The myth of America’s decline
This is an excerpt from “The Reckoning: Debt, Democracy and the Future of American Power,” published this week by Palgrave Macmillan.
For all the doom and gloom about “American decline,” the United States looks nothing like the twilight empires to which it’s often compared. For one thing, in this age of globalization, a far greater swath of the planet – including some surprising nations like China and Saudi Arabia – wish America well, albeit for their own, selfish reasons. Why would either country, in spite of what it may think of American culture or foreign policy, want to upset a status quo upheld, at great expense, by American power that enriches them more each and every year? From the US perspective, this should be an advantage. It creates stakeholders all over the planet that genuinely hope Washington can solve its current fiscal problems. With the exception of the British Empire, which had a relatively benign replacement lined up when it ran out of steam, history offers no other example of a waning empire whose most obvious potential rivals – China, India, the EU, to name but a few – all have good reasons to want to help arrange a long, slow approach to a soft landing.
“I have no objection to the principle of an American Empire,” writes Niall Ferguson, the Oxford historian. “Indeed, a part of my argument is that many parts of the world would benefit from a period of American rule.” Ferguson and others like him recognize the importance of the role the United States has played, a role that “not only underwrites the free exchange of commodities, labor and capital but also creates and upholds the conditions without which markets cannot function – peace and order, the rule of law, non-corrupt administration, stable fiscal and monetary policies – as well as public goods.” Ironically, many would-be topplers of American hegemony no doubt feel the same way.
Another key difference from the decline of Europe’s imperial powers is that while America’s relative decline is underway, the United States hardly looks likely to sink quickly to second-class status. In other words, the current trajectory would see the United States settle into a kind of parity with emerging powers. In instances where the changing of the guard occurred with amazing speed – Spain after Philip II, the Dutch after the Napoleonic wars, France after World War I, and Britain after World War II – the declining powers were exhausted, attempting to cling to far-flung colonies because their imperial economic models depended on extracting every last ounce of labor and resources to prop up the home country. The United States has something none of them ever enjoyed – the world’s largest domestic consumer market, as well as a commanding lead in many of the disruptive technologies that still drive product innovation. So absolute decline appears only a distant prospect – unless Americans badly fail at the polls, inviting another decade just like the one just finished.
Relative decline for the United States is hardly the worst possible outcome, if Washington and its allies can fashion a post-hegemonic system as resilient as the US-dominated one launched by Roosevelt and Truman in the mid-1940s. And Americans may find that, after decades of superpower headaches, they kind of enjoy being mortal again.
But this will require some serious repair work, and not just to the national balance sheet. Americans are right to take pride in their country’s achievements, but at times this pride looks, from the outside, a lot like arrogance or even racism. “Brazil, China, India, and other fast-emerging states have a different set of cultural, political, and economic experiences, and they see the world through their anti-imperial and anticolonial pasts,” says G. John Ikenberry, a Princeton professor of international relations and former State Department official. “Still grappling with basic problems of development, they do not share the concerns of the advanced capitalist societies. The recent global economic slowdown has also bolstered this narrative of liberal international decline. Beginning in the United States, the crisis has tarnished the American model of liberal capitalism and raised new doubts about the ability of the United States to act as the global economic leader.”
Removing the stain of financial fundamentalism should be a priority of US foreign policy, too, and I believe it to be achievable. In spite of the financial charlatanism that prevailed in the first decade of the century, the American economy is sputtering but not crumbling. American innovations still drive progress in many fields of science and technology, even if some of its most innovative software – Facebook, Twitter, the Internet generally – occasionally undermine its own interests abroad. American manufacturing, recently written off as a legacy of a bygone age, is mounting a comeback as the costs of labor in the emerging world rise, along with the costs of transporting products back to the home market. At some point, the political risks of a factory in China or Bangladesh might just outweigh the incremental labor cost savings. For these and other reasons, then, the United States is hardly a “spent” power. A more apt word might be winded, like an aging runner who ate, smoked, and drank too much over the Christmas holiday. The United States struggles today to call up the old reserves of strength that seemed to power growth and job creation effortlessly through the preceding two decades. This is partly because the “steroid” of the housing bubble that fueled its irrational exuberance during many of those years has turned into a weight around its neck in the form of slow, excruciating deleveraging of household debts. But the runner lives and still has a few marathons left in him.
