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The Trouble With Capitalism in One Country Theories

Capitalist Origins: A Comment

by Christopher McAuley

A discussion on the problem of "Eurocentrism" in theorization of capitalism and anticapitalist struggle was initiated with Ellen Meiksins Wood's esay on "Eurocentric Anti-Eurocentrism" (ATC 92, May-June 2001).  We present here a response by Christopher McAuley, author of The Mind of Oliver C. Cox, to be published by University of Notre Dame Press in 2001.  Other contributions will appear in forthcoming issues. —The Editors.

ANYONE FAMILIAR WITH the many theories of the origins of capitalism is probably cognizant of the fact that, like all theories irrespective of the field, they are/were conceived in opposition to one or more competing theories.  On this matter, the theoretical divides have typically run along these lines: the genesis of specialized commercial capital vs. that of industrial capital; the economic development of Protestant Europe (namely, post-Reformation England and the Netherlands) vs. Catholic Europe (primarily the Italian city-states of the late-medieval era and the Spanish and Portuguese Empires of the early-modern era); European vs. extra-European loci and foci; Marxist vs. non-Marxist definitions and characteristics of capitalism; and internal (based on class/property relations) vs. external (trade relations based) catalysts of socioeconomic transformation.

Of course, none of the theories of the origins of capitalism named in the above dyads excludes elements found in the other theories; it is simply that one argument ranks above the others.  Thus, it is common to see particular combinations of the above arguments in one theory.  For example, theorists of the origins of capitalism who consider the Industrial Revolution its hallmark or culmination tend to focus on socioeconomic and sociopolitical developments in Protestant England between the sixteenth and nineteenth centuries.

Conversely, those theorists who look to specialized commercial exchanges as the early manifestations of an eventual full-fledged capitalism (of which industrial capital is but one branch), tend to place central importance on Catholic Europe, the impact of trade on national development (or underdevelopment), and when not bound by Eurocentric thinking, even to entertain extra-European origins, inputs, and/or contributions.

Frequently, however, even when theorists of the origins of capitalism identify themselves, by name, as members of the same school of thought, the differences between the positions of individual theorists is so great that it is no longer useful to put them in the same group.  Such is the case within the Marxist school of the origins of capitalism.  One school (and the student of intellectual currents would probably name more than two of them) largely adheres to the first model we described earlier—in internally generated transformation of class/property relations in pre-industrial England.

The second school locates capitalism's origins in commercial growth in the late medieval and early-modern eras in which colonialism and neo-colonialism figure quite largely.  In other words, theorists of this branch of the Marxist school of capitalism's origins share the belief with some non-Marxist theorists that regional, if not global, trade relations played a greater role in the development of capitalism than did the trajectory of a single nation's class relations.

It should also be mentioned as more than an aside that the overwhelming majority of those Marxist theorists in the first camp are of European descent, while a substantial number of those in the second are of African descent.  I would include scholars like Maurice Dobb and Robert Brenner in the first group and Samir Amin, Oliver Cox, C.L.R.  James, Eric Williams, and Walter Rodney in the second.

It should also be noted about the scholars of European descent in the second Marxist grouping that most of them have been students of "Third World" political economy and have incorporated those lessons and experiences into their theories of the origins and reproduction of global capitalism.  Here, I am referring to Immanuel Wallerstein and his initial work on Africa; Andre Gunder Frank and his early work on Latin America and now on Asia; and James Blaut (to whose ideas the second part of this essay is devoted) and his work on the Caribbean and continental Latin America.

I have opened this essay with these remarks not to provide a synopsis of the most recent trends in the theoretical explanations of the origins of capitalism, but rather to situate myself in one of the above groups—among the Marxists of African descent—so as to foreground my reading of Ellen Meiksins Wood's May/June 2001 article in Against the Current, "Eurocentric Anti- Eurocentrism," and of her more general work on the subject, The Origin of Capitalism (Monthly Review Press, 1999.  An expanded version is forthcoming from Verso.—ed.)

From my perspective, Wood's explanation of the origins of capitalism is representative of the first Marxist school that I described above.  I will refer to that theory as the Brenner-Wood thesis since she admittedly draws on Robert Brenner's findings and conclusions.  With that said, let me now turn our attention to their theory of the development of capitalism.

