With rising global inequality and environmental crises, capitalism is unable to resolve the crises and thus has become an obsolete social system – The author discusses the history and impacts of capitalism, trends in globalisation, and persisting inequality among countries and proposes that an alternative economic system should be adopted.
Since the mid-18th century, capitalism has not only shaped modern societies, but has also witnessed periodic crises that have often threatened these societies’ very existence. A number of theorists have sought an explanation at to why such setbacks to stability and growth take place. For Karl Marx, it was due to control of wealth by a privileged few and he argued that the system produces wealth at one pole and poverty at another and simultaneously becomes immensely strengthened. Rosa Luxemburg proposed that these cycles are due to exhaustion of new land for colonisation and markets; Keynes suggested the lack of demand and the saturation of markets and Kondratieff stagnation in technological development. Despite their differences they all agreed that capitalism was not a natural system and was bound to end sooner or later.
The prominent Austrian economist Joseph Schumpeter characterised the dynamics of capitalist development as displacing old equilibria and creating radically new conditions. For him, economic development is accompanied by growth, i.e., sustained increases in national income, which occurs discontinuously rather than smoothly. According to him, the immediate stimulus for development emanating in the sphere of industrial and commercial life takes place due to innovation (i.e. new products, methods of production, markets and sources of supply). The innovation process “incessantly revolutionises the economic structure from within, incessantly destroying the old one, [and] incessantly creating a new one. This process of creative destruction is the essential fact about capitalism” (Schumpeter, 1950:83). The prime motives of entrepreneurs are accumulation and enlargement of profits.
Capitalism as a socio-economic system arose in Europe initially as “merchant capitalism” and subsequently through a technological revolution which metamorphosed into “industrial capitalism”. Slavery and colonial expansion were the main forces behind the establishment of capitalism, first in Britain and later on in Belgium, the Netherlands, France, Germany and Italy. The big question is where the principal accumulation of wealth came from? Of course, slavery and colonialism played a big role. Historically, capitalism always fought for new territories and markets. It was also instrumental in imparting ‘vertical’ and ‘horizontal inequality’ in the world. However, there was a reaction to colonial capitalism which resulted in the Russian Revolution (1917) and the Chinese Revolution (1949) and decolonisation. However, unequal economic relations and Western control somehow persisted in the former colonies in the form of “neo-colonialism”.
In the West, after successive crises, capitalism has been successful in rescuing itself mainly through exogenous support. For instance, during the “Great Depression” of the 1930s, Keynes advocated in favour of increased government spending to lift the economy out of recession. When consumers and businesses slow down, the government should increase spending to increase demand for goods and services. This fiscal stimulus could take the form of public housing, healthcare, education and infrastructure projects. However, we should not ignore the role of government spending in boosting the defence sector, which is seen as a new avenue to increase profits and also creates jobs. Thus, military Keynesianism became popular among the ruling elites in the post-war period and large corporations also saw military spending as an important form of government intervention to make profits. These defence expenditures in advanced economies such as the U.S., UK and France also helped to counteract the threat of recession in their economies.
In the aftermath of the “Great Depression” and Second World War, capitalism was transformed with the increased role of government in the economy, a strong workers union and welfare state. There was a sea change from the economic system and policies which existed in Western Europe and the United States in the 1920s. After the Second World War, the social democratic governments under Keynesian economic policies were prompted, with active state intervention, to preserve economic stability and social justice within the framework of capitalism, which is known as the “Golden Age” of capitalism. Markets were brought under social control and a number of policies were designed to protect societies from the disastrous policies of the past.
Furthermore, the ruling elites in the West came to the realisation that economic stability could not be achieved unless the poor sections of society were guaranteed some basic benefits, the costs of which were to be shared with the state. In addition, the state must have some sort of regulation over markets. The workers were brought on board to accept property rights and inequality in exchange for political democracy and wage bargaining.
However, in the 1970s economic crisis deepened in the advanced economies, with both rising prices and unemployment, and such arrangements were being questioned. To control rising prices, deflationary measures were adopted along with attacks on trade unions and welfare policies. In order to increase investments, the governments resorted to public borrowing to meet their fiscal commitments. Financial markets were deregulated and liberalised. As a result, the financial institutions started taking ever increasing risks and their reckless drive for higher profits eventually brought the entire system into collapse in 2008. The declining profits on investments adversely affected global growth in output, with money shifted into the financial sectors and speculations and this bubble eventually burst in 2008. The governments had to rescue the financial institutions by bailing them out using public funds, which resulted in a dramatic rise in sovereign debts, which was then followed by severe austerity policies.
