A Crisis of Capitalism: Guest post by Riccardo Bellofiore

Last Wednesday, The Guardian published a piece by friend and colleague Riccardo Bellofiore entitled A Crisis of Capitalism. Here I paste an extended version of that piece, which also mentions our Modest Proposal. Enjoy!

History repeats itself, Marx wrote, first as tragedy, then as farce. If you wonder how it might repeat itself the third time, look at Italy:  a country where the most effective opposition to government are – literally – comedians. Lately, however, reality has been much more inventive than comedians.  This has distorted most analyses of the country’s economical and political situation: as if Italy’s problem is just its prime minister, distracted by sex and trials.

Italy went in the eye of the storm this summer. To understand the true nature of the Italian crisis we need to look at it in the context of the wider European crisis. Both, we are told, are part of a wider sovereign debt crisis. The limits of the eurozone are well known: it has a ‘single currency’ that isn’t backed by political sovereignty, a Central Bank that doesn’t act as lender of last resort or finance government borrowing, and no significant European public budget. The ECB policy errors, its obsessive anti-inflationary stance and its propensity to raise the interest rate whatever the cause of price rises, are also plain to see, though its pragmatism must be recognised. And Germany’s neo-mercantilist dream of profiting from Southern Europe negative current accounts but imposing them balanced state budgets pertains more to psychiatry than economics.

That said, the European crisis is not an endogenous one, the sovereign debt crisis is not truly a public debt crisis, and Italy’s crisis is not Italian-born. German neo-mercantilism induced stagnation in Europe, which survived thanks to US-driven exports. When “privatized Keynesianism” – mixing institutional funds, capital asset inflation, and consumer debt (a model exported from US and UK also to Spain and Ireland) – eventually exploded, European growth imploded.

The sovereign debt crisis is thus the private debt crisis in disguise. Deficits are not of the ‘good’ kind (planned to produce use values for the collectivity, and self-dissolving through qualitative development), but of the ‘bad’ kind (induced by real stagnation or saving finance). Anyhow, for a sovereign area, default should not be on the agenda. The problem has been the unwillingness to refinance first Greece, then Ireland, then Portugal. Their share in the euro area public debt to GDP ratio is ridiculously low:  cancelling the debt would have been less painful.

Spain was next in line (because of the rapid increase in the flow dimension of  public debt), and a bigger problem. Italy is a different story altogether. The crisis came because ‘markets’ and rating agencies had fear and smell stupidity. They saw the stupidity of European leaders, who were ineffective to provide rapidly a financial rescue for indebted countries, and who introduced self-defeating austerity programmes. Fear became panic, producing a ballooning of the interest rate spread. The sharp decrease in the already very low Italian GDP growth rate (2010: 1,3%; 2011: 0,1% first quarter) and the dramatic rise in the interest rate paved the way to Italy’s current nightmare, because of the near 120% stock of debt. It is a simple issue of doing the math to see that at some point this can start a liquidity crisis, turning soon into solvency crisis.

Does this mean that Italy has not deep, serious, failings in its economy? Quite the contrary. But they are structural, long-standing ones. Their date from the mid-1960s, and they resulted in the continuous decrease in labour productivity and the growth rate. Capitalists answered workers’ struggles with a kind of investment strike, hence through higher labour intensity rather than innovation. Industrial sectors (and most big firms) disappeared, high-technology was imported, privatisations turned public enterprises into rent-seeking activities. Industrial districts prospered mostly thanks to devaluations, but are now in a deep crisis. Lately the thriving Italian pocket multinationals (mid-seized enterprises) account for the good export record in manufacturing, but they are residual and dependent on outside-generated growth. Public debt was a means to assist a de-industrialising economy.

The fatal blow came with the policies of flexibility (that is, casualisation) of labour, leading to a collapse of labour productivity. For a while, until the faltering growth was higher than the self-dissolving productivity, this led to full-underemployment in the Centre-North. The crisis is revealing the hidden truth, and the drama of Italian unemployment and further casualisation is just at the beginning. The recent policy measures to redress the government budget balance according to the ECB diktat are the sum of increasing regressive taxes and a savage reduction of government’s money transfers to local authorities, which means cuts in essential social services.

