Profit driven capitalism on the eve of default

Capitalism begins when merchants trade for money, when an exchange of equal value, commodity-money-commodity, becomes an unequal exchange, money-commodity-more money, when selling to buy becomes buying to sell at a profit. In its early stages this profitable trade concerned exotic goods from afar – it would later spread to all exchanges – and was associated to various transport monopolies on land, sea and rivers. As commerce developed some merchants became bankers and exchanged money for more money, without the trouble of intermediary commodities. On a parallel course was the age-old exploitation of labour. This had been monetised by slave trading, demonetised by serfdom and remonetised by “free” labour at the end of the Middle Ages. Labour could be bought and its produce sold for a profit, a process that was hugely accelerated by mechanisation.

Capital, whether in production, trade or finance, requires a profit. Its rule is that the selling price is greater than the buying price, and their difference is used to increase the capital outlay. Capital grows and needs ever more profits, but it cannot reveal where they are coming from. To constantly get more money out of the market than is put in, there must be a constant increase in customers with money to spend. Capital’s growth was nourished by colonial expansion and plunder. Profits, the unpaid part of production, went abroad and were transformed into land rights and forced labour or precious and raw materials.

All goods and services produced and sold either go back into the production process, or they do not. They are investments or consumption, and a portion of both categories is profit. But capital expansion only seeks investments, so the surplus consumption supplies colonialists with arms and goods in exchange for the products of the colony’s agriculture and mining. With time, however, the cost of a colonial presence outweighed the investments obtained. This signalled the end of colonial dominion and the installation of equivalent (less costly) exchanges with local ruling powers. Kipling’s notion of a white man’s burden, of bringing enlightenment to the natives, was abandoned, but the exploitation and pillage continued unabated, supervised by indigenous tyrannies.

Capital grows by investing profits. When the profits are investments all is well, but when profits are consumption they must be transformed into investments. This mutation occurs on foreign markets but that does not suffice. For growth to continue a homeland transformation is necessary, so the profit part of consumption is monetised by granting consumer credit ever more widely, from the Treasury downwards. Henceforth capital growth depends more on financial investments than on productive ones. Lending future incomes at interest avoids all the hazards of making things and selling them. Banks had been partly eclipsed by the industrial revolution, as compared to their Renaissance splendour. The credit revolution gave them control of all transactions, and digital technology enhanced their power by making paper money redundant and ending the distinction between credit and cash.

Exchanging consumption for investments on foreign markets has its limits, so capital resorts to credit for the monetisation of its profits. But, in this process, the capital accumulation is financial, not industrial. The profit of consumption is exchanged for credit, not for means of production. And the credit is already an investment that pays interest, without all the trouble of making and selling. At this point capital accumulation takes the form of debt, while the capital for production is stable due to digital cost reductions and productivity gains. This in turn increases profitability and the necessary consumer credit. The whole thing can only spiral out of control and then collapse in default, which is more or less where the world is right now.

When dreams run out of steam

Being numerically insignificant, a ruling class can only maintain its dominion if it has the support of a larger group, obtained by combining mercenary and ideological means. This intermediary group transmits orders and supervises their execution, a thankless task that is compensated by above median incomes and the impression of moving up socially. The Middle Class learns to mimic the Upper Class on a modest scale, and dreams of fame and fortune. The Working Class, those who actually do things, is also fed the dream and aspires to a higher social standing. As an alternative to brute force and heredity, a social pyramid tries to be an aspiration. Success is the result of hard work and tenacity. Everyone can climb up the ladder to the top, rags to riches, log-cabin to White House, suburbia to billionaire mansion. This orthodoxy creates a highly competitive, innovative and productive society. But the ladders are steep and there is plenty of jostling, especially on the lower rungs. So the system is a source of resentment and frustration that can be severely neurotic.
 

The social pyramid achieves a consensus by propagating upward mobility. This is an illusion, because the only way to heighten a pyramid is to widen its base. Elevation is due to a new sub-structure that raises the existing levels. And the only way to elevate a social pyramid is to lift the lowest ranks with immigrants. The Romans tried it with slaves, but emancipations were rare so that new arrivals could not push up their predecessors. The original upward movement that had promoted plebeians to the leisure of bread and circus games could go no farther. (In the late empire, when the slave trade linked to conquests was reduced to a trickle, slaves became serfs and were tied to the land not a master.) At the end of the Middle Ages the decline of serfdom allowed a rural exodus that elevated commercial cities to greatness and power, and then America was discovered and subjected to an unprecedented human flow.

