When the system collapses:
A post-capitalist capitalism?
Paul Mason’s popular 2015 book Postcapitalism begins with the provocative claim that “for the developed world the best of capitalism is behind us, and for the rest it will be over in our lifetime”. 1 Two undeniable crises drove his conviction: the Global Financial Crisis (GFC) 2 that began in 2008, and the ecological crisis of Global Warming. But are these the only existential challenges facing capitalism, and are they singly or collectively sufﬁ cient to take us into a society which is, in a fundamental sense, post-capitalist?
This depends on your definition of capitalism, and the term is so ideologically laden that some proponents assert that capitalism has always existed – because there have always been markets – while others argue that it has never existed – because there has always been government.
Leaving aside both extremes of the Loony Right, in the context of this article I will define capitalism as a social,
production and monetary system where the profit motive is dominant, whose ideology is pro-market (and broadly anti-government), where most of the means of production are owned by individuals (capitalists) rather than the State, where finance and money creation are also predominantly private, where the power of capitalists and financiers to manage their businesses and personal affairs is only lightly limited by the State (while also strongly enforced by it), and where the noncapitalist majority of the population are dependent on working for capitalists for a living.
Given that definition, I agree with Mason that there will be a postCapitalist society, because of these two crises and one other: the near-elimination, in the same foreseeable future, of the need to employ all but the most highly skilled labour to produce goods, and almost all services.
Bank lending creates money, and the repayment of bank debt, or the failure to do so through bankruptcy, destroys money.
Strangled by debt
In Can we avoid another financial crisis? 3 I show that (contrary to conventional economic thinking), credit is a significant component of aggregate demand, and that a collapse in credit in the USA, UK and much of Europe caused the GFC.
Mainstream economists were caught completely unawares by this crisis, since their macroeconomic model pretends that credit plays no role in demand. In their model, borrowing simply transfers spending power from saver to borrower, without significantly altering it in the aggregate.
This model, called “Loanable Funds”, pretends that banks do not originate loans, but instead act as go-betweens between savers and borrowers, and profit on the spread between loan and deposit rates of interest (I parody this as the ‘Ashley Madison model of banking’).
The non-mainstream band of economists to which I belong, have been calling this out as nonsense for almost 40 years, to no avail – until the GFC. But since then, Central Banks have started to proclaim that we are in fact correct, and the conventional model of lending is wrong: banks do originate loans, and these loans cause a precisely equal increase in the money supply. Bank lending creates money, and the repayment of bank debt, or the failure to do so through bankruptcy, destroys money.
I’ve taken this logic one step further to show that, since people borrow in order to buy both goods and services and assets, aggregate demand is the sum of the turnover of existing money, plus the change in bank debt, which is identical to – and causes – the credit-driven change in the money supply.
From this perspective, understanding private debt and credit is crucial to understanding capitalism, since credit is both a significant and highly volatile component of aggregate demand. Just as using your credit card increases what you can spend over and above your income, at the level of the national economy, credit increases demand over and above what it would be if only existing money could be used for spending.
It is also much more volatile too: your credit card debt can go up much faster than your income is likely to rise. And finally, just as your spending will drop well below your income if you decide you have to pay your credit card down, credit can turn negative at the level of the whole economy, reducing demand suddenly as it did back in 2008 in many countries struck by the GFC. Australia only managed to avoid a crisis because it continued to ‘max out its credit card’, and it now has one of the three highest levels of household debt ever recorded (only Switzerland has more now, and only Denmark has ever had more household debt compared to GDP than Switzerland).
Credit-based demand therefore has the drawback that it can increase the debt burden on the economy as it simultaneously boosts current demand.
Banks thus have enormous power in capitalism, but this power does not require any particular skill: their capacity to create money is simply a by-product
In macroeconomics, aggregate demand is the total demand for final goods and services in an economy at a given time. – from Wikipedia
of both double-entry bookkeeping, and being granted a banking licence by the State.
A non-bank financial institution (like a credit union) can’t create money, because it is only allowed to lend from a deposit account that it holds with a bank. Its lending thus shuffles deposits from one liability account of a bank (its own deposit account) to another (the borrower’s at the credit union), without creating money. Any increase in aggregate demand that such a loan generates is due simply to differences in how fast the borrower spends relative to the lender.
A banking licence, on the other hand, allows a bank to create an Asset on its ledger—the debt of the borrower to the bank, and thus its claim on the future income of the borrower—and a matching Liability (the deposit account of the borrower) simultaneously. This allows it to create money (which today overwhelmingly takes the form of bank deposits).
Calling this process ‘lending’ is a misnomer, since lending implies a transfer from one stash of cash to another. But there is no account from which banks transfer ‘their’ money to the borrower: instead they create the money and the debt simultaneously.
To coin an acronym, bank ‘lending’ is not lending, but ‘Bank Originated Money and Debt’ (BOMD).
A banking licence is thus a socially granted privilege, and it should be used both wisely, and in the interests of the body politic that granted it. Of course,
Australia only managed to avoid a crisis because it continued to ‘max out its credit card’, and it now has one of the three highest levels of household debt ever recorded.
