Capitalism at the Cross Roads

Not a passing cloud

Everyone is agreed that all is not well in the capitalist camp. The message from camp followers is that the difficulties are transient. This cosy vision is wide of the mark. Events suggest that the end is in sight for the form of capitalist fundamentalism that had run riot in recent decades.

I do not include ‘globalisation’ in this prognosis. Today’s capitalists did not invent globalisation; trade and capital have always moved across borders. Nowadays they move more freely and quickly, but  that quantitative change was made possible by technological innovations rather than political or economic dictates.

For most of its history, and up to the present, the United States has been relatively self-sufficient and protectionist (Samuelson and Nordhaus, Economics, 1995: 696 and 665.) On the other hand, the Chinese emperor Wudi ordered the building and operation of the 4000 mile Silk Route at about 100 BC to facilitate cross-border trade.

International trade, specialisation and comparative advantage (as advocated by David Ricardo in 1817) were in common practice even before Wudi’s time. Wool from Syrian sheep, for example, was transported abroad to be turned into cloth and then moved again to be coloured in Phoenicia before final dispatch to the market place. The Phoenicians were the leading raw materials dealers of antiquity. They enabled Nebuchadnezzer II, who reigned in the sixth century BC, to import and use English tin some three thousand miles away in Babylon.

The term ‘capitalism’ as used here does not mean the ‘market’ either. As discussed in Chapter 3 of my book on Complex Systems Theory and Development Practice (Zed Books, 2002), the utility of the market as a medium for settling most of the fundamental economic issues was recognised thousands of years before Adam Smith published The Wealth of Nations in the 18th century.

Fundamentalist capitalism

I am, however, concerned in this article with a particular form of capitalism that seems to have taken the world by storm.  Over the last few decades a group of ruthless fundamentalists managed to appropriate for themselves the concepts of liberalism, democracy, the market, and free trade. We have now a view of ‘capitalism’ that knows no bounds in the search for personal gain, corporate profits, and growth. Nothing is sacrosanct. These fundamentalists, backed by the might of the USA, have tried in effect to make laissez-faire; Carlyle’s “anarchy plus the constable”, not only respectable but mandatory.

Some of the advocates were plainly naive; such as Fukuyama who declared that history itself has come to an end with the  triumph of liberalism over communism. Fukuyama’s folly reminds one of John Stuart Mill’s assertion, made in 1848, that “there is nothing in the laws of Value which remains for the present and future writer to clear up.” This was said even before the law of supply and demand was discovered (Economics, 1995: 600)!

However, most of the market fundamentalists knew exactly what they were doing; there were rich pickings to be had and they were not going to be cheated out of their share. Scholars obliged by publishing tomes on the virtues of this latest creed. As in the case of terrorism these days, corporate America and its allies, supported by a raft of so-called international institutions, declared in effect that ‘you are either with us or you are against us’. The world leaders were won over. Nowhere has this transformation been more complete than in the case of the Labour Party in Britain which changed overnight from being mildly socialist to being decidedly right wing.

Confidence trick on a grand scale

The new creed flourished. There were numerous cracks but these were papered over, and the media, owned and controlled mainly by leading corporate interests, did there best to help. Progressively, the fundamentalists wrapped themselves ever more blatantly into flags of ‘liberalism’, ‘democracy’ and ‘openness’ and then went into an orgy of profiteering, exploitation and, in some cases, downright fraud, crime and corruption.

Growth, fast and on a lavish scale, was the only measure of success, and some enjoyed it in spades. No one noticed when the yardstick for assessing the worth of corporations and individuals jumped from millions to billions. A look at Asia’s super rich would explain the ease with which the new creed attracted adherents. In the late-1990s the top one hundred dollar billionaires in Asia were worth over $300 billions (see Asia’s Wealth Club by G. Hiscock). The same explosion in personal wealth amongst a small elite is readily evident elsewhere.

Taking from the many to enrich the few became a commonplace occurrence. Privatisation of the railways in Britain in the early 1990s was a case in point. The publicly owned railways were sold at low prices to a number of individuals who then sold them on to others at more realistic prices. It was that simple. In one case, an ‘entrepreneur’ turned an investment of £37,500 into £3.7 million in two years; a rise of 10,000 percent (Independent, 7th March 1998). This was not an isolated instance; virtually overnight, £110,000 grew to £15.9 million and £150,000 to £33 million (Sunday Times, 23rd February 1997). The water industry went through a similar process. Russia was not to be left behind; as evidenced by the oil privatisation orgy that left a few in the know rich beyond their wildest dreams.

The windfall from privatisation of public utilities shrinks into insignificance when compared with the bonuses regularly paid to a select few. In the City of London a record £500 million was shelled out to dealers, fund managers and financiers in 1996 alone. The bonanza has continued unabated ever since. In many instances, and as illustrated below, the link between performance and bonuses is hard to discern.

