The Trouble With Capitalism: Market Saturation

pp. 35 & 36:

Market Saturation

The increasing maturity of most consumer markets in the industrialised countries was becoming a noticeable constraint to economic growth in the industrialised world by the end of the 1960s. This meant that in addition to static demand for non-durable goods (food, drink and clothing) the markets for most durable products (automobiles, television sets etc.) tended more and more to be governed mainly by replacement demand rather than by the continuous opening up of new groups of first-time buyers, which had been possible throughout the 1950s and early 1960s. Hence demand for goods generally began to grow more in line with population — which was in any case increasing more slowly than in the immediate post-war period — rather than at the rapid rates recorded up to the mid-1960s.

The result was that companies serving these markets were obliged to diversify into new products or services in their unavoidable quest for further expansion, especially as they were barred by anti-monopoly restrictions from taking over their competitors, at least within their national frontiers. One consequence of this was the emergence, particularly in the USA, of 'conglomerate' groups or companies with diversified activities ranging from telephone equipment manufacture to hotel chains....

One thing that I'm particularly sensitive to in reading this book, and elsewhere, is the idea that at least a significant part of the trouble with the modern economy is exaggerated expectations of return on investment on the part of investors. This is essentially one reference to it here. Still, it doesn't seem to crop up as much as I'd guessed it would. I'm not sure whether this is because the author understates its role (or I'm just wrong in its significance), or he just assumes it as a near-axiom, not worth mentioning because it's a given.

Yet gradually, as may now be recognised with the benefit of hindsight, the development of such new consumer markets proved insufficient to offset the impact of the saturation of existing ones.... Thus for many it was an article of faith that every economy was subject to a normal or 'underlying' growth rate or trend, from which it might be expected to deviate only under abnormal circumstances and, implicitly, for relatively short periods. Likewise, as already noted, many of the cruder apostles of Keynes had convinced themselves that 'demand management' could actually permit the stimulation of increased consumption simply by injecting more money into the economy, and that consequently excess productive capacity need never be a problem again. Thus they, along with most OECD governments, failed to appreciate that, once the short-term limits of purchasing power have been reached, the only consequence of artificially trying to extend them further is bound to be inflation.³

3. Even now it is quite common to find economists who reject any notion of limits to demand growth, usually on the grounds that it is based on the 'lump of labour fallacy' — that is, the suggestion that there is a fixed amount of output (and hence labour) required to meet demand (cf. S. Brittan, Capitalism with a Human Face, Fontana, London 1996). The obvious perversity of this argument is based on a refusal to bring the time factor into the equation, since it is not a question of suggesting that demand is finite in any absolute sense but only over a given time period. Yet since rates of return on capital are reckoned in relation to periods of time it should not be necessary to point out that it is the short- or medium-term limitation which is crucial in defining whether there is a ceiling on demand growth.

I think we're getting pretty close now to the "limits of purchasing power," "bound to be inflation" point he's talking about. By the way, have you checked the price of wheat lately?

The Trouble With Capitalism: Investment promotion

Investment promotion (pp. 23 & 24)

Besides undertaking to apply the weapons of macroeconomic management to influence the level of output and employment, governments resorted to other forms of intervention to help sustain activity. Most conspicuously, they became significant promoters of investment, whether through state subsidies or incentives to private investment, or else through direct state equity participation in enterprise. The proliferation of such mechanisms — including grants, tax concessions, loan guarantees and subsidies to research and development — was for many countries (notably those of continental Europe as well as Japan) simply an extension of their traditional approach to economic development. Yet its rapid growth throughout the Western market economies (including the United States) in the post-war period meant that 'corporatism' had become a universally accepted element in the post-war capitalist system. What was scarcely perceived at the time — and is still not widely accepted even in the supposedly more laissez-fair 1990s — is that such uncontrolled use of state support for enterprise (whether in the private or public sectors) was bound to result in serious distortion of competition and international trade patterns.⁵

5. See H. Shutt, The Myth of Free Trade, Basil Blackwell/The Economist, Oxford 1985

Note that I would certainly agree that, here in the US, the "grants, tax concessions, [and] loan guarantees" have certainly gotten rather out of hand. More on that when I cover the later chapters.

