dittologica

Where did we go wrong?
Until just a few months ago opinion leaders in politics and the media were almost unanimous that the demons of inflation, stagnation, recession and depression had been largely relegated to the scrapheap of economics. Just as history had ended with Western victory in the cold war, the uncertainty of economics had been tamed by sophisticated central bankers like Alan Greenspan, who had the wisdom to micro-manage the economy around any obstacle. How fortunate we felt to be living in the age of eternal economic expansion. Then, almost overnight, everything seemed to change. The word “crisis” began to make daily media headlines: fuel crisis followed food crisis followed credit crisis followed mortgage crisis.

Now the search is on to find the event(s) which triggered the current spate of economic problems. Was it the sub-prime mortgage debacle? The war in Iraq? The yawning maws of India and China gobbling up resources? Speculators bidding up the prices of commodities?

While it may be true that any, or all, of the above contributed to the current situation, the premise underlying these assertions is that the bubbles–which is what these crises really are–are themselves the problem. If we can just regulate investment a bit more, or pump a bit more oil, or end the war in Iraq, everything will be fine again.

World of bubbles
Bubbles occur when speculators pile into a particular sector of the economy which seems to promise faster growth and bigger returns than other sectors. When investment in any of these sectors grows grossly out of proportion to the rest of the economy some event eventually triggers a collapse of the bubble. Famous examples of bubbles include the Dutch tulip mania of the 17th century, the South Sea Bubble of 1720, and the dotcom bubble of a few years ago.

Contrary to the usual jovial connotation of the term “bubble”-champagne bubbles, bubble baths, children blowing bubbles with soapy water in the garden-economic bubbles are no laughing matter. When they are inflating they drive up the prices of affected commodities beyond the means of average earners, as recently happened with the property bubble and is happening now with the fuel and food bubbles. And when they collapse they often cause bankruptcies, job losses and social disruption.
 
The coincidence of multiple major bubble-bursts could have consequences the likes of which haven’t been seen in the Western World for many decades. However, these bubbles shouldn’t be seen as the main story but rather as symptoms, of a much larger crisis which is unfolding slowly and which will have far deeper consequences than the bubbles which have transfixed us.

The longer view
Longer term historical trends are rarely mentioned in the mass media. This is not surprising given that there’s little bang for buck in a story about a gradual process that began perhaps five hundred years ago and which might take another century or so to play out. The idea of a long trend also goes against the impression cultivated by the media that society’s problems are all the fault of politicians, and can also be fixed by them.

Since the “Age of Exploration”  began at the end of the 15th century, the Western European economy has been expanding vigorously outwards. The process started with the quest for a cheaper way to acquire the luxury goods and raw materials of the “Indies”. A chief objective was to bypass Arab middlemen who until then mediated trade with Africa and Asia. This objective was accomplished with the opening up of sea routes to Asia and the “New World”, and in time all regions of the inhabited world became inextricably linked through a dense trade network encompassing complex exchanges of raw materials, finished products, labor and credit.

The continent of Europe dominated trade for the first four hundred or so years after the epochal voyages of Vasco da Gama and Christopher Columbus. After World War II the center of this world economy shifted to the United States. Now, at the beginning of the 21st century, the process of expansion is complete, with virtually no area of the world left outside the ambit of the world economy. Thus, the process now fashionably referred to as “globalization” and often thought to be a relatively recent phenomenon, has actually been going full tilt for at least half a millennium.

Accumulation über alles
The driving force behind this process is the quest by entrepreneurs to accumulate wealth and reinvest it to create yet more wealth. When investors can’t get a profitable return on their investments in one region or market they transfer to another; and when opportunities to increase accumulation seem to be lacking altogether they refrain from investing, and the system loses impetus or breaks down.

The ability of entrepreneurs to accumulate wealth is based on a system of unequal exchange with those who work directly or indirectly for them, and between more and less “developed” regions of the world. This accumulation process has always been supra-national: not only is it not constrained by the borders of nation states but in fact it thrives on the unequal conditions between them.

Over the centuries this process of accumulation has confronted many obstacles. In particular, periodic economic cycles, in which the balance of supply and demand for products and services is disturbed, have been a persistent headache for entrepreneurs. They have led to everything from investment bubbles, as mentioned above, to famine, depression and war. However, the system has always managed to overcome obstacles to accumulation using an economic toolkit which includes:

Note that the above tools have been applied by peaceful methods and by force, as the situation required.

In the 19th and early 20th centuries, the accumulation of wealth obtained by unequal exchange at home and abroad made possible the leap in the intensity of production known as the Industrial Revolution. This in turn created the conditions for a further tremendous surge of accumulation. It not only brought unprecedented riches to the entrepreneurs running the system but it also gradually, if unevenly, improved living conditions for working people. The entrepreneurs needed to bring together a large corps of skilled and semi-skilled workers to man and maintain their machines and to manage their accounts. The high level of demand for their skills gave workers the power to collectively bargain up their share of the take. The result was the creation of large affluent middle classes in the industrialized countries.

Non- and partially- industrialized regions in Eastern Europe, Africa, Asia and Latin America played the role of suppliers of cheap food, raw materials and, to some extent, of consumers of finished products from the industrialized countries. These regions also experienced some growth in prosperity for local businessmen, bureaucrats and professionals who mediated the relations between their own people and the entrepreneurs of the industrialized world. Regions which attempted to opt out and develop an independent material and labor resource base, or which resisted penetration of their economies, usually found themselves facing the sharp end of Western bayonets.

By the early years of the last century new territories in which to expand had begun to run out from. Stagnation and depression became more frequent, and world wars were fought over the allocation of international territories and their resources. It was apparent that new means would need to be found to keep the rate of accumulation rising. Social unrest led to experiments with direct economic intervention by the state in the form of corporatism, fascism and the welfare state, as a means of stabilizing industrialized economies. But towards the latter part of the 20th century this strategy too was beginning to lose steam as recession, inflation and stagnation returned to haunt economies.

The neoliberal nostrum
In the late 1970s the industrialized states began to roll out a new “neoliberal” strategy in another attempt to boost accumulation. Unlike the previous periods, in which the revolutions in industrial technology and the absorption of new geographical regions into the world economy provided the primary impetus for intensified accumulation, neoliberalism’s main strategy was to sharply drive down the cost of labor as a share of operating costs. State run services and industries were closed or “outsourced” to private owners, bringing wages down and giving the states leeway to cut taxes on entrepreneurs. More importantly, the process of “off-shoring” manufacturing jobs to low wage zones in the hitherto non-industrialized world, began to gather momentum.

For workers in the industrialized zones the consequences were severe. Many manufacturing regions of Europe and the US became “rust belts” as factories closed down. Large numbers of former workers and their dependents looked to social services for their survival. But social services require a reliable tax base and the aim  of neoliberalism was to reduce corporate taxation, while also funnelling more tax money to increasingly expensive military strike forces. So, to the extent possible without creating too much unrest, social supports were wrenched away from the unemployed.

While it was very bad news for working people, the off-shoring of jobs seemed to give entrepreneurs a new lease on life. Sending work to low wage zones and paying workers a small fraction of what they paid for the same work at home helped to overcome the stagnation of the 1970s and kick-start the accumulation process again.

But each solution to the problems of keeping the wheels of accumulation turning is only temporary and brings with it new problems. Looking beyond the oil, food, and housing bubbles it is possible to discern the iceberg-like dimensions of the underlying crisis facing the system of accumulation.

To be continued