Andrew McKillop
21st Century Wire
CAPITALISM VERSION 1.0
In a guest post to Zerohedge, 8 February, Charles Hugh-Smith starts: “The road for both global capital and the State is narrowing to a rocky trail that leads to a cliff. We turn to cycles – business, solar, Kondratiev, etc. to understand current events. But what if this era is not just a cycle but the terminal phase of Global Capitalism 1.0?”
What indeed! Somewhat like the rogue state business of Noam Chomsky, the straw man of Late Stage capitalism is a slippery mutating thing, changing in ways we do not expect. As Hugh-Smith says
there are many unknowns in a process that is difficult to define, but among its symptoms we have the self-willed and programmed destruction of the State and its enforcement of ever more monopolistic cartels seeking a declining mix of economic rent and increasing mix of capital rent, on the less and less productive side of the coin. On the other parasitic consumption side of the coin we have vast social spending and the ‘hoarding’ or concentration of capital.
He calls this the road along which global capital and the State is trundling towards a rocky end, or even a sheer cliff. “Two sides of the same expansionist coin, neither can continue to expand in a world of diminishing returns, shrinking margins, surplus labor, declining wages and tax bases, higher input costs and a restive, entitled/high-expectations, urbanized and under-employed workforce”.
CYCLE TIME
The cycling of ever less productive, ever more diluted or virtualized capital is shown by very simple indicators: in the 1960s, $1 invested in the US economy produced about 59 cents return. Since year 2000 the average return runs at about 18 cents. Inflation then makes the numbers even more lurid for the amounts needed to attain or achieve any growth of the economy; add in sovereign debt drag or its “servicing” costs, and we can be surprised there is any economic growth at all. But economic growth is vital for the State – although it is less than a side issue, even unwelcome for capital rentiers who, unlike economic rentiers thrive off the late stage, degenerate, declining economy.
This is characterized by stagnation or contraction, deflation, mass unemployment, social injustice and
conspicuous consumption, huge surpluses of production capacity and its result of distressed assets on
the chopping block at penny-on-the-dollar prices. Price distortion is rampant. Other characteristics or
symptoms include currency wars, trade wars, civil wars and military adventure, that is military and
colonial warfare.
Economists like Veblen and Schumpeter have extensively described the process. Kondratiev also
described the process but from a much longer historical standpoint. His argument for what he called
the Super Cycle is that this cycle of at least 350 years length started early in the 1600s, following the
(very) early takeoff phase of European capitalism, that Charles Hugh-Smith, citing Fernand Braudel,
Giovanni Arrighi and Immanuel Wallerstein describes like this: “Everything that characterizes modern
global capitalism was already operational by 1500: stock and bond exchanges, hedging with derivatives
and insurance, joint stock ventures, highly profitable global trade, commercial credit/paper, central
States funding their wars with privately provided credit, etc”.
For Kondratiev one key factor and possibly the decisive factor for launching his Long Cycle occurred
about 1550-1605: this was the immense amounts of gold and silver brought to Europe by Spanish
and other European colonists in Central and South America. Kondratiev estimated the amount of gold
that “washed ashore” in Europe through 55 years as possibly 40 000 tons: according to the World Gold
Council the “official sector”, mainly central banks held about 29 500 tons of gold at end 2011. The size
of the world’s population, at the time, was at least 15 times less than the present 7.1 billion, and to the
extent that economic output can be compared, the world economy was at least 50-100 times smaller.
UNSURPRISING RESULTS
From 1600 the European economy mutated. Monetarily, it took at least two centuries for the
Conquistador Gold to be be fully absorbed, lost, hoarded or used but the process started with massive
monetary deflation and economic inflation. Today, we almost certainly have the exact and perfect
opposite and, only using that basis for prediction and forecast, the post-2008 world should feature
economic contraction, while increasingly desperate attempts are made to further inflate or “super
inflate” world moneys to hide the reality of a contracting real economy and declining real wealth.
If it costs $100 or (with carbon taxes) $150 to fill a car tank with fuel “you are obviously rich”. The fact
the same amount of fuel for a similar fuel-burning car cost $7.50 in 1975 is “too complicated” for most
couched potato consumer-voters to understand. Their governments tell them inflation is “2% a year”
so why would they not believe? In fact, their money has been savagely devalued, but this is even more
complicated than price inflation, for a couched potato. More complicated again, we have the “nuance”
that monetary deflation and devaluation can operate interchangeably, under special conditions.
The very first writings on, and State threat response to monetary deflation were by Sir Thomas
Gresham and Gerard de Malynes, money and finance advisers to Elizabeth 1 of England, whose official
money had been completely undermined by conquistador gold. Gresham coined (to use a pun) the
slogan that bad coins drive good coins out of circulation, called “Gresham’s law”, but this was due to
very cheap gold becoming massively available and out of the control of monetary powers, leading to
precipitous decline in the value (and circulation) of official coins. Elizabeth’s response and reaction was
what we might expect: the heads of executed “counterfeiters” were exhibited on spikes near the Royal
Mints of the realm, but this in no way prevented people preferring real gold, to overvalued bimetallic,
even trimetallic State tokens with an effigy of the Queen stamped on them. Economic instability
became endemic in the later years of Elizabeth’s reign, and surely helped create the conditions for
Oliver Cromwell’s military putsch from the 1630s, followed by his junta rule. After his death in 1658,
Royalist restorers of monarchic rule had his body exhumed, beheaded, and hung in chains.
