country anywhere in the world) and deaths from heart disease, cancer and respiratory diseases started increasing. Indeed, in 1976, a French demographer, Emmanuel Todd, predicted the collapse of the Soviet Union on the basis of rising infant mortality. The Soviet state stopped collecting these figures in 1974.

So this should not be mistaken for a paean of regret about the unfairly maligned ‘socialist’ economy in the Soviet Union. The Soviet system that emerged from the Second World War was a full ripe Stalinist one, based on terrible repression – the secret police had executed over 680,000 people in 1937-8 alone. Although direct repression significantly abated after Stalin’s death in 1953, this was still a police state and, moreover, one based on the expropriation by a small ‘nomenklatura’ of the wealth created by the mass of people. This nomenklatura – comprising about 1 million people or 0.4 per cent of the population – even had their own health service which was, unsurprisingly, vastly better than the one ordinary people had to rely on. And this property-hungry elite, incidentally, was first in the queue to buy up all the Soviet-era assets when ‘communism’ collapsed in Russia in 1991 and mass privatisation was rushed through by Kremlin decree.

The idea – common in the West after 1991 – that the Soviet system was, economically, profoundly dysfunctional and inefficient, may also have been true. But what was also true, the evidence strongly suggests, is that this dysfunctionality was hidden by – or perhaps overwhelmed by – the vigour of the post-war boom.

 However, if this is true – and we should include the Soviet Union in any analysis of the post-war boom – then none of the explanations for its existence quite fit:

1 Reconstruction after the Second World War made an economic boom all but inevitable

This is the explanation most favoured by the Right because it excludes government policy and a strong labour movement from any credit for what ensued. The immense physical destruction caused by the six years of total war, the argument runs, guaranteed robust economic growth once peace had returned because so much work needed to be done rebuilding cities and repairing physical infrastructures.

This account makes sense for many post-war economies such as Japan (whose GDP grew at 7.8% between 1950 and 1973 but at only 2% from 1973 to 2008), Germany and Italy. It is also very plausible for Western Europe and, to a degree, Britain. And it most certainly works for the territory of the ex-Soviet Union which had been devastated by Nazi invasion at the loss of 20 million lives.

But for other economies which grew strongly in the post-World War Two decades, this rationale is far from convincing. The United States enjoyed robust GDP growth after the Second World War and, although it played a decisive role in its outcome, internally the country was untouched by it. So there was no rebuilding to be done.

True, the United States was pivotal in the rebuilding efforts of other countries – in Europe through the Marshall Plan and in the case of Japan – but were those endeavours sufficient to set its own economy on an upwards trajectory for around two decades? In recent years US companies have made huge investments in China and the country’s largest corporation, Walmart, sources 80% of its products from China. But these connections have not shown up in US GDP growth.

There were also countries in Europe – namely Portugal, Spain, Sweden and Switzerland – that enjoyed strong post-war economic growth (and in the case of Spain caught up with the rest of Europe) despite not being involved in the Second World War.

Moreover, the basic premise here – that economies emerging from war always experience impressive economic growth – is dubious. In the years since the post-war boom there have been many devastating wars – wars of independence from colonial control and civil wars – but nothing to compare with the post-Second World War boom. To take one example, the countries of the former Yugoslavia endured a brutal four year civil war from 1991-95, but – despite the devastation – subsequent economic growth has only been marginally better than the EU and global average and pales in comparison with the 20% growth rates achieved in Europe in the post-1945 years.

2. A benign policy environment aligned with powerful labour movements

In contrast to the Right, the mainstream Left (by which I mean Left Keynesians and some Marxists) draws attention, not to the physical environment, but the policy one. Free market capitalism had been thoroughly discredited by the experiences of the 1930s and the rise of Fascism and what emerged from the wreckage of World War Two was a regulated, managed capitalism. There were heavy restrictions on fractional reserve banking – the practice of banks’ inventing money by lending out a multiple of their capital assets – and a stable international exchange rate which nipped currency speculation in the bud.

