05.09.2013
Global economy: Too big not to fail
The very size of the global economy produces a tendency to crisis, argues Moshé Machover1
Discussions among Marxists about the long-term and cyclical tendencies of the capitalist mode of production have been revitalised in response to the current systemic crisis. This is a welcome sign of the vitality of Marxian theory.
However, it seems to me that one important parameter of the global capitalist economy has received insufficient attention: its gigantic and rapidly expanding size. The mistake of missing this mammoth in the room ought to be put right. For, of all the changes that the capitalist system has undergone since Marx wrote Capital, this is one of the most evident and - as I shall argue - perhaps the most momentous.
Technological revolutions, world wars, great shifts in power relations between states, battles won and lost in the class struggle, the rise of the welfare state and its decline through the new enclosures of privatisation, the altered make-up of the working class - all these have radically transformed the body of the world capitalist system. However, they have not fundamentally changed the mode of operation of the engine that powers and drives that system: the extraction of surplus value from workers who sell their labour-power as a commodity.
But the size of this engine has grown prodigiously. In the most obvious sense, this size can be measured by the total global annual surplus value extracted from hired labour-power. At a crude, conservative estimate, this total is set (at the current rate) to double in less than two decades.2 Moreover, in recent decades the growth of this total has been accompanied by unprecedented global integration of individual national capitalist economies. True, since the beginning of the capitalist era the world market has connected these economies to one another as well as to the shrinking non-capitalist periphery. But during the heyday of the nation-state the integration was incomplete: barriers of trade restrictions and sovereign currencies partially insulated national economies, much as a breakwater protects a harbour from the force of waves, while still leaving it open to marine traffic. Now these barriers are rapidly coming down, so that the many interconnected capitalist economies are increasingly merged into a single global entity.
Feedback mechanisms
This is not just a quantitative change. The dynamic behaviour of all systems - inanimate, biological or social - is crucially affected by change of size. To explain this general phenomenon and its relevance to the capitalist system, I will have to argue in a rather abstract way. In doing so, I do not intend to dismiss or displace more concrete analyses of cyclic or secular processes such as overproduction, underconsumption, long waves, bloating of the financial sector, crises originating in that sector, long-term decline, etc. In any case, these processes are not mutually exclusive, and it is plausible that the overall dynamics of the capitalist system are driven by the action and interaction of some or all of them, rather than by any single one of them alone.3
But I would like to focus on phenomena that are common to all these processes, and on the way they are affected by the size of the entire system. These phenomena are best described in terms of feedback mechanisms.
Advocates of the capitalist free market as ‘the best of all possible worlds’ have argued that it is a self-regulating system in which equilibrium and an optimal allocation of resources are established, as though by an invisible hand, through the uncoordinated actions of individuals acting in their self-interest.
Here is a - simplified and schematic - example of how this is said to work. Suppose there is a dearth of potatoes: they are in short supply, and fetch a high price, which only a few consumers competing for them are able to pay. Potato growers (or, more likely, potato merchants) are able to make a very handsome profit, above the average rate. This creates an incentive for more potatoes to be produced, by turning unused land as well as land used for other crops to growing potatoes. The supply of potatoes is increased, and their price comes down. Equilibrium is reached.
The opposite happens when there is a glut of potatoes. The price they fetch is too low to make it worthwhile for some farmers - the less efficient ones - to grow potatoes. Some potato fields are turned to other crops or left fallow. Consequently, fewer potatoes are produced, and the price of potatoes goes up. Again, equilibrium is reached.
The point of this two-part tale is that when the system is out of equilibrium - dearth or glut - the market generates forces that tend to move the system in the opposite direction, towards equilibrium. This is an instance of negative feedback - ‘negative’ because the forces act in the direction opposite to the deviation of the system from equilibrium.
This simplistic story about the benign effect of market forces glosses over some important matters. There is, of course, the human suffering involved: poor consumers going hungry when there is a dearth of potatoes, and poor potato farmers ruined when there is a glut. But, at a more abstract level, the story leaves out some crucial facts. Let me point out two of them.
First, some processes are subject to positive feedback, whereby a movement of a system away from equilibrium generates forces that push it in the same direction, further away, towards a catastrophic finale. The chain reaction that causes a nuclear explosion is a frightening example.4 In the capitalist market system, positive feedback processes have occurred many times. They are known as ‘bubbles’ that inflate and inflate until they burst. The earliest famous episode of this kind is the 1637 tulip mania in the Netherlands,5 the leading capitalist country until it was replaced by England in the Anglo-Dutch wars later that century. The most recent bubble burst in 2007 and we are still living through its aftershocks.