This explosion of wealth amongst the elite exists within a sea of  poverty and deprivation. Basically, the sham of  ‘trickle-down’ trumpeted so loudly by fundamentalist capitalists did not materialise. On the contrary, the substantial gap between haves and have-nots has steadily increased in all countries; east and west, developed and developing. The Institute of Fiscal Studies reported in the mid-1990s that during the previous two decades Britain’s richest 10 percent have virtually doubled their income in real terms while the income of the lowest 10 percent stood still. And now society at large is bearing the brunt of the worsening prospects for growth and profits. It is under full attack from the elite; as seen for instance in the rollback of welfare benefits and in the decimation of company and public pension schemes.

(Note added in May 2005: for the latest on the widening gap between haves and have-nots visit www.inequality.org/facts.html .)

Return to the bad old days

There was a time, in the post-Industrial Revolution era and for most of the 18th and 19th centuries, when brutal capitalism was in vogue. However, the hardships endured by large sectors of the populations culminated in the revolutionary movements of 1848 in Europe. Inevitably, the elite had to grant, albeit very slowly and reluctantly, some basic rights to the ‘working classes’. The most enthusiastic proponent of welfare and state regulation of companies was none other than US president Theodore Roosevelt; a Republican! Some welfare reforms were curtailed during the Great Depression of the 1930s, but again a US president, Franklin Roosevelt, a Democrat this time, set out to redress the balance with his ‘New Deal’.

The lesson was pretty obvious: extremism always ends up in tears. The welfare state and intervention by governments in economic and business matters came to be accepted as self-evident adjuncts to social, political and economic stability.

The formula worked well for a while. Growth rates of the world’s Gross Domestic Product after World War II exceeded anything seen in modern times. Profits also increased at unusually high rates. That phenomenal performance was driven by the rebuilding of countries and economies devastated by the war and the restocking of armies depleted by the war effort. In addition, the cold war created its own momentum for growth and helped to boost Western economies and America’s hegemony.

The plot unravels

While profits and growth for the elite continued to flow at an exceptionally high rate, there was no need to fleece the rest of society. The party, however, came to an abrupt end. The ‘golden age’ petered out in the mid-1970s and the era of abnormal growth and ever-increasing profits hit the buffers. Rebuilding and restocking could not go on forever as the vanquished USSR lay in tatters, although efforts are continually made to ignite wars here and there.

Growth rates went back to their usual 1-2 percent and escalating large profits became harder to achieve. Two priorities emerged: new dastardly enemies of ‘freedom’ and ‘democracy’ had to be identified quickly and company boards of directors and their chairmen and chief executives had to discover new means to keep profits and growth rates to their previously high levels.

The hopeless quest for large profits and growth had dreadful consequences for humanity as a whole. The most noticeable feature has been the escalation in strife throughout the world at a time when tension was supposed to ease following the end of the cold war. Western powers, led by a US government that is dominated by corporate interests, found numerous reasons for mounting campaigns against an astonishing collection of, mainly insignificant, foes who were said to pose a threat to world peace and prosperity. Even the tragic events of 11 September 2001 were appropriated for the purpose. An ‘axis of evil’ was promptly identified that would keep the world in turmoil, and corporations in profits, for decades to come.

Equally important, the elite turned their attention onto the welfare reforms they had conceded in the past under protest. A number of seemingly plausible explanations were put forward to justify the frontal attack on welfare. The most popular excuse was the ‘geriatric time bomb’; too many older people supported by too few people in work. In 1996, a parliamentary health committee in Britain described that scenario as a myth. The debate narrowed to an argument about whether there would or would not be a problem in the middle of the 21st century: a rare, almost unique, concern with the long-term!  The Family Policy Studies Centre and Age Concern were equally skeptical (see the Daily Telegraph, 25th February 1997). There were other, similarly questionable, excuses for the onslaught on the welfare state, and the public are now less ready to accept such explanations at face value.

Essentially, a system based on little more than greed and untenable assumptions of permanent growth and large profits, coupled with widening gaps between wealthy elites and economically oppressed populations could not endure. The setup is being progressively seen as nothing more than a confidence trick.

The final reckoning

Collapse of economies hitherto lauded as ‘miracles’ of the new form of aggressive capitalism was a good indicator of things to come. The crash of the South East Asian markets was of course the most spectacular failure. The turn of the tide became apparent in July 1997 when the Thai currency collapsed and had to be uncoupled from the US dollar.

Show of business confidence at the time was only skin-deep. When the Brazilian real was devalued in January 1999 the London market recorded its biggest-ever points fall. More recent developments in Argentina, a country which is now bankrupt, have not done much to steady the nerves.

The inevitable denouement when it finally came was rapid and dramatic. The value of shares on the American Dow Jones, the British FTSE 100 and the Japanese Nikkei indices started to fall in 1999/ 2000 and then went over the edge in February 2001. And the plunge has not stopped yet. According to the Sunday Times, 18th March 2001, the decline in shares in 2000 caused the net worth of American households to fall for the first time in 55 years. Worldwide the losses in wealth were on an even higher level.

