Archive for 28 noviembre 2014

CAPITALISM, GROWTH AND COLLAPSE. A CRITIQUE OF OUR CURRENT ECONOMIC SYSTEM

"Tonsils? Not at all! It's capitalism that is choking you."

“Tonsils? Not at all! It’s capitalism that is choking you.”

A quick introduction to the problem

          Current ideas such as economic growth, competition, investment profitability or profit maximization, keep a strong relation with our present day economic system. All of them are taken for granted without taking into consideration the particular philosophy that supports those concepts. Capitalism is founded on an endless search for profits, on increasing sales figures and business size, and on opening new markets. In other words, on exploiting and speeding up as much as possible the cycle:

PRODUCTION →→ SALES →→ PROFITS

          It’s good to remember that a company can only grow and increase its profits (which is its main purpose) in three ways:

1 – Through a “natural” expansion in its market, basing on a growth of their potential customers and buyers.

2 – Because of decrease, or even complete elimination, of their business competitors, in such a way that the losses of someone become the profits of others.

3 – Making a continuous and special effort in order to persuade costumers to increase their purchasing rate in a compulsory manner. The company achieves this target employing all its promotional and advertising resources, encouraging consumerism: people buy goods and services on a bigger rate than common sense and strict needs would advise them.

          In real life these three ways of enterprise growth work together among themselves. The economic system looks like a huge game board that spreads all over the planet, and companies behave as individual gamblers who compete and fight one against the other, not only to survive but also to try become bigger in size, more profitable and more competitive than the opposite ones. As a matter of fact, our world is objectively described so, and game rules are never even discussed.

          But now, in the first decades of the XXI century, we can easily notice that the game board, our own world, has become very small, and also that natural resources are showing clear signs to go running. If we do a little exercise of history, we’ll soon agree that at the beginning of Industrial Revolution, when capitalism began to expand and grow, there were no limits to the incipient economic development. When mass production started, after the steam machine introduction, when the first railway lines were laid, when the international trade acquired a significant dimension, and when the main banks increased their business size (more or less since the XIX century thirties), there were still huge unexplored territories on planet surface, land and sea resources were unlimited, horizon of chances was quite broad, and human activity was still too small to cause any serious damage to Nature. Western civilization, based on industrial production, spread over the world without any significant handicaps, with only exception of some natural disasters, local conflicts, colonial wars or increasing rivalry among the European powers.

          In XX century, that rivalry among states caused a couple of devastating world wars. Both of them gave rise –as an indirect consequence- to an amazing advance in science and technique knowledge, which was applied first and mainly to weapon systems. Once the II World War finished, western countries began again to experience a long period of development and economic welfare, which was this time enjoyed by wide population sectors. However, the first alarm signals began soon to be felt, when water and air pollution reached high and threatening levels. Suddenly, this fact led us to see our world very much smaller and more fragile and unsafe than before. Another phenomenon such as cold war, the risk of a nuclear conflagration, overpopulation in underdeveloped countries and the first oil crisis, contributed to increase this new feeling. The future for human being started to become uncertain, at least in middle and long run.

          Some years later, the communist regimes of Russia and Eastern Europe got collapsed. Although this fact was taken up as a victory for political and individual liberties, it also meant that several preexisting obstacles that stood opposite to liberal economic thought disappeared in a flash. As a consequence of it, liberal economic approach, passionately upheld by Milton Friedman and the Chicago’s school, found the open field for its definitive spreading. So we got to last years of XX century and first years of present century, during which productive and manufacturing economy (based on unlimited consumerism), financial economy (free from regulations and control) and globalization have worked together to reach this regrettable result: an overpopulated planet, very unbalanced concerning the welfare level of its inhabitants, seriously contaminated, and with a clear shortage of all kinds of nature resources, which Earth is no longer able to regenerate at the same rate are used, got dirty and thrown away by men. We have reached the limits, or we have rather gone beyond them, thanks to our blind and frantic activity. Till now we thought markets, businesses, and consumption of resources were endless, but suddenly we have realized it cannot go on so (to make the matter worse, many politicians and businessmen still think that old way, which turns the problem into something even more difficult to solve). The Earth, a finite and small planet, has settled a natural limit to economic growth. The longer we go without accepting it and taking enough measures all over the world, the greater disasters wait for us.

          Someone could think that, as the markets cannot grow more, the unique possibility would be then a predatory growth at the expense of the others, either competitors or just single consumers. In other words, the rule would be: I earn money because you lose; I prevail as far as you disappear. Well, reality isn’t indeed very different to this devilish and unsupportive idea. In next chapter we are going to analyze a bit more slowly questions like money, price of money (financial interest), banks activity and finance markets, all of them belonging the very heart of capitalist system operation.