This was allied with the acceptance by private owners and capitalists of strong and unyielding trade unions that had to be negotiated with. Welfare and health spending, in conjunction with pension provision, also increased. As result, real wages rose impressively, and because workers were also consumers, effective demand sustained an economic boom. And unlike today, this auspicious economic environment ensured productivity – output per worker – rose healthily, reaching 5% a year on a regular basis. All this without, it seemed, the downside of capitalism: there were no significant recessions for three decades after World War Two.

There are problems with this explanation even if the Soviet Union is not included. These are ones of timing. According to GERG’s figures, economic growth started falling around 1963 or ’64 – well before this benign policy architecture began to be dismantled. The ‘Nixon Shock’ – the refusal of the US allow the conversion of the US dollar to gold, thus effectively ending the Bretton Woods system and paving the way for free floating currencies, took place in 1971. Efforts to “zap labor” (the phrase belongs to Arnold Weber, the head of Nixon’s Prices and Wages Board) gestated in the 1970s but began in practice – in the United States under Reagan and the UK under Thatcher – in the 1980s. And in Germany, hostility to organised labour only really materialised (in the form of the ‘Hartz’ labour market reforms and wage repression) in the first decade of the 21^st century.

However, include the Soviet Union, and the ‘unique economic regime’ explanation becomes even less tenable. The Soviet Union was not in any sense a consumerist society and its economy did not depend on effective demand on the part of consumers. Wages were deliberately supressed under Stalin – until the 1950s they were lower in real terms than they were in Tsarist times. They rose somewhat in the post-Stalin era but the economy cannot be said to have been driven by consumer spending. Nor was there any finance sector in the Soviet Union to regulate. There was no need to ensure banks invested in the productive economy in Soviet-era Russia because private banks did not exist. But the country still experienced a post war economic boom.

3. The decline of profitability

This third explanation is definitely less in vogue that the first two – it is far from universally supported even among Marxian economists – but it deserves elucidation nonetheless. According to Marx, ‘the fundamental law’ of capitalism is for profit to decline – profit in the sense of the financial return on the amount of capital initially invested. This is known as the ‘Tendency of the Rate of Profit to Fall’ – TRPF for short. Barring certain counter-veiling tendencies – such as the opening up of new markets – this will deplete economic growth and lead to a recession. However, contrary to myth, in Marxist theory this is not a terminal problem. If the resulting bust is allowed to play itself out and companies permitted to go bankrupt, the stage is set for a new boom. In Marx-speak, ‘capital value’ has been destroyed and so profitability spikes again, inaugurating a new cycle of economic expansion.

According this group of Marxists, this is exactly what happened in the aftermath of the Great Depression. In the laissez-faire atmosphere of the 1930s, businesses were allowed to go the wall and unemployment to rise inexorably. But this prior destruction is exactly why conditions were ripe for prolonged economic expansion after the Second World War.

However, given the consequences of allowing the Great Depression to unfold without ameliorative action – political radicalisation, the rise of Fascism and World War – governments since then have been determined to stop all economic downturns wreaking the havoc they are bent on. They have been usually been washed away – as in 2008-9 – with bail-outs, stimulus programmes and subsidies. As result, economic downturns have not been nearly as devastating as in the 1930s. But they have also not paved the way for any subsequent boom – precisely because ‘capital value’ has not been destroyed to any great extent.  So economic growth has gradually and inexorably declined, an erosion which, in Freeman’s words, “shows no signs of ending” (the one partial exception since the 1930s to government action arresting economic downturns may well have been the recession of 1980-81, which was exacerbated by the hiking of interest rates in the US and UK and led to a quarter of UK manufacturing industry being wiped out. Coincidentally it was followed by an “8-10 year blip” in the trajectory of slowing growth).

The chronology problems in the second explanation are manageable here. Although there are disputes among TRPF economists about precisely when in the post-war era profit began to fall, one, Michael Roberts, places the tipping point in the mid-1960s.