As theories of capitalism go, the Brenner-Wood thesis is ostensibly sound.  At its most basic level it posits this: It was only when property rights became formally established such that property owners could dispose of their land as they saw fit that we can locate and date the origin of capitalism.  In their view, this transformation began to take place in southeastern England as early as the fifteenth century when landlords inadvertently converted landholding into landowning in order to reverse the trend of declining incomes.  As Wood describes the process, "by claiming exclusive private ownership," landholders-cum-landowners, "challeng[ed] the customary tenures that gave many smallholders right of possession without unambiguous title." (The Origin of Capitalism, 82.  All quotes from Wood refer to this title except where noted.)

One immediate result of this transformation was that "tenure increasingly took the form of economic leases, with rents not fixed by custom but responsive to market conditions," as current and prospective tenants now had to compete with each other to secure leases.  (46) With "profits" now serving as the base of rent payments, both tenants and landlords, the Brenner-Wood thesis maintains, "had an interest in agricultural "improvement,' the enhancement of productivity by innovative land use and techniques, which often implied, among other things, enclosure [viz., landholding expansion]—not to mention increasing exploitation of wage labor." (47)

Of course, the pressure to "produce cost-effectively" weighed most heavily on tenants since failure to do so bore the threat or "penalty of dispossession." (76) Still, agricultural improvements (increase in farm size, draining of marshlands, introduction of crop rotation, etc.) were instrumental in the creation of the first national market, since greater agricultural production meant cheaper food and cheaper food meant that all but the poorest Briton had more money to spend on consumer goods.

Finally, in addition to laying the foundations for competitive leases, land sales, the creation of a wage-earning class, and an agricultural revolution, Wood maintains that the English property revolution also paved the way for the industrial revolution:

Although this is not the place to explore in detail the connections between agrarian capitalism and England's development into the first "industrialized' economy, some points are self-evident.  Without a productive agricultural sector which could sustain a large non-agricultural work force, the world's first industrial capitalism would have been unlikely to emerge.  Without England's agrarian capitalism, there would have been no dispossessed mass obliged to sell its labor power for a wage.  Without that dispossessed non-agrarian work force, there would have been no mass consumer market for the cheap everyday goods—such as food and textiles—that drove the process of industrialization in England.  It is worth emphasizing that this large market derived its special character not only from its unusual size but also from its limitations, the relative poverty of consumers demanding cheap goods for everyday use.  It had more in common with later mass consumer markets than with the luxury trade of "classical' commerce.  (102)

Before assessing this admittedly pared-down presentation of the Brenner-Wood thesis on its empirical and theoretical grounds, I think it important to mention what its proponents believe make this theory of the origins of capitalism superior to others.  Wood names at least four reasons.

First, the Brenner-Wood thesis does not fall into the trap of "reading capitalist principles back into pre-capitalist societies," as do other theories of the origin of capitalism.  (43) In order to avoid this pitfall, the Brenner-Wood thesis assumes that, unlike capitalist societies in which change and innovation is the order of the day, non-capitalist societies are socially conservative, thus their members pursue courses of action to maintain or to reproduce the standard of living to which they are accustomed.

In light then of this conservative bias on the part of non-capitalist actors, the transition to capitalism had to be, according to the Brenner-Wood thesis, the unintended consequence(s) of actions meant to preserve rather than to change the structure of non-capitalist society.

Second, in establishing the precise historical origin(s) of capitalism, the Brenner-Wood thesis draws a clear space/time line between non-capitalist society and capitalist society.  In other words, the Brenner-Wood thesis supplies capitalism with both a date and place of birth.  Again, not only does this determination demonstrate that capitalist society is not the natural or inevitable culmination of all pre-existing systems of production and exchange since time immemorial, but that it is a "qualitative break," a decisive departure from all societies that preceded and surrounded it.

Third, the Brenner-Wood thesis demonstrates that the market in capitalist society is the bestower neither of opportunities or of freedom as is popularly believed and as the "commercialization model" of the origins of capitalism implies.