Wall-Street

A critique of current capitalism financial basis

          As everybody knows, banks lend money with the purpose of recovering the capital and earning certain interests, as a reward for their services. Banking business will run well insofar as their customers, the borrowers, prosper and are able to return the received amounts and also the interests. This will be only possible if these customers generate enough money in their own businesses or working as employees, always over what they must keep to satisfy their basic needs. In short, and simplifying the cycle as much as possible, the financial system will run well within a suitable economic scenery for everyone, that is, in an expanding economy. Banks themselves act to speed the process up by means of the well-known money creation device, through consecutive credit and loans operations. To tell the truth, this is an accounting trick that enlarges money quantities that appear in current accounts, but it doesn’t mean a real increase in the amount of circulating cash (coins and banknotes) issued by the central bank. We may then come to the conclusion that banking and finance system is closely related to growth of available monetary mass and, because of it, to a continuous inflation in prices. These are objective facts, sufficiently demonstrated by a number of scientific studies, but it wouldn’t be practical here to make a deeper analysis about the full process.

          Now, as economic history and reality itself teaches us, this expansion cannot keep on forever along the time. Sooner or later an economic crisis and a liquidity shortage take place, both of which lead to a market contraction, more or less deep, and almost always temporary (till now). There are many possible and direct reasons for a crisis, but the process usually follows these patterns: demand of goods and services falls under production levels, which leads to surplus products and storage increases. Because of sales drop, wages become frozen or come down, or even employment level decreases. People directly concerned by salary reduction give up buying many commodities and/or paying back their loans. Defaults damage finally the banks themselves, which start to have problems in recovering lent amounts and receiving the corresponding interests. Bankers, taken by surprise (well, this is just an ingenuous way of saying it), become much more careful at the moment of lending their capitals, so that they finally approve their new loans and credits only when the person or enterprise involved offers a full warranty to return the borrowed capitals back. In other words, those people and companies owning the biggest fortunes and/or the most profitable businesses. After all, this is quite logical, because banks always look for the maximum profitability and, at the same time, they try to avoid risks, delays in payment and defaults. Everyone who is now reading this text could tell me this behavior is entirely reasonable, isn’t it? The reader will probably think bankers couldn’t operate in another way. Well, the true problem consists in that, according these working rules, bankers only support and encourage some economies, and condemn others to marginality and failure, either individual people, small and big enterprises, or even governments and states.

          In fact, the whole process we’ve just examined and that happens on a small scale, can also be seen on a big scale, especially during last decades, with globalization and strong development of financial markets. In these capital markets, fabulous amounts of money move daily up and down (through single entries on accounts, not to be forgotten), always seeking the highest possible profitability. Actually, the global financial capital, which brokers are speculating with each second at a rate and in sums almost unimaginable, does no longer represent a real monetary measure for the whole goods and services produced and sold all over the world. This is already happening this way since many years ago, after deregulations introduced by Reagan and Thatcher administrations. Finance economy is divorced –and also very far away- from real or productive economy. The former has grown to such a size that keeps itself out of governments and central banks control, only providing profits to a small bunch of capitalists, stock owners, big banks and investment funds. Obviously, this privileged group does his best to avoid every type of control and taxes payment; that’s the reason by which tax havens are so appreciate by this little team of extremely rich masters of the world. Certainly, these huge capitals, which don’t ever stop moving away from some countries and continents to another, are also exposed to risks. Their fluctuations and volatile and speculative behavior, always looking for maximum profits, give rise at the end to big bubbles (usually due to valuation surplus mistakes), which end in bursting and causing deep crisis, like the last of 2007/08 years, whose consequences we are still undergoing.

          Unfortunately, we know well what happens just after this kind of crisis. Behind the pretext of “giving protection to the fragile financial system” and to avoid by all means the failure of big banks, arguing the possible risks for the whole economy (real risks, of course, but undoubtedly overestimated facing society), the governments themselves waste no time in providing huge amounts of public money to bankers, in order to save their “precarious” situation. We also know very well the consequences that follow this undercapitalization concerning governments and states: hard cuts in all social protection and welfare systems, which damage seriously all citizens. These harmful effects come together with those ones derived from credit shortage, directly caused by crisis itself, not only for families but also for productive enterprises. In fact, the last ones reduce their investments, sell fewer quantities of products and services, and finally generate unemployment. However, damages don’t yet end at this point. Paradoxically, the governments themselves, who had offered so mildly their own resources to bankers, are now much more trapped into debt by aggressive finance market agents, who have taken advantage of the situation and have become the main owners of sovereign debt issued by governments. What an ironic process, isn’t it? As we use to say in Spain, that’s enough to burst into tears (esto es como para echarse a llorar).

          As a summary and conclusion for this paragraph, we are able to reaffirm that greed and profit pursuit by capital owners is actually unbounded and harmful –something we already knew-. But, besides it, the big capital has become a too powerful entity, almost impossible to face up to it. Governments and central banks stay in a weaker position versus the big Capital-God, and accept his demands with gentleness. The question now is no longer to punish a single person or a little enterprise for a delay or a default in paying a debt. No, what now happens is that financial markets rule the governments and states themselves, which have lost their own sovereignty and have no choice but to accept the money lenders conditions. This dependence on banks and financial markets is so strong that governments are able to sacrifice EVERYTHING as long as giving the borrowed capitals (and interests) back to their owners. Governments like ours –the Spanish one- cannot support themselves with their own generated resources, and are obliged to keep on asking for new capitals over and over again, not simply to invest in productive projects and grow, but only to return capital and interests, as continuous debt issues arrive at their maturities. Regrettable scenery, isn’t it?