However, this explanation applies to capitalist societies. That the Soviet Union was not ‘socialist’ is not in dispute. A self-selecting elite ruled over the mass of society, denying most people any democratic rights or control over their work. It is not widely appreciated how unequal the Stalinist Soviet Union was – a ruling class enjoyed a materially comfortable existence while, in anti-Stalinist revolutionary Victor Serge’s words, “the rest of the population, 85 to 88 per cent lives in primitive conditions, in discomfort, in want, in misery”. Such a society fully deserves to be described as accumulative – a small minority exploited and benefitted from the labour of others. But it wasn’t actually capitalist. Investment decisions were not based on the level of profit they would accrue.

That the ‘law of the tendency of the rate of profit to fall’ did not apply to the Soviet Union can perhaps been seen by what transpired when it collapsed. As noted above, the law is cyclical – if capital value is decimated, then profitability is restored and economic expansion can begin anew. But in 1991-94, in the transition crisis in the former Soviet Union, the conditions for the destruction of capital value were undoubtedly met. Production “fell by almost half in the 1990s” and 80% of the 27,000 Russian state enterprises were privatised. Life expectancy endured the largest falls in modern history outside of war and natural disaster. But Russian economic performance in that decade ranged from terrible to mediocre.

So if gross profit – as opposed to profit share – did not spike in the ex-Soviet Union in the 1990s, one can be fairly sure that rising profit expectations were not behind the economic boom that undoubtedly occurred there in the post-war years.

What does it all mean?

According to the GERG report’s author, Alan Freeman, the findings have “profound implications”. The high growth of the post-war years was the result of a “long historical process”, rather than wise policy decisions, he affirms. The other side of the coin is that the protracted decline of economic growth since the mid-1960s cannot be undone by reversing government policy and replacing austerity with fiscal and monetary stimuli. Such policies may be urgently necessary socially, but they will not transform the economic environment of ‘advanced’ industrialised countries.

Rather – and I’m extrapolating here – if the post-war boom was the consequence of epoch-making events such as the Great Depression and World War Two, for any new boom to occur similarly momentous phenomena have to precede it.

And we have every reason for not wanting this to happen. Firstly, because deep economic downturns and hugely destructive armed conflict are intimately connected – you’d have to try very hard not to see a causal link between the Great Depression and World War Two. Secondly, because the world cannot endure a repeat of the high economic growth of the post-war decades. We are already in a situation where GDP growth levels are causing CO₂ emissions to rise year on year when they have to fall drastically and rapidly if a future of submerged cities, huge refugee flows and mass hunger is to be mitigated. And this is happening when the growth levels of industrialised nations are – in historical terms – insipid. The annualised growth of OECD countries (35 industrialised countries, excluding China and India) currently stands at 2.4%. The growth rate of GERG’s 16 Northern industrialised countries is probably just over 2 per cent. Caveats apply about how growth has been outsourced to the Global South and global trade, rather than economic growth per se, drives climate change. However, the “routine” growth rates of the 1950s – 6 per cent and higher – are unthinkable even if, though some miracle, they are achievable.

Logically, therefore, the requirement is for an economic system that provides stability and material assurance to people’s lives whilst at the same time keeping growth at negligible levels. Regardless of the visible effect of austerity policies, declining economic growth clearly has human consequences. Even in the Soviet Union, high economic growth spurred the rebuilding of cities and rising health spending, while economic stagnation produced its opposite.

Therefore the necessity is for an economic system that retains the socially benefits of high and equitable growth without relying on such growth. Such a system will not be capitalism – it will be post-capitalist – and it will negate capitalism’s fundamental characteristic: the accumulation of profit which is then used to reinvest in new profit-making schemes, and so on ad infinitum, thus turning the system into a perpetual growth machine.

