Economy Headline — 20 July 2012
Austerity and the globalization of poverty: The closing chapter in capitalism’s history?

 Idries De Vries

When back in the 1980’s the trend of “globalization” began, the general consensus amongst thinkers and politicians was that the spread of the economic system of capitalism to countries outside the western hemisphere would move the 2nd and 3rd world countries forward and eventually align their living standards with those in the western hemisphere.

Some 20 years later one has to admit that globalization has indeed brought the world closer together. Just not in the way originally expected.

The global financial crisis has brought phenomena previously considered typical for the 2nd and 3rd world to the western hemisphere, namely – rather than the other way around. Child hunger, for example, has become quite common again across Europe. Newspapers now regularly report on the complaints of schools and teachers about pupils who cannot concentrate because of hunger.[1] Food handouts to the poor, to prevent them dying of starvation, is another example. “Foodbanks”, being charitable organizations that distribute food amongst the people who cann’t afford to buy the food they need, have become a common sight in most European cities. In Britain alone their number is growing by on average two a week.[2] Probably the most disturbing example of the new, hard economic realities in Europe is the practice of child abandonment out of poverty. It has been reported that in Greece, the European country hardest hit by the credit crisis, this has become an issue in society.[3]

The struggle for economic survival is what has been globalized, in other words. This is what has become common for the masses around the world.

Fortunately for the masses in the West, their justifiable complaints about this situation are not being completely discarded by the politicians and policymakers – which in the 2nd and 3rd world is what usually happens when the masses there complain about their economic situation. One can say there is a general consensus in the West that something has gone horribly wrong in the economy and that something drastic needs to be. However, what exactly it is that needs to be done, on that there is no agreement.

This has caused some debate to emerge about the “future of capitalism”.[4] But looking at the way this debate has progressed so far, there is little reason to believe that it will be able to identify the drastic changes that everyone senses are needed.

This is because the debate so far has more or less limited itself to a review of the various models of capitalism that are being or have been implemented around the world. The American / Anglo-Saxon model, the Euro / German model, the Japanese model and the Singaporean / Chinese model are the most prominent of these. It is not entirely surprising – nor without good reason – that the discussions so far have largely been about questions such as “Is the current crisis one of too much capitalism or of too little capitalism?” or “Should the world move to the Singaporean or Chinese model where government tries to actively manage the market or to the American model where government tries to minimize interference in the market?”, because there do indeed exist important differences between these models of capitalism. But, it must be acknowledged also that despite their differences, these models of capitalism have many things in common as well.

In pre-Enlightenment Europe, the Dark Middle Ages, the then dominant socio-political order held that behind the universe there was a Creator, God, who had created everything with a specific order; that through christianity God had informed man about how he could live according to this natural order; and that man was left with a free will to choose whether to live according to this natural order or go against it. All this is explained in detail in the writings of for instance Thomas Aquinas (1225 – 1274 CE). The philosopher Grotius (1583 – 1645 CE) laid the foundation for a new philosophy, Enlightenment, from which eventually the capitalist socio-political order would emerge, when he argued that while a natural order indeed exists, the human mind has the ability to identify it. In other words, that man is not dependent on religion to know the correct way of life but that using his kind he can also find it. The father of capitalist economics Adam Smith (1723 – 1790 CE) took up this revolutionary idea and applied his mind in the search for the correct way of life. According to Smith, this correct way of life is found in the pursuit of rational self-interest.[5]

Smith observed that it is natural for man to pursue his rational self-interest. As he explained in his famous book “An Inquiry into the Nature and Causes of the Wealth of Nations”: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from our regard to their self-interest”. In addition to this Smith also observed that it is not just the butcher, the brewer, or the baker who benefits from this, but the larger society: “By pursuing his own interest [man] frequently promotes that of the society more effectually than when he really intends to promote it”. From this he concluded that the correct organization of the economic life of man is the free market, where everyone may develop the activities he believes are in his best interests, to establish ownership over whatever he would like to own, and to dispose of whatever he owns in whatever way he wishes. Because then, according to Smith, an “invisible hand” would come into existence and ensure the best possible outcome for society.[6]

All the various models of capitalism that are being or have been implemented around the world are grounded in this philosophy. Without exception.

Britain was the first mature society to develop an economic system based on this philosophy. From the perspective of the masses, however, this experiment could not be called a success. Spurred on by the new economic ideas of Smith the process of enclosure of the “common lands” was greatly accelerated. Common lands were plots of land without private ownership of which all people could freely make use. Millions of Britons depended on these lands for their survival, so the privatization of these lands sentenced them to deep and dire poverty.[7]

The only option left for the people of the countryside was to search for a job as industrial labourer in one of the cities. Overwhelmed by farmers moving to the city, and justified by the idea that the pursuit of self-interest will eventually benefit all, Britain’s industrialist saw no issue with employing their labourers for subsistence wages, utilizing women and children as labourers, and putting them to work in the most unhealthy and dangerous of environments.