Having displaced and destroyed the native populations, the United States is a nation of immigrants. To the North they came from Europe, and those who survived moved upward and westward boosted by new arrivals. To the South they came from Africa as slaves. The North followed the expansive path to riches of Renaissance cities, while the South reproduced the stasis of imperial Rome, and went into sharp decline when the cross-Atlantic slave trade was interrupted by war and law. The pyramid grows and is elevated when its base can be lifted by a new under-layer, which excludes slavery. For social mobility to be more than just ups and downs there must be a constant inflow at the bottom of the pile. When the inflow is growing, each new base is wider than the precedent. When the inflow stabilises and contracts, in absolute or relative terms, the new bases are the same and then narrower than the preceding ones. And the lifting power of an expanding base is not the same as that of a shrinking one. So the structure loses its stability and a precipitous drop separates the top from the bottom.

As the elevating force of immigration dwindles and the income gap grows, discontent and doubts beset the Middle Classes. Both trends are inherent to the process, and the mystification of perpetual movement upwards must face that contradictory reality. The ideal is so ingrained, however, and is such an important element of social cohesion that evoking its long term ineffectiveness is not an option. Instead extraneous causes are blamed, Chauvinism is promoted, and then immigrants are accused of obstructing the system their predecessors have built. When the inflow is no longer strong enough to push everyone upwards, it just increases the existing base and presents the same stagnant situation as slavery.

A society that encourages rivalry in every domain rewards inequality, so winner takes all and runners-up are ignored. It glorifies the filthy rich and, at best, pities the grubby poor. It focuses attention on the 0.01%, and does its best to convince all the rest that that is the most desirable model. Competitiveness is instilled from childhood and woe to those who fail and are left behind. This cult of success is functional when many are getting a modest but increasing share. When social ascension falters and stops, aspiration turns to envy, the identification no longer holds and class confrontation is imminent. Social recessions favour the populist discourse of fascism, with its imposed uniformity, not necessarily in uniform, that represses anything that differs and stands out. Its proponents have always cuddled up with wealth, but what may look like a rampart against popular resentment, anger and revolt has always been a disaster for all. A social recession is again enveloping the world, and it is likely that reactionary forces will follow precedent in a twenty-first century version, without the goose-stepping and castor-oil.

Credit bubbles

Being too big to fail is an astounding notion, a justification of the wildest hubris. It goes against ancient wisdom concerning pride, and it contradicts history. But then, how big is too big? Neither the brontosaurus nor the megaloceros were, nor were Babylon and Rome. In fact, getting too big seems a sure path to failure, but the temptation is there, both genetic and cultural, and life falls for it every time. So the central organ that circulates money grows and leverages, and moves more and more value around faster and faster. It becomes hypertrophic but cannot stop, because capitalist profit needs an ever more abundant flow of credit. This organ cannot fail, not because it is too big but because it is essential to all exchanges. The possible failure does not concern the social institution of token value, but it does concern those organisations that control its circulation and take usury.

Whether metal or paper, money has no intrinsic value. Its value is decided by the economic actors who use it as the intermediary measure of exchanges. The early bankers were money-changers, exchanging worn and foreign coins for local currency, and doing some lending on the side. Modern banking really took form when merchants granted credit to one another, to their customers and then to the world. This probably started in Venice or Hamburg, but it spread to other trading cities and Amsterdam seems to have built the first stock exchange where credit was negotiated, bought and sold. Soon all major commercial centres would do the same. Merchant bankers took control of credit and left to the state the costly task of minting money and pursuing counterfeiters, a prerogative that was often abused until central banks were instituted, somewhere between bankers and governments, to take on the job of monetary creation.

