The final countdown

Capital and labour share the value produced, and their proportionate shares have varied over time. Capital gets profits, rents and interest. Labour gets salaries, benefits and pensions. The state levies a tax on all this and redistributes it to both capital and labour. Over the past three decades, increased productivity has largely favoured capital, while labour’s share has stagnated. Several factors seem to be behind this shift in wealth distribution.

The turning was initiated by Thatcher and Reagan, with fewer taxes and less distribution. The free services provided by governments were taken over by profit making companies and had to be paid for. Government disengagement from providing services such as health and education was not compensated by equivalent rises in salaries, so households were encouraged to restore their unbalanced finances with mortgages and overdrafts. Meanwhile, drastically reduced taxes were forcing governments into increasing debt. All these growing debts were the result of political decisions that were preceded by an ideological conversion.

The 1970s marked a trough in the business cycle, with economic stagnation, high inflation, a crude oil crisis over OPEC price hikes, the end of the gold standard and America’s withdrawal from Vietnam. The Eastern Block fared no better. It was the Brezhnev era, when opponents filled psychiatric institutions instead of Siberian work camps, where queuing for hours for shoddy goods was part of everyday life. And Solzhenitsyn’s Gulag Archipelago was published in 1973, a terrible indictment of the Soviet regime and its communist model. The proposed counter-model was small government, low taxes and free private enterprise. This meant selling publicly owned services, utilities, land and mines, and subduing the trade unions. Maggie and Ronald were pretty good at both, and they were followed by the two champions of Newspeak, Bill and Tony.

Britain and America initiated the mental turnabout from social to private, from commonwealth to corporations. In France, a newly elected “socialist” government was eager to join them. Elsewhere, adhesion was more hesitant, but after 1991 a new Russia and its ex-satellites auctioned off everything that could find a buyer. The nation’s wealth was handed over to some oligarchs who had been Soviet functionaries or KGB officers. China kept its centralised, one-party cooptative form of government, while opening up to foreign investments and joint ventures. And the rest of the world was forced to conform by the World Bank and the International Monetary Fund. Privatising the public domain brought governments some quickly spent cash and put an end to revenue. And the privatised need for profits meant cutting costs, especially the cost of labour. So governments and households compensated their falling incomes by borrowing. Revenue had changed hands and was invested in developing countries, where wages, regulations and taxes were all very advantageous. Outsourcing production reduced incomes even more and provoked an equivalent debt bubble.

Capital and labour are unremittingly linked together, as neither can function alone. Capital needs labour to produce and consume, while labour needs capital for the means of production and consumption. Capital finances and labour does, but only the owners of capital decide what is financed and what is done. And their ultimate goal is to make a profit, and thereby increase their capital. This driving force completely neglects the well-being of societies and of humanity as a whole. Capital can bring a return in various ways, mainly rent, entrepreneurial and commercial profits, and interest. It takes capital to house people and their productive/recreational activities. It takes capital to make land agriculturally productive. It takes capital to set up infrastructure for transport, communications, sewerage and the distribution of water, electricity and gas. It takes capital to build machines, to extract raw materials, to store and sell goods, and to supply services. It takes a little capital and a huge privilege to grant credit, most of which is created out of thin air as scriptural money.

Housing, agriculture and infrastructures are long term investments that can, with appropriate upkeep, last decades if not centuries. Industrial and commercial investments are more ephemeral, because technology and fashion are evolutive and unpredictable. Sinking funds are rarely provisioned for more than ten years, and commonly from two to five years, which are the life spans of new models. Investments in credit and debt must cover all these time scales, as well as some of their own. The period between a loan and its restitution may last hours, days, months, years, decades and up to a century, with interest clocking up all along the way. Individual debts can be packaged up as “derivatives” that can in turn be packaged, and so on. Their total has been variously estimated at between ten and twenty times Global World Product (from $700 trillion to $1.5 quadrillion as compared to $80 trillion) (1). There is no way this astronomical sum can be redeemed, so the debts roll over and go on increasing every second of every day.

One of the strongest arguments against a more egalitarian distribution of wealth is the promise of growth. Growth like a rising tide lifts all boats, big and small. Another version is that increased wealth at the top trickles down to the bottom. What is not said is that, though the poor benefit from growth, they do so far less than the rich. Increased wealth for the poor is a rise in wages, whereas increased wealth for the rich is a rise in capital. Wages may cease but capital remains and brings a return. Anaemic growth does not directly impact dividends, but it blocks and reduces salaries. And that in turn influences demand and eventually profits.

Production and consumption are two phases of the same process. Productive investments need willing and able consumers, whereas investments in debt need borrowers. When the two collude to makes consumers borrowers and borrowers consumers, labour is reduced to debt bondage and the concentration of wealth reaches its final stage of global dominion. However, trying to sustain long term growth in consumer demand with debt is a fairly obvious fallacy. Debt increases consumption and is consumed, which means that paying it back reduces consumption. So debts are rolled over and new ones are contracted to keep up growth in consumer demand and to pay for interest. Consumer debt cannot be reduced without a reduction in demand. And, because of interest, debts must increase just to maintain demand.

Capitalist accumulation of rent, interest and profits is possible because more value is taken from the market than is put in. This surplus value is paid with debts. Invested debts are returned, consumed debts are not. Consumer debt cannot be paid back without reducing demand. So debts pile up faster than demand and end up by becoming unmanageable. But there is no going back other than cancellation (bailing out), and there is no attenuation other than inflation. Global debt has reached such a disproportionate dimension that it can no longer grow fast enough to cover interest and increase consumer demand (2). When capitalist accumulation slows down globally it can still grow individually by buying other companies, or by putting them out of business and taking their market shares. Concentration is the final stage of accumulation, and it signals the end of the long cycle. It is a time of extreme tensions and violence, of cut-throat competition and chauvinistic reactions. And that is a pretty good description of today’s world. How it will end this time is anybody’s guess.

1. http://www.globalresearch.ca/global-derivatives-1-5-quadrillion-time-bomb/5464666

https://en.wikipedia.org/wiki/Gross_world_product

2. Until recently, Chinese debt had mostly been a good thing. China's economy was growing faster than its debt, making the debt manageable. The growth also meant that there were positive returns on money loaned out to growing Chinese enterprises.

The problem with debt, however, is that it lasts a long time. As the debt pile grows, the repayments become larger and larger, placing a burden on the economy. Each renminbi of new credit loaned out produces diminishing results. That prompted Barclay’s analyst Ajay Rajadhyaksha to call Chinese debt a "bubble" earlier this year.

https://uk.finance.yahoo.com/news/china-may-2-trillion-hidden-073200133.html