Capitalism is suicidal. Standard modeling of a free market economy usually assumes equilibrium. However, an ideal free market, left to its own devices, will proceed tragically towards its own demise. In capitalism's youth, it was generally accepted that its destructive tendencies must be tempered by government. Recent decades have seen a paradigm shift in the United States and various western liberal democracies to a new neoliberal mode of state-sponsored capital accumulation. Corporations are accumulating ever-increasing wealth and power. The wealthiest 1% have been getting exponentially richer while the middle class is disappearing. It is not by coincidence that the system has been acting out lately. Restoring the ability of capitalism to improve the quality of life across the economic spectrum will require a reversal of recent neoliberal government policies. Because of globalism, this must be done at an international level. This must begin with a recognition that financial stability is now a global public good.
While capitalism has avoided death thus far, it exists only in a quasi-equilibrium state of booms and busts. This was first recognized by French-Swiss humanist economist Sismondi in 1819. Sismondi was a disciple of Adam Smith, but recognized that Smith’s theories failed to explain the numerous market crashes that had taken place since the publication of Smith’s Wealth of Nations. Sismondi is credited with proposing the first dynamic model of the economic process (Hyse 1991).
Many of Sismondi’s ideas were usefully appropriated by Karl Marx in Das Kapital, but reframed in terms of class-conflict. Marx clarified and extended an observation of Adam Smith that, for a variety of reasons, in a free market, capitalist profit rates tend to fall towards zero (Harman 2010, 69). In the resulting crisis [1], many firms go bankrupt. “The beneficiaries are those capitalists who survive the crisis. They pick up means of production—accumulations of value—on the cheap, enabling them to restore their own rates of profit” (Harman 2010, 76). That is, at least, until the next crisis. Marx was perhaps the first to suggest the possibility of a crisis so severe that it could bring down an entire economy. Marx proposed avoiding economic collapse—and the resulting human collateral damage—by advocating for a proletarian (workers) revolt.
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| 'Occupy' Protest. Union Square, NY. November 17, 2011. (Justin Lane/EPA via Time.com) |
When the proletarian revolt failed to materialize, Marx’s economics lost credibility in the capitalist world. However, Marx’s theory of falling rate of profit remains a compelling explanation of economic crises. Non-Marxist economists have since proposed alternative theories of market crises that generally absolve the capitalists per se of blame. Such theories include the profit squeeze (profits falls because real wages rise), the underconsumptionist traditions (lack of effective demand and tendency towards stagnation associated with excessive monopolization) (Harvey 2010, 116), and stimulative monetary policy (market rate of interest is held too low for too long, encouraging risky investment and inflation) (Caldwell 2011). These theories are not mutually exclusive, and most crisis postmortems reveal a confluence of causes. The unfortunate reality is that market crises remain unpredictable and largely unexplained.
No matter whether cause of a crisis is placed on falling profit rates, lack of demand, inflation, or a combination, there is a common feature - the crisis occurs when profits of a previous production cycle cannot be profitably reinvested in additional production. A capitalist economy is never in true equilibrium. It is a process in which “money is perpetually set in search of more money” (Harvey 2010, 40). Efficient market transactions essentially tend towards monopolistic concentrations of wealth, thus undermining the conditions of an efficient market. Conventional wisdom assumes healthy economic growth to be about 3% per annual - regardless of context. When this perpetual accumulation hits some kind of barrier (profit squeeze, underconsumption, inflation, etc.), the next production cycle cannot turn a profit and crisis ensues. David Harvey calls this the “capital absorption problem” (Harvey 2010, 182).
Firms must find new ways to invest profits regardless of natural demand [2]. Surplus capital ideally finds profitable investments in innovative new products, or increased productivity. Methods of increasing productivity may include technology, but also includes broad societal benefits such as education, infrastructure, and public health. Historically, capitalism has also expanded natural demand by opening new markets in previously undeveloped nations. However, when capital accumulation begins to exceed opportunities created by natural demand, capitalism must produce new demands to remain profitable. These are not natural demands. They are fictitious.
Products that meet fictitious demands have an inflated value. The value is contingent on the belief that the value exists (a “bubble market”). But like ancient Gods reduced to myth, the products of capitalism are reduced to relics when people lose faith. These products can take physical form; anything from obsolete technology, to last season’s wardrobe, to entire cities [3]. Non-physical manifestations of fictitious value can also take monetary forms (i.e. paper currency, stocks, bonds, commodity futures, etc.). When people lose faith in the value of these products, they are “devalued” in a market correction (the “bubble” bursts). What was once perceived as wealth is revealed as fiction.