Anyway, money only represents a fraction of payments, most of which are settled with credit. So banks in effect control payments and can expand or contract them at will, with profit as their only motive. The expansion of credit inflates bubbles, and when they burst there is a sudden contraction of credit. This happens time and time again, and is actually giving the S&P 500 index a beating, just as it battered the housing market a few years ago. The next to be thrashed are bonds, whose interest rates are far too low for the growing risk they represent. This looks like the mother of credit squeezes, and by the time the flying paper settles the capital write-off will be huge. Who will be too big this time, banks, pension funds, insurance, health, education, cities, states, and how much bailing out is possible with the public purse? These questions will probably be answered in the coming months.

Welcome to the club!

 

In the wake of other industrial nations the growth of China’s productive capacity has been so fast and on such a gigantic scale that it can be seen as a perfect example of capitalist accumulation. A process pioneered by England at the dawn of mechanised mass production. A path followed by all of today’s richest nations. In 1949, after a century of colonial plundering (1^st Opium War 1840-1842), a Japanese invasion and a protracted civil war, China was in a wretched state. Sixty-six years later it has become the world’s second largest economy, and is probably the first for manufactured goods. How has so much wealth been produced and accumulated in a lifetime?

Industrialisation begins with coal and steel, and needs protection from foreign competition. Most nations have managed this with prohibitive tariff barriers. China was a communist pariah behind a “bamboo curtain” and, before the split in 1960, the USSR was providing technical assistance, but it was using all its own coal and steel for reconstruction at home. This first stage consists in building steel works to build more steel works and the transport infrastructure between them and their sources of coal and ore. Meanwhile, consumption is either at a standstill or in regression, as its production is neglected and its labour force is diverted to mining, to building canals, railroads, etc. However, productive capacity, energy supplies and transport do not increase indefinitely without ultimate consumption. This will be military consumption and, in the case of war, the early frugality will get worse. In peace or cold war, civilian consumption of coal and steel will relay the military.

The first stage of industrial development can occur behind closed borders because coal and iron are found just about everywhere. But subsequent expansion needs raw materials and technology that must be traded for. But, after the ideological break with Moscow, China’s only remaining allies were Albania and North Korea. The 1960s were a time of political turmoil, but then Nixon decided to get out of Vietnam and visited Peking. 1972 was the turning point when Mao handed over to Zhou – who would bring back Deng, who in turn would facilitate Jiang, Hu and Xi – and when foreign trade became possible. A ruling class intent on the accumulation of capital needs to import investments not consumption, and to balance its trade it needs to export consumption not investments. The ideal case is the importation of raw materials, their transformation and their exportation. (This is what the English did with cotton in the early 19^th century, and tariff barriers on cheap imported cereals were only lifted in 1846. Cheap bred that may have helped to prevent the upheavals that spread across Europe in 1848 from crossing the Channel.) China did not have much consumption to offer, and the little they did produce was of inferior quality, though it was very inexpensive. Price was the deciding factor, and shoddy clothes and tools were soon to be found everywhere. Made in China was a pejorative term, just as Made in Japan had been twenty years earlier. Since the 1960s, Japan had managed to develop its own domains of excellence, with motorcars and bikes, cameras and electronics. In the 1980s China faced a far more competitive situation, with three industrial poles, North America, Western Europe, Japan and the Asian Tigers, dominating the world. It was also the time when large corporations were going global and were beginning to make things outside their national base. Instead of exporting finished products, they built factories abroad for a final assemblage to supply the local demand. An early example was a VW factory in Brazil in 1957. This use of cheap labour abroad brought down costs and made their products more affordable. Inevitably, some companies soon realised that these cost reductions would be even more profitable on their home market. It was the beginning of outsourced production and the multiplication of maritime and air freight. When China opened up to foreign investments in joint-ventures, some businesses were attracted by the idea of a vast number of potential new customers, while others were more interested by the huge potential of a disciplined capable work force for next to nothing. Predictably, the Chinese did not have the means to increase their consumption – that would come later – so practically all the new production was shipped out to the world, along with large quantities of counterfeit goods.

Importing investments and exporting consumption is the perfect mechanism for accumulating capital. However, it produces such a strain, nationally and internationally, that it is always short-lived. Global capitalism expands and rakes in profits, but nations suffer. At home production is increasing, but the labour force is not any better off, and sometimes the move from agriculture to industry has worsened their living conditions. Abroad the trade advantage becomes a disadvantage, as other nations are necessarily importing consumption and exporting investments. They are not increasing their investments, and may even be reducing them in some sectors. In these nations the supply of consumption increases but labour’s incomes are stagnant or in regression as “services” replace industrial jobs. This is resolved by easy credit and the accumulation of debts. There is also a rising trade deficit because their exported investments come back with added value.

