Capitalism isn’t dead, it just smells funny

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To paraphrase Frank Zappa, capitalism isn't dead, it just smells funny. The point is easy enough to demonstrate. The cost of capital, the prevailing interest rate, is, as one commentator quipped, about to hit 5000 year lows. The 'capital' element in 'capitalism' is in trouble.

Skywards view of skyscrapers in Midtown Manhattan, including the Bank of America Tower (Credit: Busà Photography / Getty)Interest rates are headed towards one per cent in Australia, they have turned negative for depositors in Germany, they are 0.75 per cent in Britain, they have been near zero for nearly three decades in Japan, and they are over two per cent in the US but probably headed lower.

It is true that there are other defining features of 'capitalism', such as private property ownership. It is also true that there are other types of capital that do not carry an interest rate, such as equity (share) capital.

But those plummeting interest rates indicate something is very wrong. The effects are also likely to be perverse, making capital less available, not more, as commentator Sajit Das observes. Banks tend to raise fees, or turn to other revenue measures, to boost earnings, which keeps actual borrowing costs relatively high. There are also many other collateral effects from a struggling banking system.

'Instead of stimulating the economy, negative rates increase uncertainty about the future,' Das says. To see what he means, one only has to look at the experience of Japan, which has failed to stimulate its economy since 1990, despite decades of low rates.

The lowering of interest rates in the wake of the global financial crisis of 2007-08 sparked a massive global debt accumulation (and a series of asset bubbles, which in Australia has been most obvious in the distorted property market). World debt is now running at over 320 per cent of global GDP and the only way of preventing a widespread collapse is to maintain the low interest on the debt. Central banks, which decades ago lost the ability to control the supply of money, can now only control the cost of money (the interest rate). That lever is all but exhausted.

It is easy to blame the financial sector — and the governments that were supposed to oversee the financial system but instead just washed their hands of it — for creating this global debt debauch. They certainly bear much of the responsibility, but in many ways the financial misbehaviour is as much symptom as cause.

 

"In an effort to keep the ball rolling, and to stimulate demand, central banks have thrown cheap money at consumers. But that trick is ceasing to work."

 

The deeper problem is global oversupply, especially in manufactured goods. Technological and management improvements have resulted in more cost effective output. This writer can remember in the 1990s observers saying that all the car factories in North America could be closed and there would still be too many cars for the market. The problem was partly ameliorated by a spate of mergers and joint ventures between the automobile giants, but the underlying trend has not changed.

On the demand side the global fertility rate is about half what it was 50 years ago — 46 per cent of the world's population lives in countries that are below the average global replacement rate of 2.1 children per woman — which means that too few new consumers are coming through. Worse, the decline in fertility is most pronounced in developed economies, where consumers have greater purchasing power.

So, in an effort to keep the ball rolling, and to stimulate demand, central banks have thrown cheap money at consumers. But that trick is ceasing to work as the level of gross indebtedness rises — about four fifths of the US population lives from pay cheque to pay cheque — and room for further interest rate falls shrinks.

What is needed is a measure of economic equality for capitalism to be sustainable. As the carmaker Henry Ford allegedly understood, it is necessary to pay workers well so they would have enough money to buy his cars.

Most proponents of the myth of the 'free market' would object strenuously to the idea that there is a symbiosis between labour and capital, and would resist efforts to ensure higher incomes for workers. Their rusted-on assumption is that the only thing that matters is higher productivity (efficient output), so as to benefit consumers. But the problem is not efficiency, as evidenced by the oversupply. People have to be able to purchase the output; for 'productivity' to exist, a transaction has to occur. If their wages are too low — mainly driven down by companies locating production in countries where workers' wages are only a fraction of developed economy incomes — then the result will be fewer transactions and slowing economic growth.

Lowering interest rates to encourage more borrowing and spending has run its course. Without an improvement in worker incomes in developed economies, capitalism's 'funny smell' will only get worse.

 

 

David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Main image: Skywards view of skyscrapers in Midtown Manhattan, including the Bank of America Tower (Credit: Busà Photography / Getty)

Topic tags: David James, capitalism

 

 

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Free markets work. But many participants are unethical, acting as monopolies and crushing competition. The world’s richest man is Amazon’s Jeff Bezos. In 2018, one in three Amazon workers in Arizona were on food stamps—paid for by the taxpayer. Last Thursday, Bezos cut benefits for part-time workers at his Whole Foods, leaving thousands without health insurance. In 2013, $6 billion of taxpayer’s money was paid to Walmart employees for food stamps/medical/housing. Uber’s founder is another billionaire, but many drivers earn below the minimum wage. In super-rich Silicon Valley in California, 86% of new jobs pay below the median wage. Most are casual/part-time. Progressives like Chris Lehane, who managed Obama’s 2008 campaign, maintains that this economy is “democratizing capitalism.” He would say that! In most of the recent elections big tech companies have financed the Democratic Party—a Party now turning to socialism. California is about to legislate to effectively turn contractors into employees; in NYC Amazon was rebuffed by Alexandria Ocasio-Cortez, the new face of Democrats; antitrust laws could see the break-up of Google and Facebook; and one senator suggested Facebook’s Mark Zuckerberg could face “the possibility of a prison term.” What did Lenin say about capitalists selling rope?
Ross Howard | 25 September 2019