Transnational corporations (p. 32):

Such was the basis of what was later to become known as the 'global economy'. Perhaps surprisingly, it has been widely acclaimed in the 1990s as the very model of a dynamic, free-market economic system in which the inability of either governments or private corporations to control the pattern of development is treated as a positive virtue. However, as suggested in this chapter, it is really the legacy of a post-war attempt to organise the world economy along the lines of international cooperation rather than uncontrolled competition & in a climate of opinion which had, indeed, come to reject laissez faire as an intolerably unstable basis for economic management. The fact that it proved a recipe for anarchy based on rampant market distortion was the result of misplaced commitment to the idea of the sovereign nation-state, combined with a lack of political will to curb the power of transnational corporations.

The Trouble With Capitalism: The New Deal

I'll be mostly glossing over the next couple of chapters in The Trouble With Capitalism, as the mostly deal with historical background. But I'll doubtless find a few bits worth mentioning. Like the following. (pp. 15 & 16)

[W]hen US President Roosevelt assumed office for the first time in 1933 he was committed to a programme of vigorous intervention by the federal government to stimulate and underpin a recovery in the US economy — the New Deal — based on broadly similar principles to those applied by the Fascist regimes in Italy and Germany....

It is significant that one area where the Roosevelt administration's proposals for state intervention in the economy met with little opposition was support for the financial sector. Nothing had been more fatal to attempts to restore confidence in the United States following the Wall Street crash than the catastrophic collapse in the banking sector, with no fewer than two thousand banks failing in 1930 alone. This prompted the new administration to introduce, as one of its earliest measures, legislation requiring all banks to insure their deposits (up to a maximum level for each one) through a government agency, the Federal Deposit Insurance Corporation, thus guaranteeing small savers against total ruin.¹³ This measure... foreshadowed what was to become, after World War II, an implicit commitment by the state to act as 'lender of last resort' to the banking community — in other words, to come to the rescue of any institution whose failure could be considered a threat to the stability of the financial system as a whole, regardless of how reckless its lending policy may have been. Yet as with so many other moves tending to advance the role of the state in sustaining the capitalist system, this far-reaching commitment was made as a purely pragmatic response to otherwise ruinous market trends. It is scarcely a matter of wonder that those responsible, who were also closely linked to the main beneficiaries, were not inclined to emphasise its ideological implications.

13. In reality the use of an insurance scheme was cosmetic, since the level of premiums paid by the banks never corresponded to the actuarial cost of providing the necessary cover and it has been understood ever since that the federal government will provide whatever support is necessary to avert the collapse of any bank which might entail 'systemic risk'.

In short, the kind of trouble that these policies were meant to avert does sound a lot like the current problems of the sub-prime collapse. Especially that bit about "com[ing] to the rescue of any institution whose failure could be considered a threat to the stability of the financial system as a whole, regardless of how reckless its lending policy may have been."

Counting the costs

This story in The Australian ties in rather well with my current reading, and helps bridge the gap of the decade since it was written.

THE Iraq war has cost the US 50-60 times more than the Bush administration predicted and was a central cause of the sub-prime banking crisis threatening the world economy, according to Nobel Prize-winning economist Joseph Stiglitz.

The former World Bank vice-president yesterday said the war had, so far, cost the US something like $US3trillion ($3.3 trillion) compared with the $US50-$US60-billion predicted in 2003....

Professor Stiglitz told the Chatham House think tank in London that the Bush White House was currently estimating the cost of the war at about $US500 billion, but that figure massively understated things such as the medical and welfare costs of US military servicemen.

The war was now the second-most expensive in US history after World War II and the second-longest after Vietnam, he said.

