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.

Other People's Money – The Degeneration of Thatcherism

 “The problem with socialism,” Margaret Thatcher famously said (or perhaps nearly said), “is you always run out of other people’s money”.

Subjecting everything to a merciless cost-benefit analysis was the core Thatcherite credo. ‘Lame Duck’ nationalised industries were privatised and left to sink or swim in the unforgiving waters of private sector, ‘uneconomic’ coal pits were shut down no matter what the cost to the communities dependent on them, and internal markets, pledged to scythe through waste and bureaucracy, introduced into national institutions like the NHS and the BBC.

Therefore, it’s one of history’s great ironies that in the 21^st century her party – the Conservatives – are, under the guise of ‘free market’ policies, more profligate with “other people’s money” than any socialist government ever was, or, if one wants to be optimistic, ever could be.

“Socialism”, Thatcher’s mortal enemy, by regulating the private sector, as opposed to throwing money at it, would be immeasurably cheaper.

Let me count the ways.

Energy

The enormity of Liz Truss’s energy price guarantee  a huge “state handout” of between £100 billion and £170 billion may have been scaled back by Jeremy Hunt but the principle remains: using taxpayer money to subsidise the profits of energy retail and supply companies because the prospect of public ownership – ‘socialism!!’ – is so horrifying it can never be countenanced.

And the huge cost of heating their homes to the public – the price cap is now at an annual level of £4,279 – has only been exacerbated by the Conservatives’ attempts to head off the idea of public ownership by introducing phony competition into a plainly monopolistic market. The £6.5 billion state bailout of the energy retail company Bulb – one of nearly a hundred new suppliers introduced to give the appearance of competition to the electricity supply system – will cost each household £230.

Despite the fact that, due to sharp falls in the price of wholesale energy, gas and electricity are cheaper than they have been since 2010, the market price will not be reflected in bills for a long time. “The cost of rescuing failed energy firms,” says Rupert Hargreaves of Money Week magazine, “will add hundreds to each bill, offsetting some of the declines in wholesale energy prices.” And of course the shaky finances of the still existing energy firms need to be secured.

It is reassuring to know that the opposition ‘Labour’ party, now safely back in Blairite hands, will continue this prudent use of taxpayer funds. Its stated approach of a six month price cap freeze, now judiciously mirroring Hunt’s policy, will give £29 billion to the energy firms, the mad Corbynite relish to “nationalise everything” at exorbitant cost having been thrown in the dustbin of history where it belongs.

It’s not surprising therefore that there is a singular lack of curiosity in Westminster as to why wholesale energy prices have been on such a rollercoaster in the first place, spiralling skywards and then crashing. It can’t have been solely down to Vladimir Putin , or the gods of supply and demand, because the falls continued, even sped up, after the Nord Stream pipeline, which syphoned gas to Europe, stopped operating and was then sabotaged.

All that Rishi Sunak will say is that it’s impossible to artificially hold energy prices down. But there is nothing natural about the ‘wall of money’ that drives speculation in commodities such as oil and natural gas. “Prices for food, oil and gas are determined independently of both wholesalers and costs,” noted economist Ann Pettifor in the Financial Times last September. “Wall Street and Chicago Mercantile Exchange investors deploy vast sums in speculation on movements in the price of both food and energy prices. It’s a profitable game.”

But rather than cracking down on speculation, the government, unfailingly loyal to a bastardised market fundamentalist ideology,  wants to encourage it. The Financial Services and Markets bill, currently being scrutinized by the House of Lords, will give the Prudential Regulation Authority and the Financial Conduct Authority additional objectives of encouraging “economic growth and competitiveness.”

The idea that you should limit speculation in commodities, which drives up wholesale prices thus inflating everyone’s heating bills by thousands of pounds, is beyond the bounds of the thinkable. This is despite the fact that it has been done in the past by an American President who would have bristled with indignation at being called a ‘socialist’.

In 1934, Franklin Roosevelt passed a law that limited speculation in commodities to 20% of the market. Stability reigned until ‘New Democrat’ Bill Clinton – channelling the deregulatory spirit of Reagan and Thatcher – legalised credit default swaps in housing (paving the way for the 2008 financial crisis) and in the same law gave the green light to unlimited speculation in other commodities, such as oil and gas – the root of our current troubles.

But the notion that we might shun this 21^st century liberation and return to the benighted ‘socialist’ practices of the past – which kept energy bills low thus obviating the need for huge public subsidies – is clearly just puerile. Like King Canute ordering the tide to stop coming in.

Public Services in general

You might think that no-one in their right mind would want to copy our dog’s breakfast of an energy supply system in other public services. But then again you (probably) don’t live in the mind of a Thatcher-besotted British Conservative.

The roll out of broadband installation in the UK is (prepare for a shock) heavily subsidised by the public purse. Under the £5 billion “Project Gigabit” programme, the government is gifting most of this money to BT and BT Openreach, its broadband division. However, stung by the lack of progress, it has augmented this with the fake competition model pioneered in the energy distribution system, encouraging other suppliers, so-called “altnets”, to start laying fibre-optic cable. Unfortunately, reports the Times, these paragons of efficiency are – much like private medical firms cherry-picking the simplest procedures – concentrating on the easiest areas. So “we’ve ended up with hundreds of fibre companies all building in the same areas.”

