Capitalism’s grave new world

The financial crisis of 2007/08 delivered a shock to the capitalist system from which it is yet to recover. It cut across globalisation – and the triumphalism that followed the collapse of Stalinism. HANNAH SELL reviews an important new book revealing the deep-rooted fears of leading capitalists.

Grave New World: the end of globalization, the return of history

By Stephen D King

Published by Yale University Press, 2017, £20

Stephen D King is senior economic advisor for HSBC holdings, the world’s seventh largest bank and the largest in Europe. He clearly considers himself a sincere advisor to the capitalists, warning them of the dangers their system is likely to face and suggesting ways to ameliorate them. However, there will be scant comfort to be found for those he advises in the pages of Grave New World… the Return of History. As King explains, the end clause of the title is "primarily a response to Francis Fukuyama’s famous claim in 1989 that we were approaching ‘the end of history’. He argued that western liberal democracies and free-market capitalism had effectively triumphed over all other political systems. As the cold war came to an end it was a claim that carried remarkable resonance. Western values were, apparently, on the verge of spreading throughout the world, thanks somewhat to the forces of globalisation".

King argues, as is now accepted even by Fukuyama, that this was hubris: "This is, perhaps, not the end of history after all. Western-led globalisation is in big trouble. We may be witnessing the collapse of the post-war international economic and political order. What follows may eventually lead to the re-emergence of imperial rivalries, a throwback to the 19th century. In the short term, however, the world is likely to be increasingly chaotic. As such, huge challenges lie ahead for the west".

King’s book is a list of challenges faced by global capitalism with little proffered in the way of solutions. It is for the capitalist class a horror story worthy of the author’s namesake. From an opposite class standpoint he draws many of the same conclusions that have been drawn by the Socialist Party not just now but throughout the post-Stalinist era.

The intractable problems of capitalism that King describes are multi-faceted. One central aspect is the retreat of globalisation and the increase in tensions between nation states. This is not new. From its inception one of the fundamental contradictions of capitalism has been between the nation state, within which capitalism developed, and the world market. However, as King says, "the scale of the problem is bigger than ever before. Even as markets – in trade, capital and labour – have become ever more globalised, the institutions able to govern those markets have become ever more fragmented. In 1945, when the United Nations was founded, there were 51 member nations. In 2011, the year in which South Sudan joined, there were 193. With the collapse of the Soviet Union, there is no longer a binary choice between what might loosely be described as US-style free-market capitalism and Moscow-inspired communism".

Declining US power

King recognises that central to the increased regional and national tensions facing global capitalism is the decline of the US and, ironically, the collapse of the Soviet Union which, in spite of its grotesque distortions, was based on a planned economy and therefore represented an external threat to capitalism. That forced the capitalist nation states, however reluctantly, to work together under US leadership.

Today the US remains the world’s greatest superpower, particularly militarily, as King explains: "In 2014… China, the second-biggest military power, had a military budget roughly one-third of America’s, while Russia’s budget was only half of China’s". It is, however, a declining power, far weaker than at its zenith in the post-war period. Even militarily there are real limits to its power, as has been written large by it being forced to cede to Russia in Syria.

King looks back with longing on that era when the US was able to enforce an international framework for capitalism which, for a period, provided a certain stability. In essence he is arguing for the development of a new framework of global institutions based on cooperation between the world superpowers. Yet his whole book points out the reasons why this is likely to prove impossible. He recognises that what existed in the past was possible only because of the US’s strength. The Bretton Woods agreement, for example, which provided a global financial framework by pegging currencies to the US dollar, was based on the premise that the dollar was backed by gold. Prior to the second world war, the US held two thirds of the world’s gold in Fort Knox.

The period of growth for western capitalism that followed the post-war boom from around 1950-73 was exceptional, only possible for specific reasons that eventually reached their limits. Part of that process was the start of the US’s decline. King writes: "One potential source of chaos from the very beginnings of Bretton Woods was the likelihood that eventually the US would not be able to meet its commitment to exchanging dollars for gold on demand at the pre-established rate". According to the IMF, "in 1966, foreign central banks and governments held over 14 billion US dollars. The United States had $13.2 billion in gold reserves, but only $3.2 billion of that was available to cover foreign dollar holdings. The rest was needed to cover domestic holdings".