Italy’s trouble is the same of Europe’s: lack of effective demand, but also perverse composition of output. Default plus exit from the euro are not options anymore within a crisis including Italy. In 1992 Italy left the European Monetary System and managed a huge devaluation of the lira: the structural problems deepened, and workers and popular conditions deteriorated dramatically. This time, moreover, Italy leaving the euro would mean the end of the monetary union, and a dramatic broadening of the European and world crisis. The crisis can be overcome only by stopping the domino effect and opening hope for the future: that is, dealing at once with the European financial and real crisis. One suggestion has come from Yanis Varoufakis and Stuart Holland: eurobonds not only as financial rescue but also as finance to a wave of investments on a European scale.

However the crisis is a capitalist crisis: it is part of an attack against labour, private and public, in production and social reproduction. From this point of view – if the problem is not neoliberalism, but capitalism per se  – a renewed New Deal should be part of a wider programme of the European left and trade unions, pushing forward for a socialization of investment, banks in public utilities, the intervention of the State as direct provider of employment, and capital controls. It is not (yet) Marx. It is Minsky 1975. Unfortunately what’s really missing in Europe is not the money to finance the public debt. It is internationalism. European struggles are the necessary condition to resist austerity and get back some decent reformism.

6 Comments

  • In many ways, this is a better description of the overall problem; while at the same time an admission of (there is) a missing link.

    Marx’ thinking was not a fusion of socialism and what almost everyone today describes as “capitalism”. Marx was coming at his thinking from a deeply feudal Europe.

    Today, the crisis of capitalism is not that that concept has failed, it is that it is grossly misconstrued; the crisis is of feudal origins. The crisis is of the feudal mercantile economy; NOT capitalism. The crisis has been caused by trying, I might add, in every conceivable way, to replace true free market, free enterprise job creation; Capitalism; with government inspired “investment” into government inspired feudalism dressed up as socialism. Or, again, the same thing, but driven by giant financial institutions investing under similarly deeply feudal rules called Merger and Acquisition, M&A.

    The BIG mistake was to believe that the people save their spare money, placed into either government borrowing, or giant “Funds” so that either the government or the fund could prosper at their expense. All that has occurred is the prosperity of the people has been entirely drained into either the government debt, or the giant funds.

    That in turn created a gigantic distortion; emphasised by the misunderstanding of the use of the word “capitalism” to describe what is in point of fact; good old fashioned medieval feudalism.

    The missing link is free enterprise investment of equity capital into the grass roots.

    True Capital, Equity Capital, particularly free enterprise equity capital based “Capitalism” is the missing link; the total lack of which keeps suppressing the natural entrepreneurialism of the people.

    The crisis is caused by there not being ANY functioning mechanism to deliver free enterprise equity capital into new business and thus new job creation.

    Instead of using Bond finance to fund government inspired projects as “Social” investment, we need free enterprise equity capital investment into new, private, enterprising companies; businesses created by the entrepreneurs; new businesses to create new employment.

    True free enterprise, equity capital investment, is very much like social investment. The difference is that any “government” inspired social investment is a large project; or, a social support mechanism to replace normal employment where such is non existent.

    Free enterprise equity capital investment is a local community use of local community savings; but instead of being large scale, it is small scale job creation, for the people, right down at the grass roots, and managed by the people for themselves, in their own local community. Of particular importance; such new business creation must be done under the rules of free enterprise – where the manager of the business owns the business.

    Again; the record is very clear, by far the majority of new jobs are created by tiny micro businesses; right down at the grass roots of any nation. If we allow them to be created under free enterprise rules, using equity capital, to the rules of a true free market; we break the link with the feudal mercantile economic model that has failed.

    That is why I keep pushing forward with The Capital Spillway Trust as it offers a solution based upon micro business start up in each and every local community.

    So, why not try some new thinking?

    • Your proposal seems very interesting, but I have a question: Could something like this be stable in the long run?

      For example, let’s take two neighbouring communities that both invest their local savings in a pottery workshop. The one community, however, comprises of wealthier people and therefore has more savings. They can buy bigger and better machines to produce more and better quality products at a lower price than the other. Wouldn’t they overshadow the other community, making it impossible for them to compete without taking a loan from a bank so that they too can invest on better and bigger equipment? Wouldn’t this situation escalate and eventually end up to a situation similar to the one you are trying to avoid?