Rather, the market in capitalist society is highly coercive: Most members of capitalist society must sell not only their labor power to their employers but also purchase or rent their means of reproduction or subsistence.  Unlike non-capitalist societies in which the market is governed by other social considerations (the will of God or of the gods, the ancestors, the Court, of custom, etc.), in capitalist society the market or, in more general terms, the economy shapes all other social forces in its image.

Finally, the Brenner-Wood thesis has an explicit political purpose which Wood describes most eloquently:

The purpose of this exercise is both scholarly and political.  The naturalization of capitalism, which denies its specificity and the long and painful historical processes that brought it into being, limits our understanding of the past.  At the same time, it restricts our hopes and expectations for the future, for if capitalism is the natural culmination of history, then surmounting it is unimaginable.  The question of the origin of capitalism may seem arcane, but it goes to the heart of the assumptions deeply rooted in our culture, widespread and dangerous illusions about the so-called free market and its benefit to humanity.  Thinking about future alternatives to capitalism requires us to explore alternative conceptions of its past.  (7-8)

Measured by these criteria, Wood maintains that James Blaut's attempts, most notably in The Colonizer's Model of the World and in Eight Eurocentric Historians, to de-eurocentrize the origins of capitalism falls short of the author's goal.  As she sees it, Blaut's claim that "protocapitalism" existed in a number of societies before the Western European "take-off" in the fifteenth and sixteenth centuries, is merely an appropriation of an "old Eurocentric principle:"

In the old accounts, Europe surpassed all other civilizations by removing obstacles to the natural development of "commercial society;' in the anti-Eurocentric version, the failure of non-Europeans to complete the process of development, despite the fact that they had already come so far, was caused by obstacles created by Western imperialism.  (Wood, "Eurocentric Anti-Eurocentrism," 31)

Moreover, in failing to provide a precise definition of capitalism, Wood contends that Blaut "can have no clear conception of non- or precapitalist modes of production with different operating principles, and no conception of a transition of one to the other.  Commercial practices shade into "protocapitalism,' which grows into "modern' capitalism." (Ibid.)

Despite the undeniable relevance of Wood's remarks about Blaut's position, they do not address what I believe to be his more serious charges against her version of the origins of capitalism.  Of these there are at least three, one at each of the following levels: the empirical, the conceptual, and the ideological.  Each warrants a brief discussion.

At the empirical level, Blaut contests the Brenner-Wood thesis on what it claims about England's agricultural revolution as well as how it describes the volume of medieval trade.  As for the first point, Blaut maintains that contrary to its adherents' instruction not to read later events into earlier periods, the Brenner-Wood thesis does just that by inserting eighteenth-century agricultural advances in British agriculture into preceding centuries, as many as three centuries in some instances.

It is particularly in the case of the widespread adoption of crop rotation in place of the three-field system (thereby virtually doing away with the need for fallow) that Blaut believes that the Brenner-Wood thesis has manipulated time.  With regard to the second point—the Brenner-Wood thesis' estimation of the volume of medieval trade—Blaut contends that the former minimizes the latter (particularly the scale of late-medieval Mediterranean trade) in order to exaggerate the significance of English agrarian capitalism.  (Blaut, Eight Eurocentric Historians, The Guilford Press, 2000, 53.  All quotes from Blaut refer to this work.)

On the conceptual front, Blaut charges the Brenner-Wood thesis with mysticizing the power of capitalism's "first" appearance.  "When it arrives," Blaut remarks, "it does so complete and entire, as though it were a god descending from Olympus to govern human affairs." (60)

Blaut adds that this mystical conception of capitalism leads its proponents to do great injustice to the historical record, particularly in the years between capitalism's first manifestations and the point at which payment in wages became the general form of labor remuneration not only in England and in its own empire, but in the world.  Here is how Blaut phrased just this point:

This mystical notion of capitalism substitutes for an empirical theory about the transition: the merely empirical facts may suggest a long, slow transition, with many complex and contradictory happenings, including some regressions toward classic feudalism—no matter.  At one mystical historical moment (or year, or handful of decades) capitalism appears and transforms rural England.  (60)

And it appears that only that "moment" matters to the Brenner-Wood thesis.