We may be nearer to that outcome than we think. The ebbing of the post-war boom in the Soviet Union was accompanied by rising mortality and declining health spending. In the mid-1970s, its demise was predicted, though at the time few were listening, by someone who noticed that infant mortality figures were going up. And in 25 years’ time, that prediction came true.

And, now in the heartland economies of the industrialised North, life expectancy is falling. Granted, in countries such as Britain, this is intimately connected to austerity policies, but it is also apparent in the United States, a country that has shunned austerity, at least at the federal level. The question is, are we a quarter of a century away from the end of capitalism in its heartlands?

The deformities of 21st century capitalism

In part one, I noted the strange anomaly that an ever more munificent corporate tax regime has resulted more and more frugal rates of investment by the private sector. Waving farewell to the relative high points of the 1960s and ‘70s, corporations have chosen to keep hold of a larger and larger proportion of their profits. Governments around the world have played the role of useful idiot, plying multinationals with multiple tax cuts, while pretending not to notice that the money given away almost never goes into production.

Especially in developed countries, says the United Nations Conference on Trade and Development (UNCTAD), corporations are now mainly using profits to pay out dividends or buy back their own shares, rather than investing in new plants or equipment. Or they are simply banking the profits, often in zero percent tax havens. It is estimated that corporations are sitting on $700 trillion worldwide.

This graph, from Chapter 5 of UNCTAD’s 2016 Trade & Development Report, illustrates just how extreme the fall in investment in the major economies has been over the last three decades:

The crucial concept here is the decline in ‘fixed capital formation’ – investment in tangible things like equipment, factories or new products. So-called ‘investment’ in financial instruments – just betting on a rise in the value of these assets – has grown exponentially.

In a remotely rational world, this outcome might have prompted a bit of a rethink on the part of governments. But, in keeping with the era of alternative facts, it has, in fact, inspired the realisation that these efforts to lighten the burden on corporate-land were, in retrospect, paltry and what is called for is a far more muscular approach to taxing cutting. The ‘love fest’ embodied by Donald Trump and Theresa May is leading the charge for a more reasonable levy on the world’s richest people. Where this will end is anyone’s guess. Probably in us sub-humans paying for the privilege of being exploited, except, of course, we’re doing that already.

What is eminently predictable is that if Britain and America set the pace by radically cutting rates of corporate taxation, other countries will feel obliged to follow suit for fear of appearing unattractive to roaming corporations. Ireland, with its corporate tax rate of 12.5%, may well be a harbinger of everybody’s future. Though Ireland will doubtless want to revise that rate downwards in an effort to retain its competitive advantage.

But for those of us keen on keeping our reality principle intact, there is another kind of realisation. That the mantra of austerity, of no money left, of ‘expansionary fiscal contraction’, is nothing more than an excuse for unnecessary suffering. There is plenty of money left, it’s just in the wrong hands, and, most importantly, is not being used. The Tax Justice Network estimates that there is up to $32 trillion lying idle in tax havens, equivalent to 10 to 15% of global wealth. US corporations alone – led by the likes of Google, Apple and Microsoft – have $2.1 trillion stockpiled overseas.

Interestingly, there is a law in America that penalises firms found to be hoarding cash. They have to pay 20% above the normal corporate tax rate. But since 1986, multinational companies have been exempt from this restriction. They can avoid all taxes on profit paid to affiliates, known as ‘passive foreign investment companies’, with no conditions on its (lack of) use. The result has been multi-trillion dollar cash mountain, untouched by the American government and not used for any productive investment.

Donald Trump is planning a ‘repatriation holiday’ for these multinationals – a discount tax rate of 10% if they bring it all back home. The narrative – as ever with Trump – is that this will create jobs. But the last time it was tried – in 2004 – it actually eliminated nearly 21,000 jobs, despite its proponents claiming it would create 660,000. The money was repatriated but was mainly used for mergers and acquisitions, the perfect rationale for streamlining workforces.