      Sorry if this is over-simplistic, but not being an economist I may have misunderstood some of your ideas.

      On the other hand, I believe that governments play (or should play) a very important role in balancing the differences between the various communities in order to ensure that all people live in a minimum of acceptable conditions. In my opinion, this should extend to unions of states like the EU and eventually to the whole Earth. I never could understand why rich people should be able to order huge quantities of food, of which they throw more than 50%, while at the same time people in the third world countries die because they cannot afford a loaf of bread.

    • Your question is very pertinent; as it shows a misunderstanding of my overall aiming point which is to break the existing venture capital link between capital and new business creation that has led to a feudal mercantile economy.

      My proposals open the potential for anyone to create their own free enterprise business via job creation within their local community. But the primary aspect, at the outset, is that the initial equity capital does NOT come from the local community; it is instead a general fund available to everyone. Only later, when new job creation becomes a stable process; do we involve local savings.

      It is precisely the aspect of the potential for losses that drove my initial thinking. What I propose is that the first stage begins with the creation of a very large general fund; created by central bank purchase of the equivalent amount of existing grossly over-leveraged bonds from the shadow banking markets; which are then converted into what I have described as vanishing bonds; £450 billion here in the UK; $2.25 Trillion for the US, etc. Their face value remains the same and they are to be designated as having the same face value as the original over-leveraged bonds. However, with the proviso, the new vanishing bonds can only be used within the rules already set out for such investment.

      Thus any local community; indeed, anyone within any local community; may create a local community Capital Spillway Trust Fund. Here where I am we might have Medstead 1; Medstead 2 etc, etc…. Capital Spillway Trust Funds. They do NOT try and raise money from their local community; instead, they set out to encourage others to create a business plan and create a business. It is the new job so created that triggers the investment.

      To gain access to their initial equity capital injection; each new employee registered for tax, (here in the UK we use Pay As You Earn, PAYE), so every new job creates a normal tax reference number that is used by the new business owner to pay the PAYE tax every week into the exchequer. However, now each new job then triggers the placement of £25,000 equity capital with the new business where the “local” Capital Spillway Trust Fund holds 20% of the equity, (ownership), of the new business and the new business owner receives the balance of 80% of the equity, but 100%, (the full £25,000), of the money. That is then immediately placed as a business deposit into the new business bank account. Further, as and when needed, the new business also becomes eligible for a further injection of working capital in the form of £50,000 of 4% 25 year money per employee.

      All the first stage vanishing bond funding, up to a general limit of 5 to 8 new jobs, comes from the original general fund held centrally by the central bank.

      The new business owner must only pay themselves a nominal wage, (to be agreed by the local fund), until either:

      They have reached a constant profit and are able to pay a dividend of at least 8% on the total equity capital invested. That will be at least £2,000 per annum for every employee; £10,000 per annum for 5 new jobs.

      Or; they have paid back the original investment to the “local” Capital Spillway Trust fund.

      As further incentive, the new business creator may also buy out the local funds 20% equity stake on previously agreed terms.

      Only when the new businesses are stable and in profit will the local saver become involved. So no saver takes a risk at the first stage.

      Overall, once this has stabilised over the longer term; the general rules for new, very small business job creation, become the primary mechanism to prevent the return of any form of feudal mercantile economy. Of even more importance, the long term result means the local saver will see the creation of local employment; their savings will be linked to their local prosperity.

      Existing venture capital always takes full control of any company they invest into, (so that they can sell the new business onto the largest company for the most money in as short a timescale as possible). It is that simple feudal mechanism that lies at the heart of the reason for the collapse of the entire Western economy; and it was for that reason I set out these rules to ensure always, at the grass roots of any nation; everyone creating new jobs remain as free enterprise business owners; where the manager of the business owns the business.

      As I see it, if you want to become a part of a long term stable free nation, then these are the rules you must follow.

      The Four Primary Rules of Capitalism

      To create a true free market, capital based, local economy, with as much competition between the many suppliers to the local economy as possible; only requires we accept four primary rules:

      1. Only the job creator makes the decision to create a new job

      2. They receive adequate Equity Capital by abiding to strict, but open rules that leave them in complete control of their new business.

      3. Local savings are invested, as equity capital, back into the local community to provide the required capital to create the new jobs.

      4. All transactions are made to the rules of a free market.

      It really is as simple as that.