In 1971 president Richard Nixon abandoned the Bretton Woods system, marking the beginning of a new era of economic crisis. Throughout the following decades the US has been in decline but that has now reached a tipping point. After the second world war it accounted for 50% of the global economic market. Now it is 16% while China has soared to 18%. If, and this is a very big if indeed, China was to continue to grow at the same rate, its economy would be three times larger than the US by 2040.

Globalisation’s limits

We have described how we now live in a multi-polar world, where the US is forced to collaborate with Russia and China, and the major capitalist powers are increasingly in conflict with each other, destabilising world relations. King sums up this process by making a comparison with George Orwell’s 1984: "Orwell may also have offered an accurate vision of geopolitical arrangements in the 21st century. The three empires in Orwell’s world constantly changed allegiances so that at any point in time two are at war against a third. As the US loses its appetite for supporting the global institutions that have established ‘the rules of the game’, it is not impossible to imagine that the 21st century will increasingly be characterised by 1984-style superpower rivalry".

The North Korean crisis is an acute example of the unstable character of world relations. Faced with the nightmare possibility of a nuclear weapons strike by the North Korean regime, Chinese and US imperialism are managing some cooperation. This is in spite of the obstacles, not least Donald Trump’s bellicose posturing, which are not under the control of US capitalism. Nonetheless, such is the extreme dysfunctionality of the North Korean regime and the unpredictability of Trump that the horror of a nuclear strike taking place cannot be absolutely ruled out.

The election of Trump is both a symptom of and a catalyst for the tendency for US imperialism to move in an isolationist direction. This trend has been developing for some time as capitalist globalisation has come up against its limits. Even some of its most rabid supporters have moved into opposition. For example, Larry Summers, former chief economist of the World Bank and no supporter of Trump, has shifted from being an uncritical cheerleader for globalisation to calling for ‘responsible nationalism’.

There is no solution for capitalism in retreating behind national borders, or even to regional blocs. What is more, there are real limits to how far the enormous integration of the world economy that has taken place in recent decades can be unwound. No trend under capitalism is ever carried through completely to its conclusion. Even so, King is accurately describing a real movement in an isolationist direction.

That was abundantly clear at the recent meeting of the G20. Capitalist commentators described it as the most important meeting for eight years. Whereas they look back at the meeting in 2009 as a great success, this one was condemned as an utter failure. The presence of Trump meant that, for the first time, there was not even a token agreement to avoid protectionist measures. It was Xi Jinping, on behalf of China, who stepped in to posture as a ‘responsible leader’, arguing for global cooperation. Unlike US imperialism in the past, however, the Chinese regime is not a strong enough power on the world stage to be able to enforce its views on others. Nonetheless, it is attempting to step into the vacuum left by the US’s retreat under Trump, as shown by its volunteering to take the US’s place in the Trans Pacific Partnership (TPP).

Full-blown crisis delayed

In contrast to the failure to agree anything this year, when in 2009 the major powers faced the worst economic crisis since the great depression of the 1930s, they cooperated to rescue the financial system, pumping vast sums into the world economy to ameliorate the worst effects of the crisis. Yet none of the underlying problems were solved. King says: "True, the G20 members collectively managed to avoid another great depression. They did not, however, return their economies to the growth rates of old. The recovery in economic activity in the western developed world was, by historical standards, unusually limp".

King points out that the cooperation actually contained large elements of competition in the form of using quantitative easing to implement a kind of competitive currency devaluation: "No one would admit such a thing – no one, apparently, was in the business of pursuing 1930s-style ‘beggar-thy-neighbour’ currency devaluations – yet as one central bank after another fired up the printing presses, it became increasingly difficult to think of quantitative easing in any other way". He adds: "Put another way, monetary policy has – unwittingly – become a mechanism by which countries end up waging financial warfare".

King argues, along with many capitalist economists, that more thoroughgoing global cooperation could have done more to combat the consequences of the economic crisis. He suggests that "those countries that can easily sustain their debts or reduce their savings should be encouraged to maintain – or even increase – their spending, even as others take a more austere path. In a post-financial crisis world, three countries were in a good position to do so: the US, China and Germany".