The development of the communist ideology forced a change in this situation. To protect the core of the capitalist system, Britain had to improve the circumstances in which the masses lived such that they would “immunize” against the communist message. This lead the British government to intervene in the free market, to a limited degree, for instance by setting minimum wages, banning child labour, providing social services, et cetera.

Following the Second World War the ideological conflict between capitalism and communist came to a head, especially in continental Europe. For this reason continental Europe saw a need to go beyond Britain in improving the living standards of the masses, which lead to the development of “social democracy”. The governments of countries like West-Germany and France began to actively manage their free markets to redistribute wealth. So highly progressive tax-regimes were introduced. The markets for various goods and services were brought under government control. And far reaching rules and regulations gave the governments of continental Europe substantial influence in all other markets.

For geographical reasons not all parts of the capitalist world followed this development. Once communism found itself a home in Russia, continental Europe found itself neighbouring her ideological foe and thereby directly exposed to the “communist threat”. Between America and Britain and the communist threat, there remained an important natural barrier – the sea. To a certain degree America and Britain took similar measures as the governments on continental Europe, but in all they intervened substantially less in their free markets. This is how the first difference in the practical application of capitalism came about and the first two models of the capitalist economic system developed. And because the natural barrier between America and communism was far greater than that between Britain and communism, America remained most “pure” in its application of capitalism.

Following the defeat of Imperial system in the Second World War, America rebuilt Japan on the basis of its capitalist principles. Unlike Europe and America, therefore, where capitalism developed as part of a long and natural process involving circumstances and thinking, Japan was effectively forced to adopt capitalism. This caused a unique model of capitalism to develop in Japan, different from both the model of Europe and the model of America. Partially this was caused by the Americans just putting in place in Japan capitalist laws and systems, but also actively managing the details of the economy. America also decided which political parties would exist, who would lead these parties, which companies would lead the Japanese economy and who would lead these companies.[8] So while in Europe and America the governments eventually saw it required to encroach somewhat upon the freedoms of the capitalists, in Japan the government and the capitalists were born as twins to the same mother. This caused a different kind of relation to develop between the government and the capitalists in Japan on the one hand, and the government and the capitalists in Europe and America on the other. In Europe and America the government and the capitalists came to co-operate out of necessity following the rise of communist, in conflict with how both sides of the coin thought their relationship should really be. But in Japan the government and the capitalists co-operated more voluntarily, seeing this as most natural for both.

In addition to this capitalism in Japan was influenced by Japan’s traditions, whereas in Europe and America capitalism influenced the traditions. As set out earlier, capitalism originally develop in Europe as a response to the christian socio-political order. Capitalism in Japan did not have this experience. As a consequence, the adoption of capitalism in Japan was not accompanied by the refutation of tradition. The traditions that the Japanese held very dearly, such as communalism, were thereby able to influence the capitalist model in Japan.

The Chinese model of capitalism is again different, which too has to do with the unique circumstances under which China came to adopt capitalism. Firstly, this is because in China the adoption of capitalism is a government lead process that is neither the outcome of philosophical considerations as in Europe and America, nor the result of foreign occupation as in Japan. China decided to adopt the economic system of capitalism some 30 years ago because it came to believe that this would best serve the state’s interests.[9] Secondly, this is because the Chinese too do not share Europe’s experience with christianity, enabling the Chinese to influence their model of capitalism with their own traditions. And thirdly, this is because the Chinese capitalist economy has been in the process of being built since 1979, and it is still not complete. This has to do with a traditional preference for cautiousness amongst the Chinese. The Chinese government prefers to take things step by step in their implementation of capitalism, while trying to learn from the (bad) experiences of the other capitalist states to avoid these.

Although it might not be obvious to some, this does make clear that the debate about the “future of capitalism” may not be limited to a review of the capitalist models in current or past existence, to evaluate their various pro’s and con’s when compared with each other. Because all the capitalist models in current or past existence very clearly share a “common ground”. And since this is the case, there is at least a theoretical possibility that the current economic problems of the world have been caused by this “common ground”.

The fact that none of the models of capitalism have been able to steer clear of substantial economic problems is a strong indication that this might indeed be the case.

The European model of capitalism was able to pull essentially everyone in society out of absolute poverty between the 1960’s and 1980’s. An amazing achievement. However, Europe’s “social democracy” wasn’t sustainable. The welfare system that had been key in eliminating absolute poverty demanded more resources than the state was able to collect through taxation. In no small part this was due to the many rigidities in the economy that the high level of government interference in the free market caused. This held back economic growth and as a consequence caused substantial unemployment to always remain.

Once it became apparent that the communist model was having equal, or rather even greater problems, Europe therefore began to move away from the capitalist model it had itself developed. The continent went the so-called “Third Way”, lead by politicians such as Tony Blair in the United Kingdom, Gerhard Schroeder in Germany and Wim Kok in The Netherlands. In all practicality this meant not much more than removing the government interferences in the free market that had defined social democracy. This had two related consequences. The freeing up of the markets substantially increased wealth inequality within society, which caused some people to fall out of the middle class back into poverty.