Insightful and inciteful (sic). Capitalism's advocates would've cringed if they'd learned interest rates could plunge to negative figures globally, but unfortunately as we navigate the economic path the "norms" one could assume fall foul of uncharted risk and lack of vision - not because they can't imagine, they just refuse to look. Thankfully the Australian Government has created a high return, safe haven for the investor - a Government guaranteed in legislation 12% P.A. return on tobacco products... so while the outlook for assets is pretty glum you can rest assured the same think-tank is conjuring up a ready-made population of consumers which we'll import (just as long as they have a PhD or will pay to get it here). You could consider good old gold as a go-to but I have a sneaking suspicion that China just might suddenly park a few thousand tonnes on the international market in retaliation to trade sanctions. If it drops below $800 per ounce it's not worth mining... Same as most things, the greatest risk to Capitalism is its proponents' hubris. And then what...?
ray | 25 September 2019


Part of the problem is that economics has turned to “least cost “ strategies as a measure of “efficiency” instead of looking at “effectiveness”, creating and sustaining local community and developing transition strategies that preserve community when traditional industries are phasing out. People matter, and people exist and flourish within coherent communities: they are not there to be discarded when something cheaper comes along.
George Mainprize | 26 September 2019


Spot on wrapping up of the situation. If employees were given shares in the enterprise in which they work as a result of increased profits, then the divide between workers and capitalists may disappear. Everybody would be paddling the same canoe. Another factor impacting on consumers discretionary spending, is not goods per sec, but utilities such as excessively priced essential services and commodities such as electricity, petrol, diesel and gas, water, sewerage rates and rents. If these essentials were brought back to an affordable level in today's economic climate, consumers would have more dollars for discretionary spending. Government taxes and charges plus the privatisation of these essential services and commodities is a majoe cause of economic grief for most.
Ungst Inverbotten | 26 September 2019


I am a novice in economics. I always find David James both a teacher and interesting. Thanks for the article.
Steve Sinn | 26 September 2019


The concept of a “Living Wage” as well as a review of “Government Benefits” or even “Universal Income” could rectify some financial disparities in Australia. This would stimulate the economy. At the moment the only sector keeping the Australian GDP afloat is the building industry - yet housing is becoming more unaffordable for more people. We have to rethink economic measures.
Anna | 26 September 2019


The pursuit of profit is all that drives capitalism. Workers are just a cogs in the wheel. I refuse to use the automatic checkouts when I am forced by need to shop at my local Coles- we usually go to Aldi , although even there I am not really comfortable either. Remember the local corner store, the butcher, the baker the 'candlestick maker'. All driven out of business by the trio which now has something like 90% of the groceries market. They provide employment to local people and put spending money into the local economy. Years ago my wife and I started an Asian grocery. We went well until "Colesworth" decided to stock Asian Groceries, often generic brands and sell them at prices which severely undercut our prices, making the business very difficult to justify . We sold it to save our assets going down the gurgler . It is still going strong, although I wonder how much debt the owners have accumulated . In the last few years, we have lost our local baker , butcher, florist , local bank branches and bank ATM as they could not compete with 'Colesworth' or in the case of the banks, the branch and the ATM were not profitable anymore. What they don't realise is as David says, people will not spend if they are insecure in employment as contractors or casuals or poorly paid. Deregulation of business by both sides of politics in the last three decades or so has led us to this mess. We need rules to govern business ethics and morality just as we need laws governing citizen, conduct , such as road rules for example. The Banking Royal Commission certainly proved that! Unregulated Capitalism = greed = inequality.
Gavin A. O'Brien | 26 September 2019


Thank you David for raising some very important aspects about the way capitalism operates and the problems it is causing. Some environmentalists might dispute Frank Zappa's statement by saying that we should substitute the word "funny" for the word "toxic"! It is important to realise that while most of us are rightly concerned about climate change, we also need to be concerned about the poisoning of the environment. Much of this is due to the behaviour of the executives of industries who illegally dump their toxic wastes which threaten the purity of our soil, water, air and food. They also resist laws to protect the health, safety and welfare of workers, the wider community and the environment. In addition, the politicians who condone this behaviour resist passing legislation to deal with the problem or ensure that enforcement activities are starved of funds and/or personnel. And, as Ross Howard points out, there is the world wide exploitation by the super rich to further increase their already huge profits. It is time that those who believe in social justice and care for the environment demand an economic system at home and abroad that does not condone the exploitatiion of ordinary working people and the environment. It was Mahatma Gandhi who said that the world has enough for everybody's needs, but not everybody's greeds.
Andrew (Andy) Alcock | 28 September 2019


Much of the economic malaise David James here ascribes to on-the-nose capitalism is in fact a product of Keynesianism. Plunging interest rates are a classic example. How can they possibly be thought of as a “defining feature of capitalism”, given they are mandated by the state, following the sainted Keynes’ statist prescriptions? It was Keynes’ stipulated (not argued) rejection of Say’s Law that paved the way for reviving the bogus Malthusian theory of the “general glut” and the ridiculous doctrine that we can somehow spend our way out of a depression (a depression caused by the state’s interference in the money supply and banking, not by the free market) via the magical Keyensian “multiplier”. All attempts to do so so far have failed miserably, for reasons a sensible child could figure out. In fact the whole fractional reserve system, wherein banks are deemed by the state as “too big to fail”, and so must always be bailed out by the hapless taxpayer, either directly by punishing taxes or indirectly through monetary inflation, is intrinsically anti-capitalist. That rathole – the government-created fractional reserve system – preceded Keynes himself. But Keynesians and other big government leftists have run the institutions wholus bolus for decades … and now they blame capitalism for the disasters their theories have wrought!
HH | 02 October 2019


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