The elite are to a large extent cushioned against these sharp losses, but for most people the impact is devastating. A study published by Kings College London revealed that those born since 1970 will carry the can. They are expected to have to work longer years, and longer hours, to endure reduced job security, and at the end to have to live on lower pensions.

In an Herculean, and largely futile, effort to reverse the trends, companies have sailed ever closer to the winds. Some inevitably succumbed. Enron, Andersen, and WorldCom have become bywords in lax governance and sharp business practices. It has been said these are isolated cases mainly associated with American business norms, but this is far from the truth. Every major economy has had its share of spectacular failures; almost always caused by mergers and acquisitions aimed at achieving overnight growth in a crumbling corporate environment.

AOL and Time Warner, France Telecom and Orange, Marconi and Fore Systems, Vivendi and Seagram, and WorldCom and MCI are only the most celebrated failures in an ever-increasing list. The failures were not simply spectacular but highly unnerving. In Marconi’s case the decline was shattering, from a prosperous leading industrial group to junk-bond status in a few short years. While the so-called experts debate the nature of this ‘transient’ episode, the public at large have already made up their minds. House prices are booming as people shift from savings and pensions into something more tangible. George W Bush’s efforts in this field have only succeeded in making matters worse.

The fruits of failure

The corporate sector is now in a state of panic. The most visible consequence of the desperate effort to shore up falling rates of profits and growth has been the scandals that have rocked the corporate fraternity to its foundations. Curiously, rates of pay and bonuses for the top people have not been affected by reduced profits, plunging share prices and, in some cases, utter failure and mismanagement.

The fiasco at Equitable Life illustrates the point to perfection. The company sold policies with guaranteed annuity rates (GAR) to about 190,000 customers. When rates fell in the mid-1990s Equitable was left with a bill for £1.5 billion. The company tried to renege on its promise and after a lengthy court case, during which the company made no provision whatsoever for an unfavourable decision, the Lords decided in July 2000 that the company must meet its obligations. As a result, just under one million customers had the value of their pension savings slashed. Nonetheless, the top executives who were at the helm before and during the debacle received large pay-offs on their way out of the mess. The clients by contrast have to pay heavy penalties if they wished to take what is left of their money out of Equitable’s clutches.

The situation at Camelot, the company that operates the lottery in Britain is just as baffling. Two of the most senior directors were given record bonus payments in 2001 at a time when the lottery sales and funds for ‘good causes’ had been falling steadily for three years.

NTL, the troubled cable-television group, provides another instance of the topsy-turvy world of business according to the credo of today’s capitalism. It was reported in May 2002 that senior executives whose aggressive acquisition strategy almost crippled the group might have been successful in securing a new package of incentives worth about $1 billion!

The rail system in Britain is crumbling and traveling by rail is becoming ever more unreliable, and occasionally dangerous. The Conservatives privatised the railways when they were in power. They set up a separate company, Railtrack, to own, manage and maintain the track and stations. Following serious management failings and fatal accidents, which led ultimately to the company going bust, Railtrack chief executive resigned in November 2000. His pay-off amounted to £1.3 million. He promptly joined Woolworths were it is reported he is doing quite well.

The Sunday Times publishes an annual value-for-money survey of bosses in Britain’s businesses. The survey demonstrates the lack of transparency and linkage between performance and rewards. The head of GSK (Glaxo Smithkline) was accorded the questionable status of being the “worst value for money”. His pay over the previous three years amounted to over £24 million, but £100 invested in the company for the same period would be worth only £90 now!

The above instances are not unique. Europe and the USA offer similarly perplexing examples of rewards for failure. And the feature is not restricted to the business world only. John Major was possibly the worst British prime minister and leader of the Conservative Party. Neil Kinnock was only marginally better as the leader of the Labour Party. They led their parties to spectacular defeats at general elections. Nonetheless, they now enjoy highly lucrative and very comfortable appointments; one in the private sector and the other at the European Union in Brussels. Members of the elites are immune, it seems, from the rigours of life.

A choice has to be made

Capitalists are today at the cross roads: they could ignore the danger signs and plow ahead regardless or they could recognise that the interests of stockholders are, at least, as important as those of shareholders. The first option would lead to massive social instability and international insecurity and would eventually end up in failure. The capitalists would be forced in the end to go some way towards adoption of a social-democratic model. The second option would be less turbulent and would lead in the end to the same social-democratic model.

After years of brain-washing, it is by no means obvious which way the shakers and movers will choose to jump. Fundamentalism is not an easy habit to kick. Sadly, fundamentalism in capitalism is more damaging than all the other forms of fundamentalism put together. To an extent, it is the mother and father of the extremism that has marked the international scene of late.