The first nations to transform consumption into investments in foreign countries did it by colonial conquest and exploitation, guns and ammunition to take gold, slaves and land. The exception was Germany. Founded in 1870 the German nation had missed out on the world’s division during the previous three centuries, and was just in time to participate in the final carving up of Africa in the 1890s. Deprived of colonial bounty, Germans privileged technology and became leaders in industrial chemistry and mechanics. They also export consumption, but more importantly they export intermediary goods such as dyes and machines. These products are sold to industrial nations and the proceeds pay for Germany’s raw materials. This exchanges investments for investments, but the outgoing trade contains far more added value than the incoming one and allows the accumulation of capital. Japan was also a latecomer to colonial plunder, Korea 1910, Manchuria 1931, China 1937, and briefly down as far as the Philippines. In the 1950s the Japanese started exporting consumer goods and, having specialized, they took market shares in the other industrial nations, while protecting themselves from consumer imports (notably food) with tariff barriers.

China’s path to industrial development had similarities with the Japanese way and considerable differences. The main difference was that Chinese industry was state owned and, due to China’s isolation, was decades behind the times. There were no Chinese equivalents of Mitsubishi, Honda, Canon, Sony, etc. who could research and develop themselves to world stature and impose their brand. Another difference was that the Chinese market did not need much protection as there was no affluent middle class with the means to buy imported consumption. Anyway the state had total control. The resemblance with Japan was to trade consumption for investments with industrial nations. The first problem was resolved when joint-ventures had top brands from everywhere flocking to China’s shores. The second difference lasted for a while and the outflow of consumption grew as fast as the inflow of investments. The accumulation of capital was as effective as ever, and its speed and dimensions were those of the age. Hence, in a record time, the usual stresses cause by this gigantic pump of investments started to provoke reactions. At home, a blooming middle class of small entrepreneurs, retailers, restaurateurs, and members of the medical, legal and teaching professions were increasing their incomes and encouraging the working class from whence they came to do the same. Abroad, the outflow of investments and the inflow of consumption were destroying jobs and creating debts. This was when some began to say that Chinese goods should be consumed in China instead of being exported, and that factories would come back to their nations of origin. So the Chinese middle class took on debts like their counterparts elsewhere, which gave capital another lease of growth, but there was little or no return of manufacturing to America, Japan and Western Europe, as pay and working hours, not to mention environmental and security regulations, are incomparable.

Just like its predecessors, China has accumulated capital by trading its consumption for the world’s investments. When that process slowed down, China turned to creating demand at home by granting credit. Capital has always had recourse to consumer credit to monetize its surplus value and turn consumption into investments. But in the past it was only granted to governments and to the wealthier members of society, other people visited the pawnbroker. Then, at the beginning of the last century, businessmen like Henry Ford realised that the working class did not need collateral to be credit worthy. Since then credit has spread to all consumption, public and private. And it is now apparent that industrial nations have spent several years of their future incomes, and that the interest on this combined debt is greater than the growth rate of incomes. As for paying it back, that would dry up consumption completely, as well as profits and all the rest.

China’s accumulation of capital was fuelled by foreign trade, and the nations they were trading with were having to borrow to pay for added value they had not produced (those few cents on a smart phone). This came on top of labour’s borrowing to cover its own unpaid added value. Together they formed a debt balloon that deflated in 2007 and brought China’s trade growth to a halt. However, its production was growing at such a rate that it could not be suddenly curbed, so Chinese consumers both big and small were given a wide access to credit. It would seem that spending one’s future incomes is an acquired habit, and many unhabituated Chinese have used this easy money to invest on the stock market instead of buying cars and washing machines. They even thought for a while that their investments would be profitable, but market speculation is about as subprime as a debt can get, so that China is in turn on the verge of a debt default crisis. It is showing the world that it is a fully-fledged member of the capitalist club, all of them up to their necks in paper promises.