          And yet our politicians, distinguished servants of this system, let themselves to insult our intelligence and to show a great insolence when they support some ideas –deeply false indeed- such as “private business management is always more efficient than public one”, which helps them to dismantle and remove under our noses the welfare state that we all have been building for a lot of years, with effort and solidarity. This sentence is one of the last false samples coming from that liberal classic economy school, the same one that tried to make us believe in the famous “invisible hand”, able always to restore the market balance, between demand and supply, as if it was a quasi-religious postulate.

CAMBIO CLIMATICO

Global degradation of natural environment and increasingly scarce resources

          We’ve already understood that current capitalist system, under a financial point of view, is a complete madness. It cannot lead us towards anything good (a “dystopia” perhaps, as we have seen many times in science fiction movies and literature?). But we must also take into account that world economy, as every other human system, stays and develops on Earth, a planet that has become dangerously small compared with the aggressive predatory activity carried out by human being, as I myself upheld it in the introduction.

          In fact, as a direct consequence of both our economic development model and our demographic growth, the whole nature resources – air, water, fertile land, fishing- are bearing such an excess in exploitation and a rate of deterioration that Nature isn’t yet able to regenerate itself. Our waste and remainders, either organic or inorganic, mean an awful menace for environment, in spite of all laudable and necessary attempts which are being developed to recycle the waste (especially in the more advanced countries, not yet in the remaining world). Gas emissions are changing climate all over the planet, and this process is entirely beyond doubt among scientists and experts on the subject. Despite the limitation of their fields, we keep on using at a massive rate oil, coal and natural gas, and therefore our atmosphere keeps on being contaminated. Zoological species disappear and natural habitats are destroyed; Earth biodiversity suffers an irreparable damage within a very short period of time, after hundreds of million years of continuous evolution. Men fight among themselves in order to exploit the decreasing fishing resources in oceans, which cannot support the rate of captures, and at the same time plastic remains settle on the bottom of the seas in a frightening way; we know well plastic doesn’t degrade biologically, though this material becomes divided again and again in smaller pieces, till microscopic fragments, and so it gets part of diet for almost whole living beings in oceans (and finally for people themselves).

          I realize how all these things sound uncomfortable. The catastrophic connotations are more than obvious, but we can’t anyway afford to stand unaware of these questions. The real state of Nature on our planet isn’t at all optimistic, and we must know and take on it, as a first step before any decisions and actions to try its recovery. First of all, we have to be conscious that the serious environmental degradation comes from:

1 – The huge pressure of increasing human overpopulation.

2 – The excessive and unbalanced rate of consumption, derived from the high standards of life in the most developed countries of the world. And at this precise point capitalism behaves as a big predatory power over natural resources of the planet, through its own economic system (including consumerism) based on growth, as we have seen before.

Superpoblación

Need for demographic control and deep changes in consumption patterns

          First of all, let us look at vegetative growth in global population. When I myself went to school, there in the XX century sixties, the whole population of our planet was calculated in about 3.000 million people. At the beginning of current year 2014, the number had already reached 7.200 million. And, according to last estimations, within only 35 years -in 2050- global population could approach to 11.000 million people! The biggest part of this dramatic increase would concentrate in Sub-Saharan Africa, India, other countries of Southeast Asia and South America.

          If we don’t soon adopt vigorous decisions, the new imbalances, migratory pressures, and all kind of conflicts will have an awful dimension, rather difficult to imagine. Nowadays in Spain, placed in the southwest corner of Europe, only a few miles from Morocco coast, we are already bearing a lot of frontier problems, due to illegal immigration that goes into Ceuta, Melilla, Andalusian seashore and Canary Islands. But in future these problems could be considered simply anecdotic compared with possible rush of people within few decades. I’d rather not think about it. If we really don’t want to face such big problems, we’d better settle, as soon as possible, all the necessary measures in order to restrain and stop the growth of global human population.

          With regards to the second factor, mentioned at the end of last section, it is evident that we must also take decisions to reduce our levels of consumption, not only of energetic resources but also of all sorts of products. At the same time, we have to decrease waste generation to tolerable amounts. Along last years, politicians and people in general are often using the term “sustainable development”, but in my opinion even this concept is unappropriated, as long as it makes reference to development and growth ideas. We must go to another mentality. We have to change radically our living way, our ideas about welfare, our laws, our politics, our living philosophy … and of course our economic system. We must definitely put a stop to capitalism based on an endless growth, a blind exploitation of natural resources, consumerism and pursuit of maximum profits. From now on, economic science will have to walk strongly joined to Ecology, to responsibility, moderation, comprehensive recycling, and use of clean and renewable energy sources.

          The man, who has been able to achieve fabulous steps forward in science and technology, besides breathtaking works of art and literature masterpieces, faces now to what will be perhaps the main  of all his challenges: to control himself and to prevent his particular way of life endangering his own survival on the planet of his birth.

Fernando Orihuel Alonso, Economist (Madrid, Spain)