To coin an acronym, bank ‘lending’ is not lending, but ‘Bank Originated Money and Debt’ (BOMD).
the opposite has happened worldwide.
As Marx put it so evocatively over a century ago:
Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner—and this gang knows nothing about production and should have nothing to do with it. 7
Bank money creation has shifted from funding the working capital and investment needs of business and the large-item consumption needs of households, to financing asset speculation pure and simple.
This speculation has in turn driven asset prices up in a positive-feedback loop, leading to vastly over-inflated asset prices, and a level of private debt which is unprecedented in the history of capitalism.
The GFC was caused by a collapse in credit-based demand, at a time when the level of private debt (relative to GDP) was already at these historic highs. Countries which had a crisis then suffered a serious downturn when credit turned negative.
In the USA’S case, credit, which had never been negative since 1950, went from plus 15% of GDP in 2008 to minus 6% in 2010. This caused only a slight fall in private debt, from a peak of 170% of GDP in 2009, to 146% in 2014. It has since started to rise again, and is now 150% of GDP.
Countries that also had high levels of debt and credit but avoided a crisis then (like Australia) did so by preventing credit from turning negative. Credit in Australia peaked at 24% of GDP in 2007, but did not turn negative (as it had back in 1992 during Keating’s “Recession we had to have”). Continued positive credit drove Australia’s private debt to GDP
The only escape from a debt crisis is to write off the debt. But...politicians have enforced creditors’ rights over debtors, leading to a stagnant global economy.
ratio up from 190% of GDP when the GFC hit to a peak of 206% of GDP in mid-2016.
Credit, though still positive, is now falling in Australia, and in many other countries that continued borrowing their way to apparent prosperity during and after the GFC. They will have recessions when credit turns negative in the next few years, and when this happens, of the order of 50% of the global economy will become what I have termed the “Walking Dead of Debt”.
As the US banker-turned-philanthropist Richard Vague has shown by examining the roughly 150 credit crises that have occurred over the last 1.5 centuries, the only escape from a debt crisis is to write off the debt. But the
8 political power of banks has instead
meant that politicians have enforced creditors’ rights over debtors, leading to a stagnant global economy.
We therefore face two distinctly noncapitalist prospects: either permanent economic impoverishment by debts that, to quote Michael Hudson ‘can’t be repaid’ and therefore ‘won’t be repaid. This would sap the economic dynamism that has been capitalism’s main bulwark against ideological criticism.
The other option is a ‘Modern Debt Jubilee’, which could use the State’s similar capacity to create money to cancel private debt.
My money, if you’ll pardon the pun, is on the former outcome: our politicians will tolerate stagnation rather than challenge the power of the banks. But I expect their hand will be forced by the second existential challenge to capitalism: the ecological damage that industrial society has wrought on the planet.
Choked by Carbon
Ecological Luddites like Trump and Tony Abbott aside, the majority of the population is at least aware that industrial production has drastically increased the level of CO2 in the atmosphere, and that this is driving an increase in the planet’s temperature. If the current trend in over-production of CO2 continues, then by 2075 – within the lifetimes of many of those alive today – the level of CO2 in the atmosphere will have doubled compared to its preindustrial norm of 280 parts per million.
This trend could be ended by a largescale switch to non-carbon-burning energy sources, and solar power is rapidly becoming cost-competitive with fossil-fuel power. But the odds of avoiding 500 ppm appear slight, and we are still left with a residue of CO2 in the atmosphere that will take centuries to reduce by natural processes alone.
While these bare bones are acknowledged by most people, I don’t believe that they comprehend the scale of the threat posed by the impact of human production systems on the planet’s ecosystem. The actual threats are not my area of academic expertise, but a more-than-layman’s interest in this issue has made me aware that, on current trends, the likely increase in temperature from sustained global warming is perhaps three times the 2-degree increase that limp treaties like the Paris Accords portray as realistic; that we will also seriously deplete the planet’s topsoil within 50 years; and that we are effectively mining the planet’s capacity to support life, since at present human production and consumption alone uses 1.6 times the biosphere’s capacity to regenerate itself (see the Human Ecological Footprint: https://www.footprintnetwork.org/).
At some stage, ecological crises that even Trump and Abbott can’t deny – or
Labour without energy is a corpse; a machine without energy is a sculpture. The real source of the physical output human society generates is neither labour nor machinery, but energy.
blame on Russia or “Maaarxists” (to reproduce both Tony’s favourite bogey men, and his nasal 'drawl')– will force us to realise that we have to respond to global warming as Churchill once responded to the challenge of the Third Reich – by declaring WWIII on climate and biosphere destruction.
When that day arrives, so will Statedomination of both consumption and production: capitalism will give way to a State-directed economy as it did during WWII, financed by government money creation—as in WWII, when the UK government’s spending exceeded taxation by as much as 40% of GDP in 1940. Rationing will limit consumption, and State-managed attempts to directly reduce CO2 in the atmosphere and seas will replace market-directed capitalist production.