The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.

"The regulators were looking the other way and money was being lent to anybody this side of a life-support system," he said.

That led to a housing bubble and a consumption boom, and the fallout was plunging the US economy into recession and saddling the next US president with the biggest budget deficit in history, he said.

Professor Stiglitz, an academic at the Columbia Business School and a former economic adviser to president Bill Clinton, said a further $US500 billion was going to be spent on the fighting in the next two years and that could have been used more effectively to improve the security and quality of life of Americans and the rest of the world.

The money being spent on the war each week would be enough to wipe out illiteracy around the world, he said.

Just a few days' funding would be enough to provide health insurance for US children who were not covered, he said.

The public had been encouraged by the White House to ignore the costs of the war because of the belief that the war would somehow pay for itself or be paid for by Iraqi oil or US allies.

"When the Bush administration went to war in Iraq it obviously didn't focus very much on the cost. Larry Lindsey, the chief economic adviser, said the cost was going to be between $US100billion and $US200 billion - and for that slight moment of quasi-honesty he was fired.

"(Then defence secretary Donald) Rumsfeld responded and said 'baloney', and the number the administration came up with was $US50 to $US60 billion. We have calculated that the cost was more like $US3 trillion.

"Three trillion is a very conservative number, the true costs are likely to be much larger than that."

This is just the kind of thing Shutt is going on about in this book. (My reading in it is currently far ahead of my posting about it.)

Afterthought (added 03-01): I might also point out that that sum comes to around $10,000 for every man, woman, and child in the United States. Enjoy your tax cuts!

The Trouble With Capitalism blogging

So, since I've gotten myself an old new book from the library, The Trouble With Capitalism: An Enquiry into the Causes of Global Economic Failure by Harry Shutt, and I'm reading it now, I thought I'd share some of the choicer excerpts as I go along. Some, I'll just post without comment; others, I might point out things that have come to pass since then, or how it relates to my own beliefs in the area, or even where I feel it might be in the wrong. Keep in mind, it is a 1998 book, so some of it is a bit dated. I might even pick on it a bit in places, for instance where it says the Interwebs don't seem to be really taking off. But it'll be good-natured; in that example, his thoughts seem to have been born out eventually by the bursting of the New Economy dot-com bubble.

A choice bit from the very first page of the introduction, to start off with:

The rapid advances of this new consensus [the superiority of laissez-faire capitalism] to near universal acceptance owes much to the recent conspicuous failure of economic models based on extensive state intervention to deliver adequate levels of prosperity or security — most spectacularly in the fallen Soviet empire. Yet despite this apparently compelling logic, anyone endowed with a reasonable capacity for impartial observation of everyday realities — and for treating official propaganda with due scepticism — might recognise that such claims of a triumph for the free market and of its supposedly magical powers are profoundly perverse, for at least three reasons.

Further on in the introduction (added 2-28):

This book is an attempt to expose the realities of the contemporary evolution of the global capitalist economy, and thereby to dispel the illusions which lie behind the neo-laissez-faire prospectus. By viewing it in the context of the longer-term development of the world economy it also seeks to demonstrate that the reason for the aggressive and irrational dogmatism of the Western political establishment in trying to forge this new consensus is a growing sense of the increasing fragility of capitalism rather than of its enduring strength. Indeed the reader may well conclude that only acute awareness of a genuine threat to the survival of the dominant vested interests could explain such systematic distortion of reality.

In some respects, it may be noted, the analysis presented here of the chronic weakness of profit-maximising capitalism is traditional, in that it emphasises the distorting and destabilising effects of the recurrent excess supply of capital in relation to the demand for it. What is perhaps less familiar is the revelation that technological change is leading to a long-term relative decline in the demand for fixed capital, thereby rendering traditional capitalist structures obsolete — much as the new technology of steam power made inevitable the replacement of feudal structures and cottage industries by capitalist enterprise some two hundred years ago.