There is also the clear and present danger in the current climate that some of these “altnets” could go bust. So, as with the energy supply ‘market’, the government is setting up a Supplier of Last Resort system, naturally at the public’s expense. Unavoidable bail-outs, in the manner of Bulb, are on the cards. According to investigative journalist Solomon Hughes:

Customers of failed broadband firms will be shunted back to the old monopolistic firm, BT. The cost of these bailouts will be borne by the customer or the government. Just as in energy, trying to break [up] monopolistic firms by encouraging new entrants might end in costly failure.

The ‘socialist’ alternative, outlined by Corbyn at the 2019 General Election, would have been far more effective and cheaper. He wanted to entrust broadband rollout to a new public firm, called British Broadband, created partly by nationalising BT Openreach, and funded by taxing trillion dollar tech monsters like Facebook and Google. But this “crazed communist scheme”, to quote Boris Johnson, was too much for freedom-loving Brits so we’re back to gifting private firms public money to dig up the same stretch of road.

It has dawned on some right-wingers that the privatisation pioneered by Margaret Thatcher at the start of the 1980s has morphed into something else without many people noticing. Initially the Conservatives did simply divest themselves of state-owned companies (that had often been nationalised in the 1970s because they were at risk of bankruptcy). Firms like Cable & Wireless, British Steel, Rolls-Royce, British Airways, Jaguar and even Thomas Cook, were sold and had to make their own way in the private sector. Sometimes they survived and often, as in the case of Jaguar, British Steel and Thomas Cook for example, they didn’t.

But from the Tell Sid era of the break-up of British Gas in the mid-1980s, so-called ‘privatisation’ changed its nature. It became synonymous with contracting out monopoly services from the state to the private sector on the dubious grounds that this would be more efficient. This process is now so ubiquitous, encompassing services like water, gas and electricity, the railways, academy schools, NHS services, air traffic control, and care homes, that its uniqueness, and crucial difference with authentic privatisation, is often overlooked. These services were funded – and continued to be funded – by the government and, most importantly, could not be allowed to cease to exist.

After British Rail ‘privatisation’ in 1996, for example, the operation of lines was subject to a franchise system companies could bid to run. At the same time, the public subsidy awarded to this allegedly privatised system has increased by over 200%. And when the train operating companies are faced with a strike by their employees, they are reimbursed by the government for lost revenue.

In the words of a journalist for the right-wing Spectator magazine:

The rail industry hasn’t really been privatised at all. It remains underwritten by the taxpayer. Nor is there much in the way of competition: local monopolies are guaranteed by the franchising system.  The only difference is that the system is rigged so as to allow the private companies owning the franchises to make a profit, even if their underlying operation is making a thumping loss.

Predictably, faced with this “rigged” system, the writer wants to return to the original spirit of Thatcherism and genuinely privatise the railways, abolishing state subsidies and forcing “the industry” to stand on its own two feet. But this solution would simply result in a system of free market anarchy that laid the ground for Thatcher’s bête noire of ‘socialism’ in the first place. Fares would be hiked into the stratosphere and ‘uneconomic’ lines shut down. What is socially necessary is not always profitable – in fact the two are often in conflict – and the fear of this realisation is why this country lives under the sway of bastardized Thatcherism.

Where did it all go wrong?

In part two, I will continue to list the myriad ways that 21^st century conservatism props up the ‘free market’ system with public funds, in addition to asking why.

The answer, in my opinion, lies in both a putatively realistic but flawed vision of human nature and the unacknowledged economic failure of Thatcherism. She told herself, and everyone else, that releasing the forces of enterprise and beating back trade unions and socialism would result in a future of unending prosperity for all.

However, it hasn’t turned out that way and all they can do, to tweak a well-known phrase, is ‘throw [other people’s] money at the problem”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The inability to make half an argument

The startling thing about the death spiral currently engulfing the UK economy is that the medicine prescribed to deal with it – austerity and tax rises on ordinary people – will only make the economic pain worse. And yet they are seen as the only conceivable option.

Jeremy Hunt soberly tells us we must “pay our way in the world” as he ordains £30 billion in spending cuts and £24 billion in tax rises. Meanwhile the ‘Labour’ opposition rules out taking “risks with public finances” and or “getting its big government cheque book out”. Given that Hunt’s public spending cuts will take place in 2025 – after the next general election – and that the Labour party will almost definitely, following Blair’s example in 1997, not dare deviate from Tory spending plans in a bid to appear economically ‘credible’, it is an odds on certainty that austerity mark 2 will happen regardless of which party is in power.

That that party is the Conservatives, is dependent, we are told, on the unlikely event of them recovering their reputation for “sound money and sound public finances” lost in the Liz Truss debacle. But the incredible thing is that following the Cameron/Osborne years they had it in the first place.

The twin disasters of Austerity Mark One

It is established, if not universally known, that the original version of austerity was a disaster in social terms. The 40 per cent cut in funding for public services, most apparent in huge reductions in local authority social care budgets (for home visits, help with dressing, washing etc.), translated to 335,000 excess deaths and falling life expectancy .