Michal Kalecki observed a rise in the “degree of monopoly” within metropolitan capitalism, which provided an opportunity for a greater squeeze on the producers of primary commodities of the developing countries. Samir Amin (2018) found that unequal exchange was manifested in the fact that the value added by a unit of simple labour in the periphery (i.e. developing countries) amounted to less than the value added by a unit of simple labour in the metropolis. This he called super-exploitation of the farmers and workers of the periphery. Amin also developed Paul Baran and Paul Sweezy’s ideas of economic surplus to explain a globally monopolised system in which Marx’s “law of value” takes the form of a “law of globalised value”, generating super-exploitation of the workers in the periphery. Under globalised capitalism, financial capital dominates worldwide production and distribution. Amin also predicts that capitalism’s current phase of neo-liberal globalised capitalism has reached a dead-end (Amin, 2018).
Conservative historian Niall Ferguson equates contemporary political developments with the period at the beginning of the 20th century, when the globalisation collapsed as a result the two World Wars and the Great Depression. He totally ignores colonialism and its impact on today’s economies, both advanced and developing. Others enthusiasts predicted the end of the nation state through rising foreign capital investments and trade, while the critics supported globalisation, but also argued for programs in favour of state-led infrastructure investment and some control over global finance to offset the adverse effects of globalisation. To address this, we need to analyse the trends in globalisation.
Globalisation means that the rate of growth of world trade is greater than the rate of growth of world’s production of goods and services. This would indicate that the world economy is becoming integrated, as cross-border trade and foreign direct investment (FDI) increasingly replaces the production of goods and services for domestic markets. The previous policy of protectionism and import substitution was reversed. This was the case during the inter-war period when import tariffs were imposed along with exchange controls. This began in 1914 as tension between European powers increased. However, after the Second World War, we saw a change in the world economy towards a sharp reduction in tariffs and growth in world trade, which grew on average at 10% annually, outstripping growth of world output two fold.
However, since the 2008 financial and economic crisis, both world trade volumes and FDI have slowed down. According to a recent OECD report, foreign investment flows declined by 7% in 2017 and thus dropping global outputs to 2.2%. Under the new situation, the U.S. has enacted various protectionist measures since 2009, mostly against China. In such critical times, Trump hopes to triumph by riding on economic nationalism, triggered by increased competition from China’s growing economy, which has now become a net exporter of capital.
During the first wave of globalisation, which was between 1850 and 1913, the colonies supplied raw materials and provided markets for manufactured goods from the metropolis, which led to vast accumulation of wealth in Europe. The treasures captured in the Americas, Africa and Asia by looting, plunder, enslavement and murder, were brought back by Europeans and were turned into capital. Karl Marx highlighted how Britain created an empire and trade through primitive accumulation of capital based on slavery and plunder of its colonial “possessions”. Of course, technological advances in the 19th century, especially with the introduction of railways, shipping and telegraph aided this process. This expansion of trade and business was far from peaceful, and growing economic expansion overseas was backed by military boots on the ground and the Royal Navy at Sea (Siddiqui, 2018a). Commenting on the two opium wars in the mid-19th century, (first opium War (1839–1842) and second (1856–1860)) involving China and Britain over the export of opium and China’s sovereignty, John Newsinger (2006) states in his book The Blood Never Dried, that “the British Empire was the largest drug pusher the world has ever seen”. And finally the British and French troops plundered, looted China and burned down the Summer Palace in 1860, afterword’s China plunged into civil wars, which continued for next ninety years until the communist revolution in 1949.
The colonisation of the economies in Asia and Africa and Latin America in the late 18th and early 19th century put a break on the internally initiated progressive reforms and structural changes. It also imposed de-industrialisation, reoccurrences of famine and forced integration of their economies with the occupying powers. To strengthen their occupation various types of compromises were made with the pre-capitalist and reactionary forces and the policies of ‘divide and rule’ which brought untold sufferings to the people in the colonies.
The colonies did not see any modern industrial growth and the world’s manufacturing remained firmly rooted in the advanced countries. The colonies were forced to specialise in the production of primary commodities such as sugarcane, cotton, coffee, tea, indigo, jute, opium and rubber rather than in modern industries.
The prices of these commodities were often suppressed; extortion and theft rather than a free market became the normal behaviour of the colonialists. The surpluses extracted from the colonies helped capital accumulation to be invested in the modernisation and industrialisation of the mother countries, but also gave them extra capital to be exported back to colonies in the form of railways, mining and plantations. All these lucrative areas of investments were only available for Europeans and therefore accentuated the unequal development between countries.