The alternative to Trump’s plan is obvious. Reinstate the pre-1986 penalty and properly tax the trillions of dollars siphoned overseas and doing precisely nothing. Apple alone has over $200 billion. The money could be used for …  just to pluck a few ideas out of the air, creating a single payer health care system, rebuilding infrastructure or instituting a basic income.

Other countries could follow the American lead, triggering a healthy race to the top, rather than the bottom, which is whether global tax competition has led us over the past 40 years. The adoption of such a policy would also have the attractive side effect of stealing the nationalist right’s thunder. Trump is, aside from the misogyny and immigration bans, relentlessly focusing on creating jobs and cajoling corporations into not moving to China. Apart from pointing out the glaring flaws in his plans (see above), the answer cannot be a centrist blank.

The Investment Dilemma

But this policy is, at best, half a solution – because it does not address why private sector investment is so feeble in the first place. If corporations could smell profit on the horizon, they wouldn’t need any encouragement to invest. They wouldn’t need the meaningless inducements of tax cuts or a regulatory cull.

We are, as some economists have noted, in the middle of depression. Global GDP rates are a pale shadow of what they were pre-2008, interest rates remain at rock bottom, companies shun investment and hoard money and global trade is running at less than a quarter of its pre-crisis rate. None of the 20 largest shipping container companies in the world are forecasting a profit.

An economy in such a parlous state clearly has effects. One of the most apparent is that businesses become obsessed with cost-cutting and reducing their overheads. They look to shore up their profit margins, rather than expand production. Part-time, zero hours and other flexible contracts have mushroomed in this environment. Good, stable jobs and adequate pensions rapidly become a memory of the capitalist golden age. Economic insecurity consciously becomes the order of the day.

There are also dire geo-political consequences. The word antisemitism dates back to 1879, not coincidentally in the midst of the long depression of the late 19^th century. The Great Depression of the 1930s ushered in Nazism and consolidated totalitarian rule in the Soviet Union. In our time, Trump is threatening trade war with China, which could easily escalate into actual war. Humanity, it was nice knowing you.

So to say that ending the capitalist depression is important is the understatement of the 21^st century. But, ignoring the legions of apologists for the system, there is no consensus as to the cause and therefore the way out.

The 21^st Century Depression

The most moderate of the critics – in the sense that they often (but not universally) believe that capitalism can be successfully reformed in the public interest – are the Left Keynesians. This is where you’ll find left-wing politicians like Jeremy Corbyn and Bernie Sanders.

Left Keynesians hone in on capitalism’s effective demand problem. Through perpetual competition, businesses are compelled to clamp down on costs, including wages – a process eased by the vanquishing of organised labour across the Western world in the 1980s and ‘90s. But, of course, workers, in their other incarnation, are also consumers.  So this is akin to cutting off your nose to spite your face. In economic terms, the gap between supply and demand grows dangerously wide. According to a report last summer, the real incomes of around 2/3rds of households in 25 advanced economies were flat or fell between 2005 and 2014.

“The roof might cave in,” American thinker David Schweickart wrote presciently in 2002. “A deep and enduring global depression is a real possibility.”

The obverse is also true. Well paying, stable jobs and pensions that allow consumption not just subsistence living to happen, ensure the equilibrium of the system.

But the difficulty in accepting waning demand as the ultimate cause of global depression is that consumerism – the motor of the economy in industrialised countries for many decades – has not really abated. Still, nine years after the 2008 crash and a ‘lost decade’ of wage (non) growth, consumer spending is the dominant force behind UK economic growth, responsible for 70% of economic activity. The endurance of consumer spending has been called ‘privatised Keynesianism’.

What is true is that this consumerism – founded on personal borrowing – is much more precarious than in the past. A rise in interest rates, as happened in the US in 2007, or a blip in unemployment could cause the roof to cave in once again. But ebbing demand is not, in itself, the problem. You could safely argue that demand would be stronger had wage growth kept pace with previous decades. But in no sense has consumer demand collapsed.

