Sunday, August 9, 2015

"How Will Capitalism End?"

Via Reddit, from the New Left Review: How Will Capitalism End? by Wolfgang Streeck. A long article; you can download the PDF but it is 30 pages, a number that exceeds my brain capacity...

So far I read almost the whole first paragraph,
There is a widespread sense today that capitalism is in critical condition, more so than at any time since the end of the Second World War. Looking back, the crash of 2008 was only the latest in a long sequence of political and economic disorders that began with the end of postwar prosperity in the mid-1970s. Successive crises have proved to be ever more severe, spreading more widely and rapidly through an increasingly interconnected global economy. Global inflation in the 1970s was followed by rising public debt in the 1980s, and fiscal consolidation in the 1990s was accompanied by a steep increase in private-sector indebtedness. For four decades now, disequilibrium has more or less been the normal condition of the ‘advanced’ industrial world, at both the national and the global levels.
(Footnotes removed.)

and looked at the first graph:

Like you perhaps, I was drawn to the article by its title. And then, that first paragraph was most satisfying: Capitalism IS in critical condition. The crash of 2008 WAS the latest in a long sequence of disorders that began in the mid-1970s. Successive crises HAVE proved to be ever more severe.

I like the quote because it identifies monetary problems: inflation in the 1970s, public debt in the 1980s, and private debt in the 1990s. Excellent focus. Then I react: Hey, I'm one paragraph into a 30-page paper, I know, but I think Wolfgang Streeck is gonna go off in some weird direction and I'm probably going to have to disagree with him.

So I have to write this before I read any more.


The end of capitalism? Where does he get that?

Oh -- I know where he gets it. I read about this. Time magazine 31 December 1965 maybe, Leuchtenburg maybe, and Toynbee, lots of Toynbee. I read about this.

William E. Leuchtenburg in Franklin D. Roosevelt and the New Deal, from Chapter 2:
The longer the depression persisted, the more people began to conjecture whether they were not witnessing the death of an era. "One wonders if this paralysis of the power to produce and consume will drive us all to a life on the level of the Middle Ages," speculated a welfare worker.... A writer asked: "Will future scholars date from 1929 the decline and fall of western civilization, as we now hear on every hand ... ?"

Many believed that the long era of economic growth in the western world had come to an end.

Sheesh. Let a time of troubles arise, and suddenly everyone thinks it's the end of life as we know it. You know what I have to say to that? Stop making predictions. Just stop.

Yes, things went sour in the 1970s -- or the 1960s, I'd say -- and got worse since then, and now things are extremely bad. The quote is valuable because it points out that the problem started long ago and has been getting worse. A lot of people don't seem to realize it.

Streeck's word "critical" implies the end is near. We don't know that. It's a prediction. Still, things have been getting worse for so long now that we don't need to predict the future. It is enough to consider the last fifty years.

"The End Is Near"

Where does this idea come from, that endings are at hand? When things go bad for a long time, when things get bad enough, our natural optimism succumbs to a more practical view. Keynes had it right when he said:
In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change.

After things have been going bad for a while, we start accepting the downhill trend as the new normal. All we can see at the end of the trend is the end of life as we know it.

I'm thinking that's where the idea comes from.


How does it work? Arnold J. Toynbee described the progress of civilizations as a repeating pattern. He called it "challenge and response":
Now civilizations, I believe, come to birth and proceed to grow by successfully responding to successive challenges. They break down and go to pieces if and when a challenge confronts them which they fail to meet.

In the Somervell abridgement of A Study of History, Toynbee described what happens when the response is not successful:
When the outcome of each successive encounter is not victory but defeat, the unanswered challenge can never be disposed of, and is bound to present itself again and again until it either receives some tardy and imperfect answer or else brings about the destruction of the society which has shown itself inveterately incapable of responding to it effectively.

This is exactly our situation today -- and for the past 50 years. Many people have been convinced by the long duration of the decline, that the end is near. Indeed, it could be. But all we need to prevent it is the right response to the challenge.


The economy was good, before the mid-1960s. On the last day of 1965, Time magazine put John Maynard Keynes on the cover, and included these words in the opening paragraph of their cover story:
In Washington the men who formulate the nation's economic policies have used Keynesian principles not only to avoid the violent cycles of prewar days but to produce a phenomenal economic growth and to achieve remarkably stable prices. In 1965 they skillfully applied Keynes's ideas—together with a number of their own invention—to lift the nation through the fifth, and best, consecutive year of the most sizable, prolonged and widely distributed prosperity in history.

They ended that article with these words:
If the nation has economic problems, they are the problems of high employment, high growth and high hopes. As the U.S. enters what shapes up as the sixth straight year of expansion, its economic strategists confess rather cheerily that they have just about reached the outer limits of economic knowledge. They have proved that they can prod, goad and inspire a rich and free nation to climb to nearly full employment and unprecedented prosperity. The job of maintaining expansion without inflation will require not only their present skills but new ones as well. Perhaps the U.S. needs another, more modern Keynes to grapple with the growing pains, a specialist in keeping economies at a healthy high. But even if he comes along, he will have to build on what he learned from John Maynard Keynes.

I always wanted to be that guy.


It was a golden age. But they did mention "the job of maintaining expansion without inflation". That one turned out to be a killer.

The Kennedy half dollar issued in 1964 contains $5.38 worth of silver at recent prices. But at those same prices, the Kennedy half issued in 1965 contains only $2.20 in silver. Because after 1964 the silver content dropped.

In 1964 the silver content in those coins was 90%. For 1965 it was reduced to 40%. They knew already in 1964 -- before they had minted any coins for 1965 -- they knew that inflation was forcing debasement of the coinage. That's a significant point in the history of the U.S. economy. They knew it a good two years before that December 31, 1965 issue of Time came out. At least two years.

Time was aware, too. They wrote of "maintaining expansion without inflation".

1965 -- That was the start of the Great Inflation, according to Alan Meltzer. And, as "Adam Smith" wrote in Paper Money,

That was the high point. The dragons of inflation and unemployment began to snort in their caves, and 'stagflation,' an awkward beast, a hybrid of inflation and stagnation, roamed without serious natural enemies. Cynics said there were two sure signs that the Keynesian era was waning. One was that Time magazine put Keynes on its cover....


What I get from Toynbee:

When the outcome of each successive encounter is not victory but defeat, the unanswered challenge can never be disposed of, and is bound to present itself again and again until it brings about the destruction of the society which has shown itself incapable of responding effectively.

The roots of our economic problem go many years back, and many people now fear the end is near. But I am reminded of Thomas Edison, inventing the light bulb. Forbes:

For example, in developing a commercially viable light bulb, Edison actually went through over ten thousand prototypes before getting it right... Later Edison became famous for saying “I have not failed 10,000 times. I have not failed once. I have succeeded in proving that those 10,000 ways will not work. When I have eliminated the ways that will not work, I will find the way that will work.”

Edison, and Sherlock Holmes:

How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth?

None of the things we've tried have solved the economic problem. We need to admit that our solutions have not worked, and find something else to try. Eliminate the ways that have not worked, and consider what remains.

Our task is to improve our understanding of the economic problem until solutions become obvious.

And do it before time runs out.

"Keynes did not despair of capitalism as so many other economists did." -- Time

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