Second, even negative-feedback processes do not usually end up in stasis or stable equilibrium. Their more typical behaviour is cyclic, oscillating motion. The negative-feedback forces do not bring the system to rest at equilibrium, but overshoot, so that the system keeps swinging back and forth. A very simple system of this kind is a pendulum. If a pendulum swings to the right of its resting position, the negative feedback of gravity pulls it back towards its resting position, but rather than staying there it overshoots and moves further to the left; and so on. In engineering, this kind of swinging is known as ‘hunting’, a term first used by railway engineers.6 An interesting example from ecology is the cyclic behaviour of population sizes of interacting prey and predator species, analysed by the mathematicians Lotka and Volterra.7 In fact, very many cyclic processes in inanimate and living nature are driven by negative feedback. And market economies are no exception.
In the case of a pendulum, the oscillations may gradually be dampened as a result of an external cause: loss of energy due to friction. But if the pendulum is part of a complex system in which it is coupled with other components - for example, if it is hanging where a breeze blows - it may never come to rest, and under certain conditions may gain energy and oscillate more and more violently. So, even negative-feedback processes may end in catastrophe. Many railway derailments and lorry crashes have been caused by uncontrolled hunting or wobble.
Conscious individuals, mindless totality
A capitalist market economy is a complex entity, comprising a great many interlinked negative-feedback processes, as well as some positive-feedback ones. So, even if we had no particular concrete analysis of the detailed causal mechanisms at work, a cyclic behaviour with occasional crashes would only to be expected on general abstract grounds.
But before I go any further let me deal with an objection that may be raised to using analogy from inanimate or biological systems to analyse the capitalist economy. Human beings act in a conscious way, making choices in which volition plays a big part. How can the system arising from such conscious activity be compared to systems whose individual components are either mindless or at best not as fully conscious as humans, but driven largely by instinct?
The answer is that, although individual human interactions are conscious, when myriads of these interactions are uncoordinated - as they clearly are in a capitalist market economy - the totality resulting from them behaves in much the same way as systems in which consciousness plays no part.8
It is for this reason that statistics can be used in demography and other social sciences. An old and striking example of this is the study of suicides. Clearly, each act of suicide is, by definition, conscious and driven by highly diverse individual circumstances. Yet, demographers can predict fairly accurately the number of suicides in a given society during each month, classified by age group and gender.9 Another famous example is somewhat less macabre. In 1898 the economist and statistician, Ladislaus J Bortkiewicz, discovered that the number of soldiers killed by horse-kicks each year in each corps in the Prussian cavalry is subject to a fairly precise statistical law (known as the Poisson distribution) - and the very same law is now used by reliability engineers to study the rate of failure in mechanical and other inanimate systems.10
As far as the capitalist political economy is concerned, Marx highlighted the phenomenon whereby the totality of individually conscious, but uncoordinated, human actions appears as a mindless, alien force. This alienation is not a mere illusion, but a fact of capitalist life. The working class can only see what is really going on behind this veil by acquiring collective scientific political consciousness.
It is interesting to compare the behaviour of capitalist society to that of a colony of social insects, such as ants, bees and termites. Over many millions of years they have evolved sophisticated methods of signalling to coordinate individual behaviours. So, although each individual insect is similar to a mindless automaton, the macro-behaviour of the colony displays something like collective consciousness and intelligence. This is exactly the opposite of what happens in capitalist human society! The key to this contrast is coordination versus lack of it.
Size matters
What has all this got to do with the size of the global capitalist economy? A great deal. The oscillating behaviour and stability of such complex systems depends on their size. Systems that are similar in all other respects but differ in scale behave quite differently. In many cases, increase in size leads to greater tendency to instability.
A good illustration of this, familiar from everyday life, is provided by wobbly substances, such as jelly: the wobble is due to the negative-feedback interplay between gravity and internal elastic forces. But, the bigger the jelly, the wobblier it is.
Another illustration is the behaviour of stretches of water. As we are taught in school, water finds its own level (just like a market economy is supposed to do …). But, as a matter of fact, no surface of water in the real world - pace the 23rd Psalm - is really still; each point of the surface undulates in a wave motion. Again, this is due to complex feedback mechanisms involving inevitable external perturbations (such as winds and earth tremors) and internal forces. But the size of a stretch of water makes a big difference. The face of a pond is ripply. A small lake has gentle wavelets. In the Laurentian great lakes of North America there are occasionally (about once in ten years) storms whipping up destructive waves. But you have to go to the ocean to witness violent waves reaching up to 30 metres. Tsunamis are fairly frequent in oceans, less so in great lakes; but do not expect them in the English Lake District.