With its close co-operation and co-ordination between government and business, and the traditional sense of loyalty between capital and labour, the Japanese model too was able to pull essentially everyone in society out of poverty. But even more than Europe, the Japanese economy built up enormous debt to do this. Currently Japanese state debt stands at around 228% of GDP: the highest in the world!

Source: http://en.wikipedia.org/wiki/Debt-to-GDP_ratio

The current experience of Europe explains why the Japan model of capitalism is therefore not sustainable either. Europe’s current problems have to do with the inflated debt positions of many European governments. The economic downturn since 2007 has left many in the financial world worried about whether these European countries will be able to service this debt going forward. This concern has lead to increased interests rates for these countries as an offset to the increase in perceived risk. This has drained so much of the resources of these countries that they have had to cut back on other expenses: austerity. Causing a reduction in overall consumption, austerity in turn has further depressed economic activity in these countries. This of course further reduced tax income for the government, bringing the whole cycle in motion once again.

So obviously, debt-to-GDP ratio increases such as in capitalist Japan can not continue for ever. At a certain stage investors will refuse to increase their lending to Japan, unless motivated to do so by substantially higher interest rates. Japan will then have to cut back on its expenses, which very quickly will cause a downward economic spiral. This is the path that Japan is heading. And even if Japan were to stop the increase in its lending today to prevent falling into this death-trap, the cut in government spending this will require will cause poverty to return to Japan no later than tomorrow.

In the “most free of capitalist free markets” America and Britain income inequality and hence poverty always remained part of the capitalist equation. For example, since 1959 on average 14% of American has lived between the official poverty line.[10] Nevertheless, America and Britain have also seen debt levels increase continuously. The American economy today is worth around $15 trillion. However, total debt in the economy stands at around 279% of that amount, around $42 trillion![11] In other words, American / British model of capitalism has never been a solution for a large part of society and it is no more stable than the European or Japanese models.

 

Debt in the largest economies of the world

Source: www.gfmag.com/tools/global-database/economic-data/11855-total-debt-to-gdp.html#axzz20hoAOeX3

During its implementation of capitalism, even with the benefit of hindsight China has not been to prevent this wealth concentration from occurring. In fact, as China has steadily moved towards a more pure capitalist economy, its problems with wealth inequality have increased. Currently China’s wealth inequality ranks amongst the highest in the world, far exceeding that of America.[12] Because this is having far reaching social problems, such as making people loose trust in the political system, it is now one of the main areas of focus for the Chinese government.[13]

It seems, therefore, that certain economic problems are typical for capitalism. These are debt increases, wealth concentration and continued poverty. So while the discussed models of capitalism have indeed been able to generate wealth increases, none of them has been able to resolve the issue of poverty in a sustainable matter.

As the western world witnesses the return of almost pre-capitalist conditions for a substantial part of its society, these experiences of the various forms of capitalism make clear that there is no point in debating the “future of capitalism” from the limited perspective of “the future must be one of the capitalist models”, as is currently being done. Capitalism has a systemic problem with poverty. And no tweeking of a system can solve systemic problems.

So to halt this trend to poverty for the masses, the need is for a new system, an alternative to capitalism, a system built on a philosophical foundation fundamentally different from the capitalist one.

Idries de Vries is an economist who writes on economics and geopolitics for various publications. As a management professional he has lived and worked in Europe, America and Asia.

 


[1] “Breadline Britain Day Three: austerity, hungry kids, mental health”, www.guardian.co.uk/society/blog/2012/jun/20/breadline-britain-day-three-austerity-hungry-kids-mental-health
[2] “Foodbank handouts double as more families end up on the breadline”, www.guardian.co.uk/society/2012/apr/26/food-bank-double-families-breadline

[3] “Children abandoned by Greek parents as cuts also sees country running out of medicine”, www.dailymail.co.uk/news/article-2085163/Children-dumped-streets-Greek-parents-afford-them.html#ixzz20aYCALg3

[4] The Financial Times has a special section on its website dedicated to the topic: www.ft.com/indepth/capitalism-future

 

[6] See, for instance, “The worldly philosophers: The lives, times and ideas of the great economic thinkers” by Robert L. Heilbroner.

 

[7] Ibidem footnote 6 .

 

[8] See, for instance, “An Occupation Without Troops: Wall Street’s Half-Century Domination of Japanese Politics” by Glenn Davis and John G. Roberts.

 

[9] “Avoiding the PIGS and Joining the BRICs: Lessons for Fast-Growing Indonesia”, www.thejakartaglobe.com/commentary/avoiding-the-pigs-and-joining-the-brics-lessons-for-fast-growing-indonesia/412274

 

[11] “Total debt in selected countries around the world”, Global Finance Magazine, www.gfmag.com/tools/global-database/economic-data/11855-total-debt-to-gdp.html#axzz20hoAOeX3

 

[12] “Narrowing the wealth gap”, China Daily, www.chinadaily.com.cn/thinktank/2011-03/07/content_12125760.htm

 

[13] “China to solve wealth distribution issues in 10 yrs”, China Daily, www.chinadaily.com.cn/business/2012-05/28/content_15403600.htm

 

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