In the mid-18th century, the South had accounted for 73% of the world manufacturing output, but this share fell to 50% by 1830 and by 1914, at the end of the first wave of globalisation, the share dropped to only 7.5% (Bairoch, 1995). Contrary to this fact, Niall Ferguson still portrays British Empire as benign and benevolent. However, the fact is that the process of globalisation was violent and exploitive, brought famines and wars and decimated the native population in the colonies. It is estimated that more than 29 million Indians died in famines during the British rule, while at the same time millions of tons of wheat were exported to Britain while famine raged throughout India (Siddiqui, 1990). For instance, in 1943, up to four million people in Bengal died when the Winston Churchill diverted food to British soldiers. When asked about the famine Churchill said: “I hate Indians. They are a beastly people with a beastly religion. The famine was their own fault for breeding like rabbits.” And when few conscience-stricken British officials wrote to Churchill in London pointing out that his policies were causing needless loss of life, and then he wrote back “Why hasn’t [Mahatma] Gandhi died yet?” Capitalism was responsible for underdevelopment, deprivation, racism and poverty. In fact, colonialism did not contribute to the development of the productive forces of the colonies but conversely inhibited their development. Prior to the Industrial Revolution in Britain, Western Europe had been poorer in natural resources and less developed economically than either China or India (Siddiqui, 2018b).
The second phase of globalisation began slowly in the 1950s, but was limited to the few developed economies of Western Europe, Japan and North America. However, in the 1980s the international debt crisis and mismanagement provided an opportunity for the IMF/World Bank to impose a “Structural Adjustment Programme” (SAP) in developing countries (Siddiqui, 1996). The opening up of domestic markets was one key element of the SAP. Taking advantage of these crises, the mechanisms controlling cross border direct investment, trade and financial flow were removed. The creation of integrated world markets meant that workers had to compete under the fear of capital outflows and jobs moving away. Any country that tries to pursue a path independent from the Western-dominated financial oligarchy is criticised. Further, the IMF/World Bank discredited and dismantled institutions which could have promoted economic independence and self-reliance in the developing countries.
The final success came with the collapse of the Soviet Union in 1991 and the globalisation project received a further boost and almost the entire world economy was open for trade and capital liberalisation. The current drive of globalisation for further integration of markets was also boosted by the development of information and communication technology (ICT). At the same time, governments deregulated the financial sector, which led to the increased financialisation of the world economy which has now become “financialised and globalised oligopolies” located primarily in the U.S., Europe, and Japan. This is global oligopolistic capitalism, in which finance capital has come to dominate worldwide production and distribution. This means expansion of financial markets and an increase in the portion of income generated by the financial sector worldwide. It has also led to further fuelling of global capital flows with a profound impact on global and national economies.
However, when neo-liberal policies were imposed in the South after the debt crisis mainly through the IMF, World Bank, and WTO, the aim was to create a just and stable global economic system. However, the global recession along with the financial crisis betrayed the neo-liberal claim. This was largely due to the change in the nature of global capital from “productive” to “fictitious”. The “new rich” have enhanced their wealth not by creating “real value” via production but by engaging in speculative businesses. This sort of a “capital” makes the global economy unequal, unstable, unproductive and unsustainable. It is unlikely that crony capitalism will promote economic growth with social and environmental justice.
Donald Trump becoming President of the U.S. last year seems to have successfully convinced U.S. political and business elites that protectionism will restore American power and will harm the U.S. much less than its rivals. For example, in the United States trade measured nearly 30% of total output in 2016. This is compared to 167% in Belgium, 85% in Germany, 59% in the UK and 42% in China. This means that any move towards protectionism by the U.S. will be less adverse than in other advanced economies. Martin Wolf (2017) notes that Trump: “appears to be intent on replacing multilateralism with bilateralism, liberalism with protection and predictability with unpredictability.” Therefore, the future of globalisation depends on the outcomes of such tension in the world and also within the U.S. ruling elites.
Inequalities among nations were stabilised in the early decades of the post-colonial period (i.e. 1950-70) due to decolonisation and commodity boom, but in the 1980s and 1990s rose massively during the debt crisis due to financial instability and the global economic crisis of 2008. For the last three decades, there have been huge economic changes taking place globally and structural changes and patterns of trade have also taken place both in advance and developing countries. However, some developing countries have achieved faster growth rates than the advanced economies, particularly China, India, Indonesia and Turkey. However, they constitute a small numbers among the developing countries, but accounts large number of its population. In fact, international inequality in terms of distribution of per capita incomes among the countries’ population has declined in the last two decades. Trade liberalisation and with the removal of trade barriers did have some positive impact on country’s growth but not all the developing countries have benefitted from it. We also find that with globalisation, transnational companies largely from the advanced economies driven by competition at home for markets (Siddiqui, 2018b) and higher wages and low returns, driven rising competition for markets, whilst also seeking to cut their costs, have started investing abroad especially given by the rise of global value chains since the 1990s.