      So you can see, in the first instance; everyone, in every local community, will start out on a level playing field. In which case, only the best will endure to finally succeed in supplying the marketplace and the failures must set out to try again, perhaps to try and supply another product to again, try and compete.

      Now I want everyone reading this to accept a challenge. Sit down with paper and pen and list everything you will need, great emphasis on the word everything; to enable someone to be able to sell, across a trade counter, one wood chisel, made from scratch from Iron ore dug out of the ground.

      To give you a pointer, list ALL of the components of the earth mover that digs out the Iron ore. (And, that includes all the components that are required to MANUFACTURE those components, and, again, all the components to manufacture the components). Then the truck that transports it to the mouth of the Iron ore mine ……. Now take that right through the entire process, transport, ore processing, steel processing, wood processing for the handle, all manufacturing, storage, delivery, sale.

      If you have a list of less than one thousand components you are not trying hard enough….

      Now, imagine every single component is sufficient to enable the creation of a new small business to supply those components and then multiply that chisel by the total number of items ANY nation needs to be able to function…

      Economics only deals with the function of money in society; but a fully functioning manufacturing nation has quite literally millions of opportunities to supply a component, in direct competition with the EXISTING manufacturer.

      Many who try to so compete will, yes, fail. But that always leaves the capital so invested circulating within the nation to increase the overall prosperity; permitting others to try.

      THAT is true capitalism; with free enterprise capitalism being the only way to remain free.

      Please; think about that.

    • Yanis,

      These ideas came from decades of thought. The core problem is to bridge the left and right viewpoints because the left always thought of job creation as a government inspired exercise and the right always saw the same exercise as a classic “Capitalist” one, neither saw that both sides had failed to recognise that classic “Capitalism” as most understand it; is in fact a feudal mechanism and not true free market investment of equity capital.

      The end result has been that job creation has become a government inspired exercise involving power to “Control” totally over riding common sense.

      We do not have ANY recognised mechanism to invest free enterprise equity capital into new job creation; anywhere on the planet. Yet, everything we do revolves around the need to create new jobs. We must have those new jobs; millions of them.

      The right sees only the ongoing success of the giant corporates. The left only sees the potential for power to spend taxation. Neither ever succeeds; both sides continuously fail, each in their own way.

      Job creation should be the simplest mechanism that does not involve anyone other than the individual that “sees” the potential to compete.

      The long term result will see all new creativity removed from government. By that I mean even long term research and development funding for universities will eventually be simply a function of an academic deciding that they want to do some new first stage research and they will simply get on with it. Funded by simple rules; No committees, just create a new job and the funding automatically follows.

      Gosh, imagine no need to ask anyone and government reduced to simply keeping track of needed changes to law; yet always adhering to simple rules that everyone understands and agrees with; always done as true free enterprise, equity capital investment to the rules of a true free market. Real, honest, true, capitalism.

      Everyone creating a new job always remains a free citizen. No more feudalism.

      We need a rain forest of new jobs; lets get on and create them.

  • we produce too much; and… after this crisis our crafty leaders will look around and come to the conclusion that the root of all evil is the export of manufacturing in Asia.

    so… we’ll produce three times as much (the crafty ones over the pond will figure it out too); depleting our resources even faster. And we’ll have a 10 times bigger pile of useless crap(some of the currently produced crap is actually useful). Eventually some skirmishes too on Africa’s resources(the locals will get the shaft – I guess I’m captain obvious here).

    To add more misery, some benevolent souls thought women should work too(work rocks, right?) – bonus, we need to invent twice as many jobs despite an obvious dramatic reduction of needs due to automation. PR, HR, publicity and so on are such blessings for civilization…

    Getting in an age where we don’t really need to work is a very mixed blessing. Especially when 90% of the population lacks the education to spend their free time doing something non idiotic.

    Even more, no progress was done in space colonization since the ’70s. So, we’re stucked on this rock, with dwindling resources and, for the 1st time, the ability to self destruct. Yuppie!

    it’s a problem of distribution; and of education. So people can actually do something intelligent with their free time instead of keeping up with the Jones and retarded soap operas. Especially since dumb consumption enhances that tiny resource problem we might have…

    Unfortunately, Marx’s response is totally useless; might work in an ideal world which wasn’t yet invented. At least he figured out the problem.