Capitalism is evolving, but into what?
This is an excerpt from Standing on the Sun: How the Explosion of Capitalism Abroad Will Change Business Everywhere, published this month by Harvard Business Review Press.
Like any “ism,” capitalism is a social construct; capitalism is only a term for what capitalists tend to believe and do. Beyond a few fundamentals—that it puts faith in markets as the best way to allocate resources, that it depends on private ownership of property, that it features mechanisms for accumulating capital to fund endeavors larger than individuals can undertake alone—very little about it is set in stone. This is why we often hear phrases suggesting different styles of capitalism: “capitalism with Chinese characteristics,” for example, or “Northern European social capitalism.” No surprise, then, that capitalism is subject to change.
And what’s behind that change? Again, at the theoretical level, it’s easy to surmise. Like any adaptive system, capitalism is nested in an environment, so any substantial change in that environment alters what it takes to thrive. It’s the same basic phenomenon as in nature: when the insect population of the Galapagos moves on to new flowers with a different shape, the beaks of the finches evolve in turn.
That the environment of global commerce is undergoing major change is no secret. Advancing technology, for one thing, constantly reinvents the context in which commerce operates. Demographics, too, have an effect, as the generations raised with new technological capabilities begin to fill positions of power. Most strikingly, the very geography of capitalism is shifting. With each passing year, emerging economies account for a larger proportion of global GDP; from 2004 to 2009, they accounted for almost all of the world’s GDP growth. Patterns of consumption are being upended as global standards of living rise; India’s middle class is now bigger than the entire U.S. population. Americans and others in the developed world have long fretted about job losses and other social implications of this huge and ongoing shift. But the impact of emerging economies will go beyond what anyone is talking about. It isn’t simply that capitalism will increasingly happen elsewhere. It’s that, taking root in different soil, capitalism itself will grow into something new.
Capitalism doesn’t evolve only in theory. The most cursory review of economic history shows how much it has changed in practice. The rules shift constantly. For example, when Great Britain was the epicenter of industrial capitalism, it was understood that a business founder who borrowed capital and then went belly-up should be shipped off to debtor’s prison—or worse, Texas (before air-conditioning). But U.S. capitalists more disposed to second chances later rewrote those rules, creating bankruptcy laws that encouraged entrepreneurial risk taking. The system morphed again with the introduction of limited liability, which allowed firms to shoulder the risk of large-scale manufacturing and, in doing so, gave rise to monopolies (an eventuality no one had worried about before). Even rock-solid assumptions—such as the assumption that currencies must be backed by precious metals—have been tossed aside as trade marches on. These are only a few, top-of-mind examples of ideas that cropped up locally, took hold, and changed capitalism globally.
At a more fundamental level, when production shifted from agriculture to industrial production, the theories of economics changed profoundly, because financial capital gradually overtook land in importance. As information—inherently not a scarce resource—becomes the most productive resource, economics will change again.
We’re convinced therefore that we’re on firm ground with our thesis: capitalism evolves, and even now it is evolving into something new. The question is, Into what?
Copernicus was standing on shoulders of Aristarchus of Samos, whose seminal on work heliocentrism work he noted. It seems Richard Morley needs a decent education.
Morley to Chris, “In order to see the solar system as it is, Copernicus had to be standing on the sun.”
Are capitalists happier?
By Ronald Rotunda, Vernon Smith and Bart Wilson The opinions expressed are their own.
As many of the world economies seem to be collapsing simultaneously, it is a good time to step back, take a deep breath and look at the bigger picture. Which kind of economy ultimately works better in the long run — capitalism or socialism?