Since the 1970’s or so, an embrace of neoliberal economic ideology in the US, UK, and select other nations, has implied an ethos that the largest capitalist firms should be assisted in perpetual accumulation, and protected against crises. Deregulation and globalization have crippled the traditional dampening mechanism of national governance on the cyclical self-destructive tendencies of capitalism. Crises in the last 40 years have become increasingly severe - with an unusually high amount of devalued capital lost by households rather than firms (Harvey 2010, 6).
Contemporary economists have come to accept the self-destructive nature of free markets. Many describe the ensuing crises as the “business cycle,” negate destruction of household savings as a “correction,” and celebrate the innovation implied by “creative destruction.” Regardless of market failures, capitalism remains the only economic system that has proven to be workable in the real world (Stiglitz 1999, 60). Marx seems to have overestimated the ability of government central planning. He also failed to anticipate the ability of western liberal democracies to keep capitalism from failure. A liberal government has five basic roles in a stable market economy: (1) provision of a stable legal framework for the market to operate within, (2) production of public goods and services when necessary, (3) regulation and subsidization of private production when necessary, (4) purchase of private goods and services, and (5) redistribution of income via transfer payments when necessary (Stiglitz 1999, 27).
The 2008-current global economic stagnation and resulting civil unrest has suggested to some that western liberal democracies have fallen behind in the project to keep capitalism functional. Economists are usually dismissive of Marxist warnings of systemic economic failure – yet it was such a fear that spooked the far-right Bush administration in 2008 to funnel billions of borrowed dollars to the private financial industry, and effectively nationalize the mortgage corporations Fanny May and Freddy Mac. Had the series of government bailouts not been enacted, it is within the realm of possibilities that there could have been a systemic economic meltdown. The American taxpayer probably got a good value for potentially saving the global financial infrastructure. The CBO estimates that when loans are repaid, the bail-outs of the financial and automotive companies will cost only about $19 billion (Congressional Budget Office 2011). Rebuilding a national and global financial infrastructure would have been inconceivably costly.
In the mainstream US political-economy, blame for the 2008 crisis was carelessly assigned to irresponsible home-owners, predatory mortgage lenders, Federal Reserve policy, derivatives traders, government regulators, Congress, President Bush, and even President Obama (who was inaugurated months after the crisis began). But there was no mainstream acknowledgement that under the neoliberal paradigm, the system is encouraged to create dangerously large bubble markets.
While a rapid paradigm shift is unlikely, it should seem obvious that we need to address at least the destructive elements of the economy that have been revealed in the current crisis. But any structural change to the global economy must necessarily be incremental. Economic history suggests that stable economic paradigms evolve over decades. Rapid paradigm shifts are volatile. Furthermore, the liberalization of world markets has accompanied unprecedented international stability and improvement in the global quality of life [4] - it is not worth abandoning the project. The 2008 crisis, however, is a wake-up call to evaluate why, over the last 40 years, economic crises have become increasingly frequent and severe (Harvey 2010, 6). I offer that the primary destabilizing factor in the current global economy is creeping neoliberal ideology. If global capitalism is allowed to continue under neoliberalism, it is tragically destined for demise. We must resurrect the legitimacy of strategic state intervention to correct inefficient capital markets. This role of the public sector was taken as granted before the current neoliberal era and must now be remembered.
Unfortunately, the public response cannot come from any one government. Globalization has entwined essentially every nation-state into a complex global network of capital flows. This is a good thing; coordinated liberalization of global markets is a project that began in the wake of World War II in an effort to prevent the next total war. The ongoing project of global free trade combined with the rapid advancement of communication technology allows information and capital to move instantly across borders and oceans. However, since large firms can move capital freely between nations, they can structure their operations such that their rate of profit is maximized. International firms are thus able to (for example) place production facilities in nations where excess labor is cheap and plentiful, sell goods to nations that have excess capital, and headquarter in nations with low tax rates. Firms should be expected to behave this way when modeled as self-interested rational actors. The problem is that non-coordination of national regulatory and monetary policy forces each nation into market (zero-sum) competition for firms. Liberal democracies, dependent on taxation for continued operation, have responded to contemporary global capitalism by adopting neoliberal policies that attempt to attract and retain firms by actively assisting them in capital accumulation and minimizing taxation and regulation.