Of course, one of the "complex and contradictory happenings" to which Blaut makes reference in the above passage is imperialism and its role in the development of capitalism.

By and large, the Brenner-Wood thesis has no reason to entertain this question.  For in locating the roots of capitalism before (rather than during) the era of English overseas expansion, the Brenner-Wood thesis posits, as Blaut puts it, that colonialism "was not significant for capitalism, was rather a marginal process, a temporary aberration or diversion or sideshow, not a vital need of the system as a whole, which evolves in response to internal laws of motion." (45) It is this aspect of the Brenner-Wood thesis that strikes Blaut and others as intellectually racist.

Wood's response to charges like Blaut's is to raise Spain's failure to capitalize on an empire far larger than England's between the sixteenth and eighteenth centuries.  She regards this failure as proof that "much, if not everything, depended on the social property relations at home in the imperial power," and consequently that colonialism cannot be considered the parent of capitalism but rather capitalism's offspring.  ("Eurocentric Anti-Eurocentrism," 35)

While it is impossible to deny that England benefitted from its then modest empire in greater measure than Spain did from its vast one, comparing the outcomes of the two imperial ventures may raise more questions than it answers.  I refer primarily to the question of why English capitalists chose to colonize overseas (like Spanish non-capitalists) so soon after having happened upon the "self-sustaining process of economic development" as Wood describes capitalism ("Eurocentric Anti-Eurocentrism," 33), and thus before they had brought the entire domestic economy under its rule.

To this question we must also add the one that inquires why English capitalists chose to use unfree labor in many of their colonial possessions well after they had presumably already come to the realization that there were greater economic gains to be made in paying workers wages both at the production and consumption ends.

As I understand the implications of these questions, they should call into question both the contention that the origins of capitalism antedate the era of England's overseas expansion and that the use of unfree labor does not rank in the repertoire of capitalist labor forms.  And I believe that it is for reasons such as these that Blaut and others find themselves forced to reject both the definition and periodization of capitalism that theories like that of Brenner-Wood offer.

Bearing in mind these considerations, it is possible to conceive of an alternative interpretation of both the Spanish and English imperial examples.  From this perspective, Spain's inability to capitalize on its empire may have been due less to the self-imposed limitations of its domestic class structure and more to the acquisition of colonial possessions (both American and European) the scale of which exceeded the capacity of that country's military, managerial and mercantile personnel.  This overambition was no doubt fed by what seemed to many Spaniards in the sixteenth century the endless supply of Amerindian bullion.

Given their own imperial ambitions, it is doubtful that English "capitalists" would have acted differently from Spanish adventurers had they been the first to lay claim to Amerindian mines.  It is likely that they too would have waged even more wars of territorial expansion in the Americas as well as in Europe; would have used their riches to purchase luxury and even food imports to the detriment of domestic production; would have been forced to tolerate the illegal provisioning of their colonies and the plunder of their ships by European rivals; and they too would have relinquished to the Crown yet more political-economic power.

To restate this hypothetical imagining, put in an international imperial context, England's relatively late start in American expansion worked to that country's advantage because it enabled its elites to learn from Spanish mistakes and conversely from Dutch successes.  This was, in practical terms, the basis of mercantilist doctrine whose tenets English capitalists followed to great effect.

With these remarks about imperial Spain and England, it is not my intention to deny the empirical support of the Brenner-Wood thesis but rather to suggest that it tells only part of capitalism's story, its perspective from England, but one with which I am not convinced that even a sixteenth- or seventeenth-century participant would have agreed.

Again, for those of us who believe that the extra-European world made significant contributions (in the way of labor, resources, and the forward linkages derived from that labor and those resources) to the development of capitalism, what Wood sees as the "historical specificity" of her thesis, we see as a selective narrative that excludes extra-European inputs.

Consequently, in my reading of Blaut's project, his goal was not to claim the "prize" of capitalism's first site for the Afro-Asian worlds, but to underscore that the rise of capitalism in Western Europe was inextricably related to the decline of protocapitalism elsewhere.