But austerity was also a disaster economically.  GDP per head only reached an average of 1.2% between 2010 and 2018, lower than the previous decade (which was already low). Despite a mania for selling off public assets, which raises revenue in the short-term, public debt rose from 65% of GDP in 2010 to 79.1% in February 2020, and then mushroomed further because of the Covid lockdown.

Under ‘Osbornomics’ all this pain for masses of people was accompanied by an unconditional bounty for the super-rich in the form of quantitative easing, a state subsidy which raised the value of financial assets like shares. In the Eurozone, a mirror-image – ‘Draghinomics’ (after Mario Draghi former head of the European Central Bank) – likewise dispensed the suffering and largesse to, respectively, the undeserving poor and the undeserving rich, resulting in similarly comatose economic growth.

That there is a connection between falling real wages, lacklustre GDP growth, rising government debt, and austerity (which cuts the public sector workforce and reduces spending power and thus has ripple effects in the economy, and therefore on government revenue) can only be denied by an ideologically-induced blindness, which handily our government and its handmaidens in the media have in abundance.

Nonetheless, the barely contested response to projections that government revenue will be reduced in future, in the context of even larger falls in personal income, is to reintroduce austerity, the effect of which will be to further reduce government revenue.

It must have been this kind of iron-clad logic that earned the Conservatives their reputation for economic competence.

Don’t cut your cloth according to your measure

It shouldn’t take a PhD in economics to see through it. Despite the tenacity of home-spun wisdom that the government is like a household and must budget for hard times accordingly, cutting its outlays to take account of lower income, it isn’t and shouldn’t*.  The government’s spending – on for example enhanced salaries for nurses and other public servants – will multiply through the economy by being spent by individuals, and eventually turn into income for the government paid through tax. As economist Anne Pettifor points out:

Once earned, individuals, households and firms spend and invest their new, higher income. They spend on goods, on rent, on food, and on services provided by for example, football clubs, lawyers, accountants, musicians, artists etc. That spending generates additional tax revenues for government, this time paid by football clubs, firms, shops, landlords, farmers, lawyers, musicians etc.

This anti-austerity insight that the government is not like a household and shouldn’t behave like one essentially comes from John Maynard Keynes, who famously said in 1931, “You cannot balance the nation’s books by cutting its income”. That this perception, which comes from a man who explicitly wasn’t a socialist, is now indelibly associated with the Left and non-mainstream economists is an indication of how far to the Right politics and economics have shifted in the West in the last four decades.

The economic limits of shopping

Because in the context of 2023, not 90 or so years before, there’s something wrong with it. It, and its contemporary proponents, are making half an argument.

Resuscitating what economists call “effective demand” – a virtuous circle that ensures people have more disposal income so they go out and buy consumer goods, thus stimulating production to keep up and, through increased tax, shrinking government debt – is not the panacea for the economy because it doesn’t get to the root of what’s fundamentally wrong with it.

For decades the economy has become more dependent on profits from finance and speculation for the prosaic reason that more money can be made that way than from expanding production. This is despite unrelenting efforts to sustain demand in the form of escalating personal debt. And as a profits are made, more capital is inevitably produced, conditioned to seek profitable outlets of one sort or another. Curiously, governments in the West in the last decade responded to this surplus of capital but creating even more of it through Quantitative Easing.

There is no realistic way of expanding demand quickly enough to absorb this ever growing mass of capital. Even if the UK government miraculously saw the light and stopped suppressing demand through austerity and holding down public sector pay.

In this financialised economy, government progressively becomes more indebted as it has to support a weak private sector through bail-outs, tax cuts and subsidies to low pay. Meanwhile private sector debt escalates because being “highly leveraged”, in technical parlance, is seen as the way to increase exposure to financial products and thus bring in future profits.

Theoretically, the route out of this conundrum is strong economic growth which enables the gradual amelioration of debt, private and public. In its own rather pathetic way this is what the short-lived Truss administration was trying to do through its “investment zones” and scattergun tax cuts, which would supposedly have ‘paid off’ after a few years. That the ‘markets’ quickly pulled the rug from under Truss’s feet is an indication that no-one really believes revived economic growth is possible. With Sunak and Hunt, we’re back to stabilised misery.

Socially it is imperative that the RMT and others win their pay disputes. It is vital that the NHS is properly funded and re-nationalised. It is essential that Sunak’s attempts to force workers to continue working even if they want to go on strike – reminiscent of the Fascist regimes of the 1930s and one continuity with Liz Truss – are defeated. But we shouldn’t pretend that these victories – should they happen – will bring about an economically sustainable system.

*The idea that the government should ‘trim its sails’ in hard times, much like a sensible household, has proved to have a tenacious hold on public opinion, since it was first outlined by the conservatives and their allies in the media in the wake of the 2008 financial crisis. But not only is the analogy wrong, it is belied by the fact that most people don’t take any notice of it in their own lives, in that personal debt goes on rising year by year.

 

 

 

 

 

 

 

Speculation and its Discontents

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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