The other solution often proposed by Left Keynesians is that public investment should substitute for moribund private investment. In the UK, Corbyn is proposing £500 billion government spending over 10 years through a National Investment Bank. Former Greek finance minister Yanis Varoufakis wants a revitalised European Investment Bank to spearhead economic recovery and an end to austerity.

The argument is that when, in Keynes’ words, the ‘animal spirits’ of the private sector are depressed, government should fill the gap. In any case, as interest rates are so low, government borrowing is begging to happen and, most importantly, will ultimately pay for itself through higher economic growth and increased tax receipts.

The flaw is that no convincing reason is given as to why increased public investment will stimulate a revival of private investment. Japan, the world’s third largest economy, has stubbornly resisted the siren song of austerity and invested hugely in infrastructure – planning, in 2013, to outlay over $2 trillion over ten years, with the explicit aim of spurring growth. Yet Japan has not emerged from nearly three decades of anaemic economic performance and its economy actually shrank in the last quarter of 2015.

Interestingly, Japan illustrates how a country can combine huge private and public debt and masses of unused corporate profits. “Japan’s corporate savings glut is unique in scale,” says Martin Wolf of the FT. In common with their counterparts in other countries, Japanese corporations are making high profits and not investing. The country also has the highest debt levels in the world.

So, in order to understand why private investment refuses to budge in response to financial inducement, government investment or Trump-style cajoling, I believe you have to look elsewhere – into the realms of anti-capitalist economics:

The Marxist Dissidents

Karl Marx called the tendency of the rate of profit to fall “the most fundamental law of capitalism’. According to this theory, all profit derives from human labour but as mechanization inevitably spreads through the economy, replacing workers with machines, the overall rate of profit declines. Various counter-tendencies – such as paying workers more, finding new markets or using dirt cheap labour – continually operate and can for a long time eclipse the tendency of profit to fall. But, in the end, this law will reassert itself.

The relevance for my argument is that the decline in the rate of profit first makes itself felt through a slump in investment.  Expectation of profit is the motivation for all private sector investment, and if this expectation is dampened or vanishes, investment won’t happen, or will happen on a much smaller scale. A decline in investment is a sign that a recession or depression is impending.

There is disagreement among Marxists of this kind as to when the decline in the rate of profit started to kick in. Some, such as Andrew Kliman, trace it back to the first recession of the post-war period in 1973. Others, such as Michael Roberts, claim it was postponed until 1997. But all agree it is a fact of life now.

One way of temporarily offsetting the decline in the rate of profit is financial speculation, or a rise in ‘fictitious capital’, as Marx called it. “If the capitalists cannot make enough profit producing commodities, they will try making money betting on the stock exchange or buying various other forms of financial instruments,” says Roberts.

It is a conviction of Marxists of this ilk that capitalism can only be restored to health – rates of investment will rise to support a growing economy – if there is a mass destruction of ‘capital value’.  This means a spiral of bankruptcies and a huge rise in unemployment. The crash of 2008 didn’t involve such destruction; it was arrested and bailed-out. Andrew Kliman thinks we are thus doomed to experience a state of ‘not quite recession’. Another Marxian economist – Roberts – says we are in the midst of an ‘economic winter’, awaiting another crash which will finish the job of 2008.

Under this variant of Marxism (most Marxists reside in the Left Keynesian camp), there is no final apocalypse, no final and irrevocable crisis. The decline of profit is cyclical – if is allowed to play out, levels of profit are restored and the whole process (or ‘crap’ in Marx’s description) can begin afresh. However, given the geo-political events that would be triggered by another crash of capitalism, and one much deeper than 2008, one can assume that the apocalypse will be general, not economic, involving world war and mass physical, human destruction. Kliman thinks that the warlordism afflicting parts of Africa and Asia is likely to become the norm if capitalism persists. The only way to avoid such a scenario is to transcend a profit-driven economy.