Of course, some tendencies to positive-feedback escalation or catastrophic oscillation can be counteracted by careful application of controls, based on detailed knowledge. Thus in nuclear reactors explosions are prevented by careful precise manipulation of the fissile fuel. And railway engineers are able to prevent wild hunting by using precise stabilising mechanisms, so that when you travel by train you only notice a rather pleasant rolling motion. (Nevertheless, accidents do happen …)
Let us get back to the capitalist economy. In the three decades following World War II, capitalist states were able to apply to their home markets - partially sheltered behind national economic breakwaters - Keynesian counter-cyclical measures that attenuated the inherent tendency of the capitalist economy to periodic crises. However, towards the end of that period, the adverse (to capital) side effects of this medicine became increasingly noticeable. As the economy operated much of the time at near full capacity, unemployment was relatively low. This lent the working class unusual bargaining power and confidence, and thereby exerted pressure on profits. Capitalists reacted by raising prices, creating an inflationary spiral. Keynesian policy was eventually abandoned by the capitalist states in order to stem inflation and break the bargaining power of the working class.
The present, much expanded, increasingly complex and more thoroughly globalised capitalist system, with eroded national breakwaters, faces an unprecedented contradiction. On the one hand, due to its sheer size, complexity and enhanced integration, its tendency to extreme, cyclic ups and downs and destructive storms is likely to be greatly exacerbated. It no longer resembles a set of interconnected great (and smaller) lakes; it is more like an ocean. On the other hand, counter-cyclical measures, which would need to be applied on a vast scale, are at present less feasible than ever. This is because they would require tight, unified, global political governance - in effect, a world state. However, economic integration of the national markets has not been matched by a corresponding adequate political integration. While the nation-states have lost much of their ability to exert economic control, they have resisted the creation of a super-state to which they would have to cede much of their precious sovereignty. The nearest partial approximation to a super-state, the European Union, failed badly its first serious test.
The global capitalist system is getting out of control because its very size is a cause of greater instability than ever before; and there is no political structure adequate for attenuating its swings. It is too big and chaotic not to fail, and fail again.
This will continue, causing great human dislocation and misery, until the working class of all lands, ever increasing in numbers, takes collective, conscious political action to replace this mindless system by a new global society - neither like an ant colony, nor like the alienated world in which we live now; but a communist commonwealth, whose individuals coordinate their social interactions in a freely planned and fully conscious way.
Notes
1. I wish to acknowledge extremely useful comments made by comrade Arie Finkelstein to a draft of this article. Of course, he may not necessarily agree with some of my arguments and conclusions.
2. Direct data on the total global surplus value are not easily available. But since inequality of income and employment conditions have been steadily worsening, it is fair to assume that the global surplus is growing at least as rapidly as the gross world product (GWP). This year (2013) the GWP is estimated to grow at the rate of 3.9%. At this annual rate, the GWP would double in about 18 years. In recent years the annual growth of GWP reached a peak of 5.2% in 2007, just before the onset of the global crisis. At that rate, the GWP would double in less than 14 years. If we take a somewhat pessimistic forecast that the GWP will grow at an average annual rate of 3.5%, it will double in just over 20 years. These calculations are based on International Monetary Fund data. See http://en.wikipedia.org/wiki/Gross_world_product.
3. At this point let me make a parenthetical remark. One analysis I do wish to dismiss is that presented in chapters 13-15 of volume 3 of Capital, according to which the average rate of profit has a long-term tendency to decline, due to the ever-increasing overall organic composition of capital, which in turn is caused by the rising productivity of labour. It has recently been debated whether this analysis is genuinely part of Marx’s mature thought, or has been inserted by Engels, who edited volume 3, based on early notes made by Marx, but later discarded by him. Such debates belong to Marxology, not to political economy. My point is that the analysis, whether adhered to by Marx or merely attributed to him, is erroneous. As I have argued in detail in my article, ‘Saving labour or capital?’ (Weekly Worker October 6 2011), although the productivity of labour does keep on rising, this need not increase the overall organic composition of capital; hence its effect on the average rate of profit is indeterminate.
4. See http://en.wikipedia.org/wiki/Chain_reaction.
5. See http://en.wikipedia.org/wiki/Tulip_bubble.
6. See http://en.wikipedia.org/wiki/Hunting_oscillation.
7. See http://en.wikipedia.org/wiki/Volterra-Lotka_equations.
8. This is argued in detail in E Farjoun and M Machover Laws of chaos London 1983.
9. See http://en.wikipedia.org/wiki/Epidemiology_of_suicide.
10. See http://en.wikipedia.org/wiki/Poisson_distribution. By the way, Bortkiewicz is also known for his critical reappraisal of the so-called transformation problem in Marxian political economy.