We have long known that workers are richer in capitalist countries than in socialist ones. But are they happier? Capitalism sounds much harsher, like Thomas Hobbes’ depiction of the state of nature — the war of all against all. Socialists see capitalism as a system where people unfeelingly compete by trying to drive out their opponents. Capitalists counter that free markets are really about voluntary exchange and trading for mutual benefit.
So who is right? Using virtual economies, we can now literally recreate, in laboratory investigations, the state of nature and are no longer left to philosophical musings of first principles.
In the state of nature, individuals produce what they need — e.g., grain, beef, etc. People can remain self-sufficient, or choose to trade and specialize — some people may be more efficient than others in certain jobs. For example, some may herd cattle better while others have a green thumb growing crops. Or, they can even steal from each other because, in the state of nature, no legal system protects private property. (That should please the French anarchist Pierre-Joseph Proudhon who proclaimed, “Private property is theft”).
The virtual economy endows each participant with an icon, “home,” where they consume goods, and a “field” where they produce them. For simplicity there are only two goods. They could be meat and potatoes, or ham and eggs. We call them red and blue. The experimenters privately inform each participant of their preferences over these two goods. Half are told that for every 3 reds they need 1 blue to earn 3¢, and the other half earn 2¢ for each red unit consumed with 2 blues.
I keep a thread open until the time it closes. But this one has been open for months.
So Magpie – they may not have been at home when you asked your question and were trying to design a better experiment or just gave up on the idea? They may not even know you asked the question.
I don’t think you can use the old Roman principal – “Silence connotes consent”. You may also have them stumped or they can’t figure out what you were asking?
People also have to be trained and educated to live in a capitalist society.
The barter or the more sophisticated money economy, are not that hard to learn. I think they are instinctive, or skills even a child understands at a very early age. How many times have you seen children trying to imitate the grownup world by setting up lemonade stands? People were using money in Mesopotamia before anyone had a clue what “capitalism” was. Capitalism and market economies may not actually be the same thing at all.
Have you even read the work of Fernand Braudel?
from MacroScope:
Step aside capitalism, how about leverageism
Our recent post on the End of Capitalism triggered much interest and comment. There were plenty of diverse views, as one would expect. But one thread that came out was that what we are now seeing is not true capitalism (nor, of course, is it old-style communism). Ok, but what is it?
Anthony Conforti suggested in a comment that we need a name for what is happening,:
The first step in defining a new economic paradigm is coming up with the proper terms…new words to define a new economic environment. As words, “capitalism”, “communism”, “socialism” may now be inadequate to describe the emerging economic reality. We need new nomenclature. Any thoughts?
Here's one suggestion. There seems to have been precious little capital building going on is the last few years, so even in a free market, capitalism sounds a bit inaccurate. How about "leverageism"? Borrowers of the world, unite. You have nothing to lose but your shirts.
Time to pick up the challenge. What should we call the dominant economic system?
from The Great Debate UK:
Slavoj Zizek on resurrecting the Left
Soon after the global financial crisis erupted in 2008, treatise "Das Kapital" saw a resurgence in popularity throughout eastern Germany.
The 1867 critical analysis of capitalism by Karl Marx became a bestseller for academic publisher Karl-Dietz-Verlag, as a rejection of capitalism set in following intense financial turmoil.
More than a year later, questions over the validity of the capitalist economic system remain in focus amid ongoing concerns about the cost to society of bank bailouts, high unemployment and stimulus measures.
If anything, the financial crisis has made capitalism more lean and mean, author and philosopher Slavoj Zizek told Reuters ahead of a talk at the London School of Economics.
"Capitalism as we knew it cannot survive -- it's the time for mobilization."
Zizek, International Director of the Birkbeck Institute for the Humanities in the University of London, posits in his new book "First as Tragedy, Then as Farce" that "critical leftists have hitherto only succeeded in soiling those in power, whereas the real point is to castrate them . . ."
Zizek suggests that those in power should be undermined via "patient ideologico-critical work" rather than direct confrontation.
