The rich have too much money. That’s not a moral judgement, it’s an economic fact. An IMF paper last December spelled it out: across the developed world, corporations are saving and lending money, rather than investing it in their operations, while rich individuals are actually running short of profitable companies to invest in.
Among corporations this is the age of the share repurchase. Instead of just merely paying dividends out of the yearly profit, large firms are also using their excess cash to buy back shares from ordinary investors — in many countries reducing their tax burden — while still further concentrating the ownership of assets among the super rich.
Meanwhile, the money of rich individuals and families has the same problem: nowhere to go. Private equity firms, who typically use the cash of rich families to acquire and restructure companies at high rates of return, spent about $500bn worldwide last year — but four times that much, a cool $2trn, remained in their bank accounts unspent, for want of a safe opportunity.
If you combine that with the $3trn in cash unspent by US companies alone, you get a sense of the huge dysfunction at the heart of post-2008 capitalism. The technological basis for a fourth industrial revolution is there, in the form of automation, biotec, robotics and post-carbon energy systems. But it’s not happening. Capital, right now, does not want to participate in capitalism.
As to the causes, the IMF researchers are clear: high net-profit rates, near-zero interest rates and exorbitant tax cuts.
Profit rates have risen because, first of all, workers have little power to bargain their own wages upwards. Meanwhile, the market power of large companies such as Apple, Amazon or Volkswagen mean they have been able to push so-called “markups” — the difference between production cost and selling price — to historic highs. In 1980 the average markup for a US company was 21 per cent above cost; by 2016 it had risen to 61 per cent.
As to low interest rates and tax cuts, these are responses to the repeated financial boom-bust crisis that began to hit the neoliberal system after 1997. Governments, via their central banks, had to throw a tsunami of free money at big business just to keep the economy alive, and then divert even more money — via tax cuts — away from the neediest in society.
Beyond driving gross inequalities, what do these developments mean for the future of capitalism? For mainstream economics, there is always the search for an anomaly, or a bad policy. Giant firms can charge more than double what a product costs to make because there is too little competition, says the theory. If so, why don’t regulators aggressively break up and penalise firms like Apple and Google? The answer is because these firms have decisive lobbying power, and because the political class is heavily invested in the status quo.
What mainstream economists rarely do is consider the problem at the level of the entire economic model. But the root cause of this malaise would not have mystified Nikolai Kondratieff, the first systemic thinker about long-term patterns in economic growth.
Kondratieff is famous for his “wave theory” — more accurately called a theory of long cycles. Writing in the 1920s he believed the long-range price data for the developed world shows evidence of a roughly 50-year cycle in which profit rates, and prices, rise and fall. At the start you get a technological takeoff, an expansion in the global marketplace, an increased supply of currency, and the emergence of new, high-profit sectors and business models.
But, said Kondratieff, towards the end of a cycle, money tends to pool into the finance system, unable to find productive outlets. With more and more money chasing financial assets, their price rises — so you get stock market and property booms even as the real economy slows down. At the end, with interest rates low, and growth stagnant, something forces money out of the finance system and back into production, deploying new technologies and new skills.
This is a highly plausible theory and, for me, once you add in one crucial modern development, has been the key to understanding the malaise of capitalism since 2008. According to Kondratieff’s theory, the world should, by now, be on the brink of a fourth industrial revolution. The tech innovations have been made, the idle money is there — literally sitting in the cash accounts of companies and individuals doing nothing: so why do the rich buy yachts and watches — or for the super-rich, spacecraft — rather than pouring their money into the mass deployment of high-productivity technology?
The answer lies in the state of the class struggle. If you study the real history of the big turning points that Kondratieff described, it is nearly always working class resistance that stimulates technological innovation.
Around 1848 the capital-owning classes realised they could not go on operating the Dickensian business model of leaving urban populations in penury. The mid-19th century saw industrial capitalism take off on the basis of a partnership between capital and labour. Again, around 1900, the sheer strength of working class resistance caused capitalists to innovate managerial techniques to stratify the workforce — the so-called Taylorist revolution — and at the same time to automate old, high-paid, skilled jobs like carriage manufacture (which was replaced by the automobile production line). After 1945 the biggest upsurge of growth in history was triggered by a new social contract between workers and the state.
But what now? One of the unique features of neoliberalism was its determination to atomise the working class — destroying not only its wage bargaining power but its social cohesion. Absent a vigorous class resistance, there is no incentive for employers to replace workers with machines: it’s cheaper to employ precarious workers. And there is no incentive for the ruling class to cut a deal with the labour movement in the form of a new social contract that boosts demand.
Capitalism in the northern hemisphere is, in short, stuck. People with money would rather pour it into loss-making start-ups like Uber, whose purpose is to further undermine the social cohesion of cities, than into risky technological innovations. The political system actually rewards speculation: witness the speculative building frenzy in places like Manchester and London, both under Labour control.
What capitalism needs is a shock — and the shock will come in the form of left governments committed to a massive restructuring of priorities around zero net carbon. That, of course, is what the existing elites are fighting to prevent, using their newspapers, TV stations, lobby groups and private intelligence agencies.
In the design of Green New Deal programmes, there is a lot of emphasis — rightly — on the need to borrow and spend. Until we overcome our obsession with fiscal discipline, the money needed to fund state-led energy transformation programmes will not be found.
But it is equally important to reshape the investment priorities of the private sector. The money stored up as “dry powder” in private equity funds, and in the cash piles of corporates, needs to be coerced and cajoled into long-term productive activity.
The carrot takes the form of clear, 30-year infrastructure and housing plans. Once it becomes clear that the government will incentivise clean renewable energy and social housing, and the creation of high-wage jobs in high-technology sectors, long-term investors might change their behaviour.
But nothing happens at inflexion points like these without the stick. To stimulate competition and reduce the markup power of large corporations, the authorities will have to aggressively break up monopolies and limit the size of corporations. To boost the wage share of GDP, we need the immediate restoration of trade union rights, alongside the strengthening of minimum wage and workplace regulations. Until the profit share of GDP falls back to its historic level, it is logical for governments to hike taxes on business profits, and ruthlessly collect the taxes due.
Right now, most of the Tory leadership contenders are gobbing off about the need to save capitalism. The problem is, they have no idea how to — and in their commitment to a monopolised, low-tax, low-wage and deregulated economy, they are actually helping to kill it.
Given the urgency of the IPCC mandated carbon target — to cut emissions by 45 per cent by 2030 — either capitalism has to be reformed to achieve this, or it has to be replaced. Though I believe, long term, that a transition beyond market economies and scarcity is under way, the easiest way to halve our carbon output would be to radically reform capitalism over the next 10 years. Capital that does not valorise itself is not really capital: it’s a coin collection and some neat Swiss watches. The historic mission of the market-industrial system was always meant to be more than that.
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