Such a system is beneficial in the short-term for multinational firms, but potentially devastating to the long-term stability of sovereign authority and the global economy. Neoliberal policies are failing to control the destructive tendencies of capitalism. Markets are trending monopolistic or oligopolistic [5] and becoming noncompetitive. Wealth is being concentrated in a decreasing number of firms, who work to minimize labor costs and tax expenditures, further concentrating wealth in the executives of such firms. History has shown that such stark inequity is unstable – for economic and political reasons. However, because each firm is in competition, and each nation-state is in competition with other nation-states to attract and retain the tax dollars and other external benefits of each firm, we cannot expect cumulative individual self-interest to move towards a solution of this problem.
A solution must include coordinated policies in the global public interest. The first step of the rejuvenation of global capitalism must be an awakening to the idea of economic stability as a global public good. A critical function of government is the provision and distribution of pure public goods. Such a good is one that is (1) non-excludable – meaning it is not feasible to exclude individuals from benefiting from such a good, and (2) non-rival consumable – meaning that there is zero marginal cost of each additional consumer (Stiglitz 1999, 128). For example, a prototypical pure public good is national defense. Economist Joseph Stiglitz has also suggested that efficient government is a national public good, as “it is difficult and undesirable to exclude any individual from the benefits of a better government” (Stiglitz 1999, 149). Historically, an effective national government has been capable of relative success in facilitating a productive capitalist economy and buffering the effects of crises. However, the ubiquity of global capitalism now transcends the sovereignty of any one nation. Economic stability is the foremost global public good as it is difficult and undesirable to exclude any nation or its citizens from the benefits of an efficient global economy [6]. There must be coordinated global action.
Adam Smith provided the insight that governments and central planners usually produce less efficient distribution of goods than free markets (Stiglitz 1999, 56). When economists talk about market efficiency, they are usually referring to a condition known more specifically as Pareto efficiency, after Italian economist and sociologist Vilfredo Pareto (1848-1923) (Stiglitz 1999, 57). Pareto advanced that an ideal free market can only distribute wealth - not create or destroy it. In a Pareto efficient transaction, the amount of 'utility' lost by one actor is equivalent to the amount of utility gained by another [7]. Public policy economists attempt to design and enact Pareto improvements—market interventions that increase net utility—so long as it does not decrease utility for anyone (Stiglitz 1999, 57). Unfortunately, such interventions are rare, and most government intervention introduces inefficiency into a market.
Though generally inefficient, some government intervention is necessary. At minimum, a government must exist – and it must fund its existence through some form of taxation. Second, a government must engage in some form of redistribution of capital as a necessary precursor to a Pareto efficient ideal free market (Stiglitz 1999, 60). Government redistribution of wealth (i.e. tax-funded infrastructure construction, public education, transfer payments, subsidies, etc.), is usually discussed in terms of social equity or fairness. These may be valid ethical concerns, but such discussions obscure the value of government redistribution as an essential component of functional capitalism. An ideal competitive market consisting of Pareto efficient transactions tends to concentrate wealth. Adam Smith’s “invisible hand” that guides a free market can only do so with a relatively equitable initial distribution of capital (Stiglitz 1999, 60). If redistribution of capital by the public sector ceases, wealth becomes concentrated, and the market fails. A perfectly efficient market is a tragically doomed market.
Neoliberal ideology has abandoned much of the traditional respect for government intervention in markets. Neoliberalism’s predecessor, classical liberalism “does not believe in capitalism or the free market for its own sake. Rather, it is a philosophy that puts paramount values on freedom and individual liberty as the ultimate objective, with capitalism and the free market identified as the best means for achieving and maintaining that objective” (Malloy 1991, 80). Normative neoliberal economics not only does dictate capitalism for its own sake, but assumes that an approximately 3% growth in a nation’s GDP is ideal – regardless of context (Harvey 2010, 27). The United States, in particular, has embraced the neoliberal project of facilitating capital accumulation. The current (112th) Congress includes 238 Representatives and 41 Senators who have signed a pledge to oppose any increase of tax rates or elimination of credits (Americans for Tax Reform n.d.) [8]. Deregulation and privatization have become almost universally heralded as achieving greater efficiency in markets – particularly the financial industry. Popular conceptions of market economies have become so demented in some circles that about 20% of Americans conflate Adam Smith’s “invisible hand of the free market” with the hand of God – and accordingly view government intervention as a thwarting of God’s will (Grossman 2011).
