Can the 500-year-old system survive

“All systems have lives. When their processes move too far from equilibrium, they fluctuate chaotically and bifurcate. Our existing system, what I call a capitalist world-economy, has been in existence for some 500 years and has for at least a century encompassed the entire globe. It has functioned remarkably well. But like all systems, it has moved steadily farther and farther from equilibrium. For some while now, it has moved too far from equilibrium, such that it is today in structural crisis.” 

This statement  by Immanuel Wallerstein in an article published by Foreign Policy on the second day of 2011 sumerises the growing pessimism in many circles that capitalism as we got to know it, especially since the 1970s, can survive for much longer. It might have developed terminal structural defects, many commentators argue.

Some of Wallerstein’s arguments even imply that the democratic model as we know it and as it developed in tandem with modern capitalism might be part of the problem and therefore could come under pressures of its own.

His main arguments are:

• The basic costs of all production factors have risen remarkably -- personnel expenses, cost of renewal of resources and infrastructure;
• Democratisation of the world has led to demands for more and more, from education to health care and guarantees of lifelong income leading to significant increases in taxation of all kinds;
• Combined, these costs have risen beyond the point where serious capital accumulation is possible; and
• Price increases have limits beyond which they cannot be pushed  because of the elasticity of demand.

The result is a growing profit squeeze, which is reaching a point where “the game is not worth the candle”, he writes.

It might be these structural pressures, some commentators argue, that led to the situation that, in turn,  led the chase for profit via complicated, high-risk financial products that in reality produced nothing of any practical value and were at the root of the financial crisis that started in late 2007.

The extraordinary expansion of the world economy in the post World War II years until 1970 has been followed by a long period of economic stagnation in which the basic source of profit has been rank speculation sustained by successive indebtednesses.

The financial system has been prostituted to the point where its core business, of being a facilitating service industry is totally overshadowed among others by the chase of profit via, often debt-financed speculation that does not add a single penny to real production.

To what extent production as the core value of capitalism has been displaced is well illustrated by the fact that according to Benjamin M. Friedman of Harvard University, from the 1950s through the 1980s profits earned by financial firms (excluding insurance and real estate) accounted for 10% of total United States profits. By the 1990s it grew to 22% and to 34% from 2001 to 2005.

“Fantastically high salaries and bonuses attracted more than a quarter of Harvard’s graduating job-seekers to investment banks, hedge funds, private equity firms, and the like,”  Bloomberg reported in November last year.

As was painfully illustrated by the financial crisis of 2007/08 and by the fact that the financial industry is full-steam back at its old game, governance of the sector has not kept up with developments in that sector or with the effect of globalisation on the financial industry.

And, as Bloomberg points out in its November article, “any effort to make finance safer, especially via new taxes, will be vociferously opposed by Wall Street and the banks, whose profits are amplified by leverage”.

Other threats

But the state of the financial sector is by far not the only threat to the modern capitalist system.

In another article on the same Foreign Policy-webpage referred to above, under the heading “Economies can’t just keep on growing,” Thomas Homer-Dixon writes: “Within this century, environmental and resource constraints will likely bring global economic growth to a halt.”

He argues that available resources already restrict economic activity in many sectors, though their impact usually goes unacknowledged and cites as an example rare-earth elements essential to the manufacture of many technologies. Meeting demand will require new mines at staggering environmental cost.

He also points out that for the petroleum industry the amount of energy received for each unit of energy invested in drilling has dropped from 100 to 1 in Texas in the 1930s to about 15 to I in the continental USA today. The oil sands of Alberta, Canada yield a return of only 4 to 1.

If the World Bank’s projected rates of global economic  growth hold steady, global output will have risen almost tenfold by 2100, which will imply tripling of carbon emissions. This, according to scientists, in terms of impact on the climate would cause such extreme heat waves, droughts, and storms that farmers would likely find they couldn’t produce the food needed for the world’s projected population of nine billion.

“Indeed, the economic damage caused by such climate change would probably, by itself, halt growth,” Homer-Dixon writes.

Socio-political implications

Much is written about the resentments building up in many societies against the ever-growing economic gap between the privileged few who benefit from the system as it is presently functioning and the majority in most countries.

The most dangerous factor, however, is ever-increasing food prices and the growing numbers of those who go hungry across the globe.

In an article in the UK Guardian newspaper Raj Patel last week reported that the UN has announced that its global food price index is now higher than it has ever been. Already this year, protestors have taken to the streets in India, Jordan and Algeria.

Illustrating how shocks to the system in one part of the world get transferred to other parts because of  the way the economic system has developed over the past 100 years. About food inflation, he writes: “It’s true that weather events have had an impact on global markets, but this is hardly the first La Nina. This historian Mike Davis, in his magisterial work Late Victorian Holocausts, looked at how the world responded to the cyclical El Nino/La Nina shocks throughout the 19th century.

“In the 1800s, the effects were survivable – but by the 1890s, in the so-called golden age of liberal capitalism, weather shocks were being transmitted directly to the poor through the newly established system of global commodity markets. And it’s these markets that have recently gone into overdrive.”

More than $200 billion has been poured into food markers since the financial crisis by speculators hunting profits, creating volatility. In the meantime  one billion people have gone hungry in 2009.

But if  you think that by governments clamping down on such practices the problem will be fixed, you would be mistaken. Without global consensus fixing the present problems of the economic system will be extremely difficult – and if you think that is a likely scenario, just ponder the following sentence from the Patel article: “The World Bank’s Robert Zoellick calls for freer markets, but researchers at ,er, the World Bank found that it’s government spending that helps most!”

In conclusion

In conclusion we take a paragraph out of Wallerstein’s article: “The only sure thing is that the present system cannot continue. The fundamental political struggle is over what kind of system will replace capitalism, not whether it should survive. The choice is between a new system that replicates some of the present system’s essential features of hierarchy and polarisation and one that is relatively democratic and egalitarian.”