He goes on to bemoan the fact that, "of the three key players, however, only China delivered this outcome. The Middle Kingdom’s balance of payments surplus dropped from its 2007 peak to a mere 1.6% of national income by 2013, rising modestly thereafter". There is no doubt that the actions of China did lessen, or to be more accurate delay, the full consequences of the economic crisis, particularly for a number of the major commodity producing countries. This was only possible because China is still not a ‘normal’ capitalist country, as King recognises, but because of its history still a peculiar kind of ‘state capitalism’ which was able to pump credit into the economy on a monumental scale. This in turn has produced a ratio of state debt to GDP of 270% which under a ‘normal’ capitalist regime would have already caused a major collapse. As it is, growth in China has slowed and many of the countries it sustained in the years after 2007/08, such as Brazil, are now in devastating economic crisis.

This is a precursor to a new stage of global economic turmoil that will be posed at a certain stage. King has no policy proposals to prevent this. When he touches on the reasons for the 2007/08 crisis and the weak recovery since, he gives many of the same explanations as Socialism Today. Explaining what 2007/08 revealed, he writes: "So what was hiding behind the curtain? The pace of economic growth was much slower than had previously been assumed. For most countries in the developed world, the rate of increase in living standards had begun to slow long before the onset of the financial crisis. The crisis itself – and its aftermath – simply reinforced the point".

‘Socialism’ for the rich

He adds: "The idea that international free-market capitalism has delivered the best outcome for all is less than compelling. Take, for example, the US economy. On average, living standards appear to have risen a long way since president Reagan took office in 1980. Gross domestic product per capita – an overall measure of living standards – almost doubled between 1980 and 2015. The distribution of the overall gain, however, has been heavily skewed in favour of those who were – for the most part – already well-off. The median weekly salary for full-time employees has barely budged in real, inflation-adjusted terms since 1979 – the year before Ronald Reagan came to power. For men, salaries in real terms have actually declined by over 7%".

He links this to the process of globalisation: "Yet income and wealth inequality in some parts of the western world are, once again, on the rise, both pre- and post-tax, and both pre- and post-benefits. The usual fiscal checks and balances no longer seem to be working. There is a simple explanation. If the two defining features of the modern era are, first, the increased concentration of capital ownership and, second, greater cross-border mobility of capital, it is hardly surprising that a national system of taxation and benefits can do little to prevent the continued rise of inequality".

On the ‘recovery’ he explains accurately the effects of quantitative easing, which we have described as ‘socialism for the rich’ and he describes as benefiting above all "not so much the top 1% as the top 0.0001%". "They proved to be the major beneficiaries of quantitative easing – the supposedly magical monetary medicine where, in effect, a central bank purchases financial assets in a bid to drive their prices higher, in the hope that households and companies will spend more. The S&P 500 index peaked before the global financial crisis at 1,557. It then plummeted to a low of 683. A handful of years later – partly in response to sustained pump-priming from the Federal Reserve – the index had jumped to a new high of 2,270. Given that around 90% of the total value of financial assets in the US is owned by the top 10% of households, this was – particularly for the very well off – a very pleasant windfall gain".

"Quantitative easing may have been designed to kick-start economic growth, but the pace of recovery in the US – and elsewhere – was unusually weak. In particular, despite strong gains in equity markets, companies mostly remained unwilling to invest. In many cases they didn’t need to. Subdued labour incomes – thanks to a mixture of weak demand, technological change and competition from cheaper labour elsewhere in the world – meant that gains in sales revenues alone led to higher corporate profits; higher profits, in turn, fed through to further stock market gains, even in the absence of a recovery in the economy. For both the owners and managers of companies, this appeared to be a case of ‘heads I win, tails you lose’, triggering much gnashing of teeth and, not surprisingly, a renewed interest in the causes of, and cures for, rising income inequality".

Here King touches on a fundamental symptom of this phase of capitalist crisis: historically low levels of investment by the capitalist classes, despite sitting on huge cash piles. He makes a similar point elsewhere: "In particular, although stock markets made impressive gains in the years after the financial crisis, capital spending in the developed world remained largely moribund". In other words, capitalism globally is largely failing in its ‘historic mission’ of investing in developing the productive forces: science, technique and industry. It is not doing so because there is insufficient money-backed demand for the goods it is already producing with current industry.

King raises the prospect that this problem will become worse not better in the coming period. He suggests that there could be a growth in ‘reshoring’, bringing factories back to the US and other economically-advanced countries as the protectionist wings of the different capitalist classes gain influence. However, he explains that this would not be done on the basis of providing jobs for workers in the countries to which industry was ‘reshored’ but by "replacing cheap labour with robots", thereby lowering wages further on a global basis.