Resources are no longer plentiful. The bankers have destroyed all the inflated wealth. In the meantime the planet is in peril and the free market system and the politically run economies are incapable of sustaining mitigating action. I think there is a little more at stake here than preserving an economic system of privilege.Before civilization mankind fought each other over the control of potable water and viable farmland, not oil or gold. As we ponder the fate of capitalism and our personal finances we remain oblivious to our descent into that same condition. As with global climate change we must act quickly and decisively. Or it will be to late.
from MacroScope:
The end of capitalism
Hard to imagine with financial markets still buoyant and newspapers full of tales of bonus greed, but there is still the possibility that captialism will end. At least there is according to prestigious investment consultants Watson Wyatt in their latest study called "Extreme Risks".
The firm listed the demise of the system of private ownership as one of 15 threats to investors and the global economy that probably won't happen but which it reckons are worth worrying about anyway. The idea behind the report is that such things as climate change, the break up of the euro zone and war are always worth being included in an investment risk management process.
As for the future of capitalism:
In our view, the most likely scenario is moving along from one end of a spectrum where market is king (minimum regulation) towards the other end, where we could see more onerous regulations and government intervention in, and control of, the economy. The extreme risk, however, is the demise of the capitalist system and the end of the market as the primary means of resource allocation.
And the impact:
The economy would be likely to run a higher risk of failure and economic growth would be sluggish in the long run due to lower productivity. Centrally controlled economies tend to be characterised by shortages, which are inherently inflationary. Private investment activities would collapse or even be terminated. The end of capitalism is simply the ultimate extreme risk. The economy is likely to be associated with extreme uncertainty and a large amount of wealth destruction during the transition period.
Watson Wyatt does try to give its free market clients some hope, suggesting that buying gold may be one way to hedge against the propect of capitalism's demise. But it admitted that in such a circumstance investors would probably be more concerned about the return of their investments rather that the return on them.
I’m probably wrong but, hasn’t true capitalism been dead for nearly 100 years now if not more?
from The Great Debate UK:
Economist John Kay mulls Berlin Wall anniversary
When the Berlin Wall fell 20 years ago, the momentous event marked the triumph of the market economy over planned economic structures, says British economist John Kay.
He explains his views on why the capitalist system reigns supreme.
Capitalism is not dead
Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed here are her own.
The past month’s turmoil in U.S. and global financial markets has spawned several articles tolling a death knell for capitalism. Some said that the crisis is proof that capitalism never worked, others opined that the solutions to the problems will end capitalism.
To paraphrase Mark Twain, reports of capitalism’s death are greatly exaggerated. Although Washington is using non-market solutions in an attempt to unfreeze the credit markets, they have not succeeded, and are unlikely to be permanent. The next administration, Republican or Democratic, might take over more of the economy. But if one country in our global economy proceeds down an unsuccessful socialist road, others will demonstrate the effectiveness of capitalist measures—just as America led the way with tax cuts in the 1980s.
The present crisis started not because capitalism was allowed to run its selfish course, but because the government interfered with the operation of private businesses and allowed excessive growth of money and credit.
Take housing, where the crisis began. The government interfered with private decision-making by requiring banks to make loans to people who could not afford them, through the 1977 Community Reinvestment Act. It forced banks to improve lending and service to borrowers in poorer neighborhoods, including people with poor credit histories. Some of these borrowers only qualified only for subprime mortgages, which had introductory low rates that eventually rose.
In another example of government interference, Fannie Mae and Freddie Mac were given implicit government guarantees, letting them borrow at favorable rates. The rationale given by both mortgage companies was that this was the way that less-affluent Americans could get homes of their own—housing that they could not afford under otherwise. While the government was pressuring financial institutions to increase lending, the Federal Reserve was lowering interest rates to try to avoid a recession after the terrorist attacks of September 11. This vast expansion of money and credit had to go somewhere—and it went into an inflation of housing prices of horrendous proportions, the real estate bubble that eventually burst.
The mission of the central bank is to keep a sound currency. The Fed failed.
Sorry woodchuck, I know facts aren’t as much fun as hype.