Like Wood, Blaut also sought to get capitalism's story "right" not only for the purpose of demonstrating that it is not the "natural" culmination of history and therefore unnatural to desire its supersession, but also to show that non-European people have been and will continue to be instrumental in capitalism's demise just as they were integral to its genesis and reproduction.  In my opinion, the Brenner-Wood thesis does not lend itself to such an inclusive vision of the future.

http://solidarity.igc.org/atc/94McAuley.html

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Samir Amin’s “World Poverty, Pauperization, and Capital Accumulation,” the Review of the Month in this issue of MR, addresses the growing phenomena of landlessness and pauperization among rural populations in the periphery. He reminds us that half of the people in the world are peasants, a group largely unseen by liberals and radicals. The dispossession of the peasantry throughout the third world represents one of the central problems of our time—for reasons of straightforward humanity. Amin points out that the worsening position of the peasantry, their forced migration to cities, and the growth of hunger among the poor cannot be adequately dealt with by treating these problems as mere aberrations of the system. Mounting occasional “anti-poverty” programs or “humanitarian” assistance or even projects to enhance farm productivity offer no real long-term solutions. In fact, the inherent contradictions in the third world are such that even increases in the productivity of peasants so that more food is producedin the absence of employment opportunities for rural labor that is no longer needed in agriculture—can seriously worsen the problem of displacement and hunger! The enormous humanitarian problem that Amin describes is rather a result of the way capitalism works on a world scale. The clear lesson to be drawn from his article is that the anti-globalization struggle needs to be aimed at the real problem—the capitalist system.

In August the 2003 Career of Distinguished Scholarship Award of the American Sociological Association, the sociology professions highest scholarly honor in the United States, was given to our friend and MR author Immanuel Wallerstein. Wallerstein is most famous for his pioneering work in world-system analysis that began with volume 1 of The Modern World-System, published in 1974. In a review in the December 1975 issue of MR, Samir Amin (himself one of the earliest and foremost contributors to the analysis of “accumulation on a world scale”) wrote: “Immanuel Wallerstein’s new book, The Modern World System, is not simply an addition to this long list of volumes [on the transition from feudalism to capitalism]: it transcends them because of the authors ability to integrate all aspects of reality in a powerful, synthesized, overall vision which has none of the defects of a unilateral thesis. We therefore consider that this is an outstanding contribution to historical materialism.” The same could be said of the whole body of work that Wallerstein has produced in the almost thirty years since the publication of that book. In honoring him, the sociology profession has perhaps for the first time acknowledged the reality of modern imperialism: its roots in capitalism as far back as the fifteenth and sixteenth centuries and its overriding presence today. Congratulations Manny!

In the same award ceremony the American Sociological Association presented its 2003 Public Understanding of Sociology Award, given annually to a person who has made exemplary contributions in advancing the understanding of sociology and sociological research among the general public, to our friend and MR author Frances Fox Piven. Author of many pathbreaking books, including (with Richard Cloward) Regulating the Poor (1971), Poor Peoples Movements (1979), The New Class War (1982) and Why Americans Don’t Vote (1989), Frances Fox Piven is the very model of a public intellectual. Our congratulations Frances!

Given the concern with changing conditions in rural society in much of this issue (as represented by the work of Amin and William Hinton) we thought that readers would be interested in the origin of a misunderstanding that surrounds Marx’s thoughts on rural life. One often hears the criticism that Marxism was from the beginning an extreme modernizing philosophy that looked with complete disdain on rural existence. Did not Marx himself in The Communist Manifesto, it is frequently asked, refer to “the idiocy of rural life”? Here a misconception has arisen through the mistranslation of a single word in the authorized English translation of the Manifesto. This issue is addressed in Hal Draper’s definitive, though little known work, The Adventures of the Communist Manifesto (Berkeley: Center for Socialist History, 1998)an expanded version of his earlier work, The Annotated Communist Manifesto. Draper’s Adventures includes a new English translation of the Manifesto, together with paragraph-by-paragraph annotations, and the most detailed history currently available of the various editions of the Manifesto in major European languages.