Mass opposition

On the one hand, King recognises that mass political opposition to such developments is inevitable, and that both right and left populist movements are a response to the endless austerity on offer from globalised capitalism. On the election of Trump he correctly points out that this reflects the enormous unpopularity of all politicians who are seen as part of the establishment, not least Hillary Clinton: "The proportion of Americans polled who have either ‘a great deal’ or ‘quite a lot’ of confidence in Congress dropped from 42% in 1973 – when Gallup first asked the question – to just 8% in 2015, an approval rating lower than for any other institution, including banks, organised labour, newspapers, the criminal justice system, television news and big business".

King has a tendency, however, to condemn all such movements as ‘nationalist’ without differentiating between them. He does not properly acknowledge, for example, that the election of the Syriza government in Greece was motivated by opposition to the capitalist austerity being imposed by the institutions of the EU and IMF rather than opposition to the EU on a nationalist basis.

Moreover, he overplays the role of social media in aiding the development of new popular movements: "It also provides a platform by means of which (let us call them) ‘disruptive’ politicians can quickly establish a meaningful voice, and are easily able to recruit the support of like-minded people who may in no way reflect the views of the political mainstream. No longer does the aspiring disruptor have to go to Speakers’ Corner in London’s Hyde Park to air his or her views before an audience of people hoping to be amused rather than inspired. Instead, the disruptor can take to social media, in the process bypassing the established party systems that have traditionally acted as filters to limit the success of populists. This leads, in turn, to the success of previously fringe movements – Syriza in Greece, the Five Star Movement in Italy – and to the hijacking of mainstream parties".

Without doubt social media provides a very useful tool in building support for new anti-establishment and anti-capitalist movements, and combating the lies of the capitalist media. Nonetheless, social media platforms remain controlled by massive multinational corporations. This meant that at the height of the Egyptian revolution the state was able to shut down Facebook and Twitter completely in order to prevent their use, although this did not stop the revolutionary movement.

Of course social media is an instrument which socialists should utilise, but the real reason for the growth in what King calls ‘disruptive’ ideas are the fundamental failings of the capitalist system which he eloquently describes. On one level he understands this and fears the development of an effective alternative to capitalism which would threaten its existence. This review article, however, does not have space to elaborate all of the potential disasters he sees ahead for capitalism.

He spends some time, for example, looking at the likely growth of Africa’s population and the resulting millions of young unemployed or underemployed people. He links this to the growth of ethnic and religious violence in different countries and raises the prospect of mass migration to Europe. Picking out Nigeria, he writes: "Should this violence [ethnic and religious] escalate further… Nigeria would eventually be in danger of becoming Africa’s Syria. In the event, Syria’s refugee crisis – appalling as it is – might end up being a mere footnote in a new epoch of mass migration".

Ready for socialism

Lying behind all of his fears for capitalism creating war, social collapse and mass migration is the fear that this might lead to a search for a new society. King spends some time on the Soviet Union explaining that, in a time of world economic crisis in the aftermath of the Russian revolution, it attracted millions of people worldwide because of the improvements it attained in living standards – possible on the basis of a planned economy: "We now know that, between 1920 and 1930, Soviet living standards rose by more than 150%, compared with gains of 42% for Germany, 20% for the UK, and 12% for the US".

He then adds: "Soviet living standards rose relative to those in the US in the interwar period – from 20% in 1920 to 35% in 1938, only to return to 21% in the immediate aftermath of the second world war. They rose again during the cold war, reaching a peak of 38% of American incomes in 1975, before falling to 31% as the Berlin Wall came down in 1989. The Soviet version of economic progress… just didn’t deliver the goods". Whether or not these figures are accurate, far from showing that a planned economy ‘just didn’t deliver the goods’, they give a broad outline of the positive economic consequences of capitalism being successfully overthrown for the first time in Russia in 1917.

Russia was an economically backward country left isolated and under attack from world capitalism as a result of the failure of revolutionary movements in other countries. In these circumstances it degenerated into a monstrous Stalinist dictatorship. Nonetheless, as King has to accept implicitly, the planned economy – even with a Stalinist stranglehold at the top – was for a long period able to develop the economy more quickly than even the most advanced capitalist country, transforming the Soviet Union into a world superpower. Eventually, the bureaucratic mismanagement of the economy, which always had a terrible cost for the working class and the environment, became an absolute fetter.