Though private entrepreneurs may well design and build many of the systems that will extract CO2 from the atmosphere, there will not be a market-based solution to our over-exploitation of the planet’s biosphere.
If we survive that challenge and live, as a species and a civilisation on this planet, then our post-climate-war society will face a third challenge: managing the distribution of the fruits of production in a world where not just the working class, but even the middle class, is no longer necessary for production.
Obsolescence of the working class
One point where I strongly differ from Mason is on the role of labour in capitalism. Mason champions the Labour Theory of Value (LTV) as the analytical means by which to understand the evolution of capitalist society. I long ago argued that Marx’s dialectical philosophy in fact contradicted the primary claim of this theory, that all surplus arises from labour. But in the
context of this essay, the main fallacy of the LTV (and Neoclassical theory as well) is that it pretends that output can be produced by labour and capital alone.
Put simply, this premise contradicts Laws of the Universe that cannot be disobeyed: the Laws of Thermodynamics. Nothing can be
produced without energy, and the very idea of labour and machinery without energy does not make sense: labour without energy is a corpse; a machine without energy is a sculpture. The real source of the physical output human society generates is neither labour nor machinery, but energy.
Labour and machinery are of course critical to exploiting this energy, but rather than being the source of value, they are the means by which we harness the energy we already
find in the universe (the First Law of Thermodynamics) to convert part of it into useful work. Part is also converted into waste energy (and waste matter), and in the aggregate the increase in disorder (pollution and energy degradation) must exceed the reduction in disorder that turns raw materials into finished goods (the Second Law of Thermodynamics).
As a polymath, Marx was aware of the early work on Thermodynamics, and acknowledged this in Capital:
“Creation of value is transformation of labour-power into labour. Labour-power itself is energy transferred to a human organism by means of nourishing matter.”
But he never considered the implication that machines also harness energy and convert this into useful work, thus contradicting a key component of the Labour Theory of Value, that machines only add to output what they lose in depreciation.
Labour of course played a huge and direct role in the conversion of energy into useful work in early human societies, and harnessing that energy initially involved exploiting our fellow humans (and domesticated animals) very directly in slavery. Then, the caloric work capacity of labour was the dominant factor in determining the capacity to produce output.
But as our technology (itself the product of human ingenuity) improved, the comparatively puny energyprocessing power of humans (the average unskilled worker’s useful energy output is slightly less than that of a 100 Watt incandescent light bulb) gave way to the exponentially increasing energy processing capacity of our machinery.
Labour’s role became controlling the machines, rather than directly converting its own surplus calories into useful work. The source of the increase in material prosperity over the last quarter millennium has therefore been, not exploitation of labour, but the exploitation of what Buckminster Fuller termed ‘energy slaves’.
Now our production technology – which the inventiveness of human brains creates, but which only results in production once that inventiveness is embodied in machines – is developing machines with the capacity to manage themselves.
The days of unskilled labour as necessary to production are severely numbered, and even relatively high level (though not truly innovative) skilled labour can and will be replaced by algorithms (even if we never do produce true AI). The vast majority of the population will therefore not be needed to produce output, and labour’s capacity to bargain for a share in output via the need for unskilled
Material prosperity over the last quarter millennium has therefore been, not exploitation of labour, but the exploitation of what Buckminster Fuller termed ‘energy slaves’.
and semi-skilled workers to control the machines will disappear.
There are two scenarios for such a world: a dysfunctional Hunger Games world in which a wealthy minority enjoy vast wealth while the rest live in poverty if they live at all, or a hopefully less dysfunctional world where income for the vast majority is not dependent on their contribution to output. A Universal Basic Income, rather than a wage, would need to become the primary source of income for non-capitalists.
A Post-capitalist Capitalism
If we survive these three existential threats, then this post-capitalist world will be a social, production and monetary system where the profit motive is subservient to an ecological imperative to restore the biosphere after the enormous damage we have done to it. The ideology will be Gaia first13 and market second, and broadly pro-government because of its role in harnessing our resources to restore the biosphere. The means of production and environmental regulation will be owned equally by individuals and the State, and finance and money creation will be both private and public. The power of capitalists and financiers to manage their businesses and personal affairs will be strongly limited by the State to prevent future ecological damage, and the non-capitalist majority of the population receive their income from the State via a Universal Basic Income.
Such a society will clearly be post-capitalist, but it will still be capitalist at the same time. The great advantage of capitalism over all previous large scale social systems, is that it encourages innovation, far more effectively than did slave, feudal and socialist economies.
We need the inherent dynamism that the profit motive gives capitalism but the days of unconstrained market ideology that allows capitalists to privatise their profits and socialise their losses will be over.
The great advantage of capitalism over all previous large scale social systems, is that it encourages innovation, far more effectively than did slave, feudal and socialist economies.
This post- capitalist world will be a social, production and monetary system where the profit motive is subservient to an ecological imperative.
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