Under neo-liberal policies the world’s wealth and income has been concentrating into fewer hands. According to a recent Oxfam study, in 2015 the total wealth of the world’s 388 richest was on a par with that of the bottom half of the global population. In 2017 the top eight richest people’s wealth equalled that of the bottom half. In the U.S. alone, 0.1% of Americans enjoy 90% of the country’s wealth.
Currently, the word “globalisation” in India means capitalist expansion, through over-exploitation of natural resources with the inevitable consequences of marginalisation of tribal peoples, uncontrolled growth of inequalities, and transformation of the country into a crony capitalist state and proliferation of billionaires who symbolise the capitalists’ de facto control over the country’s economic sovereignty. Neo-liberal policy unleashes a vigorous process of primitive accumulation of capital in the countryside, where the domestic corporate oligarchy and multinational corporations impinge on the small landowners and petty producers, causing them great distress. The big businesses attempt to restructure the government by forcing it to be functionally autocratic through bureaucracy, and by legislating centralisation to substitute democratic procedures (Siddiqui, 2017).
Since the 1980s, inequalities within countries has risen sharply, especially after the adoption of neo-liberal economic policies. In India, for example, during the last quarter of a century under neoliberal policies inequality within the population has widened further. According to the latest Human Development Report of UNDP, 55.3% of Indians are under multidimensional poverty. On the Human Development Index (0.624), India’s rank among 188 countries is 131. According to the recent World Bank World Development Report (2018), 172 million Indians live in extreme poverty, thus making India home for 24.5% of the world’s poor. The recent Oxfam Study points out that the richest 1% of Indians now own 58% of the country’s wealth. Another recent study by Chancel and Piketty observed that the top 1% of Indians owns 22% of country’s total income. There is also a concentration of landed wealth in India. 70% of India’s rural population is landless, only 30% owns land. Persistent agrarian distress has been making the life of the majority of people miserable. According to an official estimate, since 1995 more than 300,000 farmers in India have committed suicide (Siddiqui, 2017).
Capitalism has been moving on a relentless march towards automatisation through displacement of labour. This situation has led to further weakening the position of workers towards secure jobs as they are threatened by artificial intelligence and driverless cars. The world has become too vulnerable with the rising craze for automation, robotisation and artificial intelligence. With rising global inequality and environmental crises, capitalism is unable to resolve the crises and thus has become an obsolete social system. Randell Collins (2013) believes that capitalism has reached a dead end, and at present it has no escape routes. In this predicament, we need an alternative economic system which respects ecological diversity, environment, democracy, social-economic equality and facilitates fair and reasonable redistribution of incomes and wealth.
About the Author
Dr. Kalim Siddiqui teaches International Economics at University of Huddersfield, UK. He is an economist, specialising in Development Economics and has written extensively on development economics, economic reforms as well as on the political economy of development.
References
1. Amin, Samir. (2018). Modern Imperialism, Monopoly Finance Capital, and Marx’s Law of Value, New York: Monthly Review Press.
2. Bairoch, Paul. (1995). Economics and World History: Myths and Paradoxes. Chicago: University of Chicago Press.
3. Collins, Randell. (2013). Does Capitalism Have a Future? Oxford: Oxford University Press.
4. Newsinger, John. (2006). The Blood Never Dried: A People’s History of British Empire, London: Bookmarks.
5. Schumpeter, Joseph. (1950). Capitalism, Socialism and Democracy, New York: Harper.
6. Siddiqui, Kalim. (1990). “Historical Roots of Mass Poverty in India” in edited by C.A. Thayer, J. Camilleri, and K. Siddiqui. Trends and Strains. pp. 59-76, New Delhi: Peoples Publishing House.
7. Siddiqui, Kalim. (1996). “The Debt Crisis – Need for a New Strategy” The News, 17 May.
8. Siddiqui, Kalim. (2017). “Globalization, Trade Liberalisation and the Issues of Economic Diversification in the Developing Countries”, Journal of Business & Economic Policy, 4(4): 30-43.
9. Siddiqui, Kalim. (2018a). “David Ricardo’s Comparative Advantage and Developing Countries: Myth and Reality”, International Critical Thought, 8(3) September, Taylor & Francis Group.
10. Siddiqui, Kalim. (2018b). “Imperialism and Global Inequality: A Critical Analysis”, Journal of Economics and Political Economy, 5(2): 266-291.