An effort at restoring global economic stability should center on policies that recognize that neoliberal utilitarian capitalism is not sustainable. A solution must be approached from two complimentary angles: short-term regulation and long-term reconstruction.
In the short term, we must recognize that financial stability is a global commodity that requires global public intervention. The interconnection of the global economy became evident in the latest crisis when a series of mortgage defaults in a few real estate markets nearly collapsed the global financial infrastructure. In 2008, $50 trillion of “wealth” is said to have been “destroyed” (Harvey 2010, 46). Yet all this “wealth” was lost without any actual destruction. There was no war or natural disaster. The wealth disappeared when it became obvious that the financial industry had inflated its own worth several times over. The wealth never existed. It was a fiction. Unregulated financial products that were supposedly designed to limit risk resulted in multiplying risk several times over and spread it around the globe.
No matter whether cause of a crisis is placed on falling profit rates, lack of demand, inflation, or a combination, there is a common feature - the crisis occurs when profits of a previous production cycle cannot be profitably reinvested in additional production. A capitalist economy is never in true equilibrium. It is a process in which “money is perpetually set in search of more money” (Harvey 2010, 40). Efficient market transactions essentially tend towards monopolistic concentrations of wealth, thus undermining the conditions of an efficient market. Conventional wisdom assumes healthy economic growth to be about 3% per annual - regardless of context. When this perpetual accumulation hits some kind of barrier (profit squeeze, underconsumption, inflation, etc.), the next production cycle cannot turn a profit and crisis ensues. David Harvey calls this the “capital absorption problem” (Harvey 2010, 182).
Firms must find new ways to invest profits regardless of natural demand [2]. Surplus capital ideally finds profitable investments in innovative new products, or increased productivity. Methods of increasing productivity may include technology, but also includes broad societal benefits such as education, infrastructure, and public health. Historically, capitalism has also expanded natural demand by opening new markets in previously undeveloped nations. However, when capital accumulation begins to exceed opportunities created by natural demand, capitalism must produce new demands to remain profitable. These are not natural demands. They are fictitious.
Products that meet fictitious demands have an inflated value. The value is contingent on the belief that the value exists (a “bubble market”). But like ancient Gods reduced to myth, the products of capitalism are reduced to relics when people lose faith. These products can take physical form; anything from obsolete technology, to last season’s wardrobe, to entire cities [3]. Non-physical manifestations of fictitious value can also take monetary forms (i.e. paper currency, stocks, bonds, commodity futures, etc.). When people lose faith in the value of these products, they are “devalued” in a market correction (the “bubble” bursts). What was once perceived as wealth is revealed as fiction.
Since the 1970’s or so, an embrace of neoliberal economic ideology in the US, UK, and select other nations, has implied an ethos that the largest capitalist firms should be assisted in perpetual accumulation, and protected against crises. Deregulation and globalization have crippled the traditional dampening mechanism of national governance on the cyclical self-destructive tendencies of capitalism. Crises in the last 40 years have become increasingly severe - with an unusually high amount of devalued capital lost by households rather than firms (Harvey 2010, 6).
Contemporary economists have come to accept the self-destructive nature of free markets. Many describe the ensuing crises as the “business cycle,” negate destruction of household savings as a “correction,” and celebrate the innovation implied by “creative destruction.” Regardless of market failures, capitalism remains the only economic system that has proven to be workable in the real world (Stiglitz 1999, 60). Marx seems to have overestimated the ability of government central planning. He also failed to anticipate the ability of western liberal democracies to keep capitalism from failure. A liberal government has five basic roles in a stable market economy: (1) provision of a stable legal framework for the market to operate within, (2) production of public goods and services when necessary, (3) regulation and subsidization of private production when necessary, (4) purchase of private goods and services, and (5) redistribution of income via transfer payments when necessary (Stiglitz 1999, 27).
The 2008-current global economic stagnation and resulting civil unrest has suggested to some that western liberal democracies have fallen behind in the project to keep capitalism functional. Economists are usually dismissive of Marxist warnings of systemic economic failure – yet it was such a fear that spooked the far-right Bush administration in 2008 to funnel billions of borrowed dollars to the private financial industry, and effectively nationalize the mortgage corporations Fanny May and Freddy Mac. Had the series of government bailouts not been enacted, it is within the realm of possibilities that there could have been a systemic economic meltdown. The American taxpayer probably got a good value for potentially saving the global financial infrastructure. The CBO estimates that when loans are repaid, the bail-outs of the financial and automotive companies will cost only about $19 billion (Congressional Budget Office 2011). Rebuilding a national and global financial infrastructure would have been inconceivably costly.