However, there are other post-capitalist thinkers who don’t regard capitalism’s travails as cyclical. By contrast, they think its troubles stem from having reached the limits of its technological capacity. And having over-stayed its welcome, the defects of capitalism are now grossly outweighing its benefits.

The Capital Glut

Capitalism epitomises a strange combination of abundance and scarcity. Corporations hoard money, landowners and developers hoard land. But there is also, says economist Harry Shutt, an over-abundance of capital at the summit of society, perpetually seeking financial returns.

This ‘wall of money’ does not merely comprise the profits of corporations. It is also made up of pension funds (a vast number of occupational pensions have been invested on the stock market since the 1980s), insurance companies and other ‘investment’ firms seeking returns for their clients.

And it is in the nature of capital-ism, money used as capital, that the profit made is immediately recycled as new capital seeking fresh returns. “The inevitable consequence of maintaining a high return on the capital stock as a whole,” writes Shutt, “is that yet more investible funds will be generated for which outlets must be found.”

Others, such as the geographer David Harvey, have noted the same expansive logic. “To keep to a satisfactory growth rate right now would mean finding profitable opportunities for an extra $2 trillion compared to the ‘mere’ $6 billion that was needed in 1970,” he writes in Seventeen Contradictions and the End of Capitalism. “By the time 2030 rolls around, when estimates suggest the global economy should be worth more than $96 trillion, profitable investment opportunities of close to $3 trillion will be needed.”

But, to my knowledge, Shutt is unique in adding another dimension. The pressure to find new investment opportunities to satisfy the perpetually expanding horde of capital has been intensified by a steady decline, since the 1970s, in outlets for fixed investment – investment in physical things such as plants or equipment. Technological change means that capital-intensive industries are becoming rarer (as are labour-intensive factories but that is another story).

Last year’s UNCTAD report hinted at this process (see graph above).  In the leading developed economies (France, the USA, UK, Japan and Germany), the report reveals, fixed capital investment rates fell from over 20% GDP in 1990 to ‘historically low levels’ of less than 16 per cent in 2015.

In 2016, Bank of England Governor, Mark Carney, lamented ‘more savings chasing fewer investment opportunities’ – an acknowledgement that there is now ‘too much capital for capitalism to function’.

This pincer movement of declining fixed investment opportunities and an ever-growing mass of money clamouring to be used, means an incessant pressure for financial deregulation and privatisation. This money becomes, in Marx’s description, ‘fictitious capital’. The original rationale for privatisation – loss making state industries requiring the bracing discipline of private investment – has been quietly abandoned.  Profit-making state enterprises – particularly profit-making state enterprises – are now considered the most succulent fruit, as a means of supplying safe outlets for private investment.  In the language of international government bodies like the IMF, the OECD and the Bank of International Settlements, deregulation and privatisation are urgent ‘structural reforms.’

Privatised utilities are one essential source for private investment. Prices and investment strategies, such as London’s ‘Super Sewer’- are now set at a level guaranteeing a high return for private investors. Over-investment is mandatory and set, in Shutt’s words, “on the basis of a hypothetical market rate which effectively guarantees a stream of profit on whatever investment is allowed”.

“For decades,” says one Guardian economics commentator, “they [savers] have bullied governments to release assets for sale that can then be leased back at high returns. In the UK, this is why we have privatised utilities and a swath of other safe, previously state-owned, assets in private hands.”

Opening up public, taxpayer funded assets, such as the NHS, to private sector investment – whether at home or from countries like the US, is now an integral component of government policy. This wall of capital at the summit of society is the main reason why neoliberalism did not die in 2008, despite disparate predictions of its imminent demise.

So under this understanding of the present state of capitalism, its travails are not cyclical. Mass destruction of capital value will naturally abate the pressure on public assets for a while, but the intractable problems of technological advancement, which does not demand huge capital investment as it did in the past, will reassert themselves. Capitalism, as a system, has outlived its usefulness. Its deformities are now front and centre.