Monetary deflation and its counterpart of economic inflation is, we repeat, so different from what we
have today that we can have problems imagining the results. One early result, certainly in the period
of about 1575-1625 was however the same as what we have today: general economic deflation and
very slow economic growth. In today’s conditions, the deflation is only hidden by fantastic issuance, or
in fact dumping of paper and electronic money with close to zero real purchasing power – or any real
economic role. This is Token Money, like Elizabeth’s cheap metallic token coins with a picture of her
stamped on them!
Also in the Europe of the early 17th century, and like today, the monetary economy and the ‘physical
or real’ economy were and are heavily de-linked or disconnected. They operate along parallel but
separate pathways. In the early 17th century surplus capital drove the foundation of the early capital
rent economy. Since 1980, but especially since 2008, the same process is all powerful.
The tale of Elizabethan monetary crisis can be called “devaluation shock”. Across Europe, from
the early 17th century, monetary devaluation can be considered as essentially the same process as
monetary deflation (for example through declined velocity of circulation), but again for diametrically
different reasons from today’s rampant monetary crisis called “devaluation war” or “currency war”.
The results, also, were diametrically different: the period of about 1675-1800, in Europe, was marked
by rising real economic growth. To be sure this included “one off” special factors, notably the early
Industrial Revolution and coal mining expansion, and this real growth slowed the previous fast and
dominant growth of “pure play” capital rent on the back of very slow economic growth. Also, it pushed
forward the date of the next major Crisis of Capitalism, to about 1875-95.
Since 1980, we have ever declining “trend rates” of economic growth, reflecting the yawning gap or
massive disconnect between the monetary economy and the real economy, or the capital rent economy
and the productive economy. This is a major crisis of capitalism.
CRISIS MODEL AND PROCESS
As Hugh-Smith says, everything was in place for the casino-type degenerative phase of the capitalist
model by about 1500 in Europe – but without traders huddled at their 24/7 on-line playstation
consoles “discovering new value”. Hedging, derivatives trading, risk cover, insurance bets, bond/debt
issues, credit creation and trading were all in place in the early 16th century, albeit in a rudimentary
form not able to be operated round the clock and worldwide.
The monetary devaluation/deflation shock hitting official moneys and dated by Kondratiev to the
1550-1600 period created conditions resulting in a shift of operating mode for economic rentiers – who
became capital rentiers. The underlying asset – the real economy – expanded at a slower rate, that is it
underperformed, generating declining rates of return for classicl or conventional economic rent.
The overlying and purely parasitic superstructure of the capital rent economy was transformed into the
dominant model, with capital concentration or ‘hoarding’ replacing capital formation and creation. This
process advanced very fast with “high gain positive feedback” through at least 50 years in the period
of about 1600-1675. Non-economic results included numerous civil wars (such as Oliver Cromwell’s
military putsch in England), colonial wars such as Cromwell’s gory military adventures in Ireland and
early European military rivalry for possessions in Africa, religious pogroms and massacres across
Europe, and formal international wars between European powers. The real economy stagnated.
Monetary crisis was rife and longterm – Kondratiev also estimated that perhaps 400 000 tons of silver
had been brought to Europe, along with the gold booty, in the same hinge period of 1550-1605. The
role of ‘fiat’ or paper money rapidly expanded. This was especially in the form of credits and trade-
related paper, company stock, bonds, insurance, and all other tradable non-coin or non-physical ‘specie’
with high potential for extracting “super profits”. This was the enabler and focus of capital rentiers
operating their early version of today’s casino economy, with the sole objective, then as now, of capital
hoarding as distinct from money hoarding.
Well before 1700 the parasitic superstructure of European capitalism, that had grown like a cancer
in the preceding century, was in regression due to a combination of factors including population
growth, scientific discovery and technological innovation leading to much faster expansion of the
real economy. Other factors most certainly included mass migrations, uprisings, civil wars, religious
conflicts and international wars. They may also have included climate change, notably the Maunder
and Sporer Minimum of very low or no sunspot activity, declining from a 30-year average number of
about 45 000, to less than 100, that was most intense about 1640-1695. It was associated with the tail
end of Europe’s “little ice age” depressing food production and causing frequent famines for several
decades.
The present “triumph of capital rent” is a stepwise process starting about 1980, with several phases or
stages of intensification, most recently and intensely since 2008. As Hugh-Smith says: ” The standard
business cycle has no answer to these structural quandries, and even the credit expansion/renunciation
Kondratiev cycle does not provide a model for the next global system, or perhaps non-system”. He
rightly continues that technology cannot provide the “solution” because it has already replaced labor-
intensive business models with new low-labor models generating the maximum possible “super profit”
extraction, from industry. The capital rent economy is now “the only game in town”, for profit gougers.
Because it has no inbuilt self-limiting mechanism, removing this parasitic outgrowth can only be
achieved through the classic or proven means – political mass mobilization, civil war and international
war. Anarchic and socialist political phases are certain. The constant intensification of the terminal
capital rent phase of Capitalism 1.0 can only result in terminal crisis, after which there is reversal from
monetary expansion/real economy contraction, to the opposite. Capitalism, as a process, can only and
will only continue.
Andrew McKillop is a former expert in policy and programming with the European Commission in Brussels. He writes and consults about the impact of oil prices on the economy and currently advises the ECOHABITAT sustainable housing and property development project near the French, Belgium and Luxemburg borders.