In the mainstream US political-economy, blame for the 2008 crisis was carelessly assigned to irresponsible home-owners, predatory mortgage lenders, Federal Reserve policy, derivatives traders, government regulators, Congress, President Bush, and even President Obama (who was inaugurated months after the crisis began). But there was no mainstream acknowledgement that under the neoliberal paradigm, the system is encouraged to create dangerously large bubble markets.
While a rapid paradigm shift is unlikely, it should seem obvious that we need to address at least the destructive elements of the economy that have been revealed in the current crisis. But any structural change to the global economy must necessarily be incremental. Economic history suggests that stable economic paradigms evolve over decades. Rapid paradigm shifts are volatile. Furthermore, the liberalization of world markets has accompanied unprecedented international stability and improvement in the global quality of life [4] - it is not worth abandoning the project. The 2008 crisis, however, is a wake-up call to evaluate why, over the last 40 years, economic crises have become increasingly frequent and severe (Harvey 2010, 6). I offer that the primary destabilizing factor in the current global economy is creeping neoliberal ideology. If global capitalism is allowed to continue under neoliberalism, it is tragically destined for demise. We must resurrect the legitimacy of strategic state intervention to correct inefficient capital markets. This role of the public sector was taken as granted before the current neoliberal era and must now be remembered.
Unfortunately, the public response cannot come from any one government. Globalization has entwined essentially every nation-state into a complex global network of capital flows. This is a good thing; coordinated liberalization of global markets is a project that began in the wake of World War II in an effort to prevent the next total war. The ongoing project of global free trade combined with the rapid advancement of communication technology allows information and capital to move instantly across borders and oceans. However, since large firms can move capital freely between nations, they can structure their operations such that their rate of profit is maximized. International firms are thus able to (for example) place production facilities in nations where excess labor is cheap and plentiful, sell goods to nations that have excess capital, and headquarter in nations with low tax rates. Firms should be expected to behave this way when modeled as self-interested rational actors. The problem is that non-coordination of national regulatory and monetary policy forces each nation into market (zero-sum) competition for firms. Liberal democracies, dependent on taxation for continued operation, have responded to contemporary global capitalism by adopting neoliberal policies that attempt to attract and retain firms by actively assisting them in capital accumulation and minimizing taxation and regulation.
Such a system is beneficial in the short-term for multinational firms, but potentially devastating to the long-term stability of sovereign authority and the global economy. Neoliberal policies are failing to control the destructive tendencies of capitalism. Markets are trending monopolistic or oligopolistic [5] and becoming noncompetitive. Wealth is being concentrated in a decreasing number of firms, who work to minimize labor costs and tax expenditures, further concentrating wealth in the executives of such firms. History has shown that such stark inequity is unstable – for economic and political reasons. However, because each firm is in competition, and each nation-state is in competition with other nation-states to attract and retain the tax dollars and other external benefits of each firm, we cannot expect cumulative individual self-interest to move towards a solution of this problem.
A solution must include coordinated policies in the global public interest. The first step of the rejuvenation of global capitalism must be an awakening to the idea of economic stability as a global public good. A critical function of government is the provision and distribution of pure public goods. Such a good is one that is (1) non-excludable – meaning it is not feasible to exclude individuals from benefiting from such a good, and (2) non-rival consumable – meaning that there is zero marginal cost of each additional consumer (Stiglitz 1999, 128). For example, a prototypical pure public good is national defense. Economist Joseph Stiglitz has also suggested that efficient government is a national public good, as “it is difficult and undesirable to exclude any individual from the benefits of a better government” (Stiglitz 1999, 149). Historically, an effective national government has been capable of relative success in facilitating a productive capitalist economy and buffering the effects of crises. However, the ubiquity of global capitalism now transcends the sovereignty of any one nation. Economic stability is the foremost global public good as it is difficult and undesirable to exclude any nation or its citizens from the benefits of an efficient global economy [6]. There must be coordinated global action.
Adam Smith provided the insight that governments and central planners usually produce less efficient distribution of goods than free markets (Stiglitz 1999, 56). When economists talk about market efficiency, they are usually referring to a condition known more specifically as Pareto efficiency, after Italian economist and sociologist Vilfredo Pareto (1848-1923) (Stiglitz 1999, 57). Pareto advanced that an ideal free market can only distribute wealth - not create or destroy it. In a Pareto efficient transaction, the amount of 'utility' lost by one actor is equivalent to the amount of utility gained by another [7]. Public policy economists attempt to design and enact Pareto improvements—market interventions that increase net utility—so long as it does not decrease utility for anyone (Stiglitz 1999, 57). Unfortunately, such interventions are rare, and most government intervention introduces inefficiency into a market.
Though generally inefficient, some government intervention is necessary. At minimum, a government must exist – and it must fund its existence through some form of taxation. Second, a government must engage in some form of redistribution of capital as a necessary precursor to a Pareto efficient ideal free market (Stiglitz 1999, 60). Government redistribution of wealth (i.e. tax-funded infrastructure construction, public education, transfer payments, subsidies, etc.), is usually discussed in terms of social equity or fairness. These may be valid ethical concerns, but such discussions obscure the value of government redistribution as an essential component of functional capitalism. An ideal competitive market consisting of Pareto efficient transactions tends to concentrate wealth. Adam Smith’s “invisible hand” that guides a free market can only do so with a relatively equitable initial distribution of capital (Stiglitz 1999, 60). If redistribution of capital by the public sector ceases, wealth becomes concentrated, and the market fails. A perfectly efficient market is a tragically doomed market.
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| Adam Smith's "Invisible Hand" |
An effort at restoring global economic stability should center on policies that recognize that neoliberal utilitarian capitalism is not sustainable. A solution must be approached from two complimentary angles: short-term regulation and long-term reconstruction.
In the short term, we must recognize that financial stability is a global commodity that requires global public intervention. The interconnection of the global economy became evident in the latest crisis when a series of mortgage defaults in a few real estate markets nearly collapsed the global financial infrastructure. In 2008, $50 trillion of “wealth” is said to have been “destroyed” (Harvey 2010, 46). Yet all this “wealth” was lost without any actual destruction. There was no war or natural disaster. The wealth disappeared when it became obvious that the financial industry had inflated its own worth several times over. The wealth never existed. It was a fiction. Unregulated financial products that were supposedly designed to limit risk resulted in multiplying risk several times over and spread it around the globe.
The financial sector, as a whole, no longer serves the multiplier function of traditional banks. The financial industry has evolved within the neoliberal environment to find an ever-increasing number of ways to siphon value out of an efficient free market economy. As a result, several financials had grown so influential that by 2008 they were deemed “too big to fail” and succeeded in coercing additional capital out of taxpaying citizens. Policies must be enacted to dismantle and prevent “too big to fail” firms. Foremost among such policies would be a global incarnation of the now-defunct Glass Steagall Act - a US law that divided commercial banks (whose holdings would be FDIC insured) from investment banks. The law was repealed in 1999, and many see today’s credit crunch as a direct result of its repeal (Figure Wizard 2009). Complete restriction of risky financial instruments should not be necessary. But it has proven to be too dangerous to have a global financial infrastructure run by profit-seeking private firms who engage in such risky behavior outside of regulatory scrutiny. There should be an effort to clarify a set of economic functions that are essential to the global financial infrastructure, and these should be unbundled from investment banking and regulated as a global public utility (Buiter 2009). There should also be efforts to monitor and regulate “over-the-counter” (firm-to-firm) transactions at the global level. In the long term, we must reconstruct foundational assumptions of capitalism. It is doubtful that any alternative economic system has the resiliency and adaptability of capitalism. However, neoliberal utilitarian capitalism is hopelessly flawed. It assumes no natural limits to growth, and no diminishing marginal benefits of wealth. Both of these assumptions are demonstrably false.
Conventional wisdom considers annual economic growth of 3% to be “healthy” - without regard to context or natural limitations. Without hypothesizing what economic factors could be limiting, it is reasonable to abandon the assumption that exponential growth can proceed forever. We live on a finite planet and have not even begun to use natural resources sustainably. We are running out of new markets to liberalize and natural resources to utilize. When the economy cannot expand in response to natural demands, the only remaining option is to manufacture fictitious bubble markets and accept their destructive collapses.
Modern utilitarian capitalism is a lazy and counterproductive misinterpretation of a noble philosophy. Bentham’s “utility” was a measure of happiness, not material wealth (Sweet 2001). The maxim that happiness is directly correlated to wealth is ridiculous. Nearly every attempt to measure and study a psychological interpretation of utility finds that wealth is only strongly correlated to human happiness to the point that basic needs are met. Once basic needs are met, happiness as a function of wealth levels out drastically. For example, a 2010 Gallup study found that Americans, Venezuelans, Costa Ricans, and Saudi Arabians to be about equal in “wellbeing,” despite the average US citizen being 2-4 times wealthier (Rath and Jim 2010). For the health of capitalism, and for ourselves, we must pull back on the ethos of perpetual competitive consumption.
Financial stability is a global public good. We must strengthen international efforts to treat it as such. Protection of large capitalist firms has not, and cannot, protect capitalism from crises. Instead, cyclical crises have become more frequent and destructive in recent decades – with the destructive aspects concentrated on the working class. The significance of Occupy protests and popular uprisings around the globe are reflective of the system breaking down. Status-quo operation of the global economy can only result in eventual global economic collapse. Extant institutions such as the World Trade Organization, International Monetary Fund, and World Bank will be crucial to coordinating efforts. However, these institutions are heavily influenced by the United States and are currently steeped in the same neoliberal ideology. It is crucial that the firms and states that make up the global financial infrastructure promote a renewed and coordinated vision of a stable global capitalist economy. Success at such a project is the only foreseeable way to stabilize the global economy and return to the increasing peace and wellbeing that has accompanied the modern capitalist era.
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| How long can we ignore that we are all in this together? |
End Notes:
[1] One definition of a market crisis in capitalism is an instance when “surplus production and reinvestment are blocked” (Harvey 2010, 45). In other words, some capitalists cease to turn a profit and may even lose monetary wealth.
[2] By natural demand, I mean the demand for products that is endemic to human needs absent of manufactured needs - approximately the level of consumption where the marginal wellbeing of additional wealth approaches zero. While this is an admittedly undeveloped idea, and difficult to define, it is sufficient here to assert that natural demand is less than the overall demand in a capitalist economy. This is because the structure of capitalism promotes perpetual competitive consumption.
[3] The high-industrial capitalist era was given material form by the production of cities that were purposefully built to further a specific mode of capital accumulation, i.e. Detroit, Pittsburg, Buffalo, etc. (Dennis 2011). The life-cycle of such cities may indicate that sprawling upper-middle-class suburbs will be the future devalued relic of the current mode of capitalist production.
[4] The constant stream from news media regarding global crises and upheaval may cast doubt on this statement. But, as pointed out by Steven Pinker in Better Angels of Our Nature (2011), there has been a bumpy but steady decline of violent death for the entirety of the modern era. Violent deaths have steadily declined globally since World War 2, and we are now enjoying the most peaceful time in human history (Pinker 2011).
[5] A market supplied by only a few firms, which often operate in collusion.
[6] It is possible, to a limited extent, for a person or nation to voluntarily exclude themselves from the global economy. Yet it is impossible to withdraw completely. There is no corner of the globe that is not subject to national sovereignty or international law. All peaceful human residents of the earth benefit from the protections offered under a rule of law sovereign – which can be supported only by a functional economy. The foremost example of a nation withdrawing from the global economy this is likely North Korea. Yet, even North Korea has multiple ties to the global economy, though they may be unofficial. Additionally it would almost certainly benefit from increased inclusion in global capitalism (U.S. Central Intelligence Agency n.d.).
[7] Utility is a short-hand term economists use to capture the benefit that is gained through purchase of a good or service. In capitalism, utility is equated to capital, and is thought to be sufficiently represented as a money value. An attempt to maximize the amount of utility (capital) in any economy is a utilitarian approach and is implicit in capitalism. The traditional approach does not consider sociological factors such as of large discrepancies in wealth within a society and the potential societal instability. It also does not consider discrepancies in use value - thus, a $500 refrigerator is equivalent in utility to a $500 pair of stilettos or $500 worth of cigarettes. Utilitarianism was originally introduced by Jeremy Bentham (1748-1832) as a moral directive to maximize human happiness (Sweet 2001). However, when utility is equated to capital, money has no inherent diminishing marginal utility. Thus, utilitarian capitalists place no inherent limit on individual wealth or inequality.
[8] All but 3 are of the Republican Party.
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Caldwell, Bruce. Ten (Mostly) Hayekian Insights for Trying Economic Times. Washington, DC: The Heritage Foundation, 2011.
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