In Draper’s translation the phrase “the idiocy of rural life” in paragraph 28 of the Manifesto is replaced with “the isolation of rural life.” His explanation for this correction is worth quoting at length:

IDIOCY OF RURAL LIFE. This oft-quoted A.ET. [authorized English translation] expression is a mistranslation. The German word Idiotismus did not, and does not, mean “idiocy” (Idiotie); it usually means idiom, like its French cognate idiotisme. But here [in paragraph 28 of The Communist Manifesto] it means neither. In the nineteenth century, German still retained the original Greek meaning of forms based on the word idiotes: a private person, withdrawn from public (communal) concerns, apolitical in the original sense of isolation from the larger community. In the Manifesto, it was being used by a scholar who had recently written his doctoral dissertation on Greek philosophy and liked to read Aeschylus in the original. (For a more detailed account of the philological background and evidence, see [Hal Draper], KMTR [Karl Marxs Theory of Revolution, New York, Monthly Review Press, 1978] 2:344f.) What the rural population had to be saved from, then, was the privatized apartness of a life-style isolated from the larger society: the classic stasis of peasant life. To inject the English idiocy into this thought is to muddle everything. The original Greek meaning (which in the 19th century was still alive in German alongside the idiom meaning) had been lost in English centuries ago. Moore [the translator of the authorized English translation] was probably not aware of this problem; Engels had probably known it forty years before. He was certainly familiar with the thought behind it: in his Condition of the Working Class in England (1845), he had written about the rural weavers as a class “which had remained sunk in apathetic indifference to the universal interests of mankind.” (MECW [Marx and Engels, Collected Works] 4:309.) In 1873 he made exactly the Manifesto’s point without using the word “idiocy”: the abolition of the town-country antithesis “will be able to deliver the rural population from the isolation and stupor in which it has vegetated almost unchanged for thousands of years” (Housing Question, Pt. III, Chapter 3).

Marx’s criticism of the isolation of rural life then had to do with the antithesis of town and country under capitalism as expressed throughout his work. See also John Bellamy Foster, Marx’s Ecology (New York: Monthly Review Press), pp. 137-38.

http://www.monthlyreview.org/nfte1003.htm

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The Trouble with Socialism...

A thought for the day:

"The trouble with socialism," a European observer once remarked, "is socialism. The trouble with capitalism is capitalists."
William F. Buckley, Jr. Quotations from Chairman Bill: The Best of Wm. F. Buckley, Jr.

Posted by Daniel at June 7, 2004 11:22 AM
http://www.dr5.org/mt/archives/000588.html

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The Trouble with Capitalism: An Enquiry into the Causes of Global Economic Failure - Review

Edward Chase

By HARRY SHUTT. London, New York: Zed Books/St. Martin's Press, 1998. 230 pp. $65.00, cloth; $25.00, paper.

Despite its mood of Luddite pessimism, this in-your-face critique of the status quo makes for diverting reading. It's fun to accompany Shutt on his journey recapitulating the origins of capitalism through the Industrial Revolution, the span from the 1920s' boom and 1930s' Depression, World War II, the postwar years, and the Soviet collapse to the present. The bulk of the book thus becomes an analysis of how lousy things have become - thanks to such demons or human goofs as capitalist profit maximizing, globalization, privatization, deregulation, leveraged buyouts, hostile takeover mergers, monetarism, creative accounting, redundant excess capital, the short-termism of profit-maximizing greedheads, the crisis of illegitimacy (fraud, corruption, organized crime), and the basic pathology, inert economic growth.

Oddly enough, after a generally sober if critical take on the world, Shutt ends his tract with a scary "Boo!" He dismisses as hopeless and impossible the current effort of "the apostles of laissez-faire" to revert to old-fashioned "self-reliance" and thereby undo the social gains made in the West this past century. Any such reactionary course, he writes, "would fail to resolve the deepening economic crisis whose only possible denouement, without some radical alteration of course, will be a financial holocaust on such a scale as to bring comprehensive ruin even to the most convinced supporters of the status quo." Take that!

As I say, Shutt's appraisal of modern economic history is sober and his criticisms detailed and mostly convincing. Yet a reader had best be on guard. Like all of us, he is fallible. One reads how utopian were economic growth and stability in the postwar 1950s into the 1960s, but without a single mention that this bonanza was due, of course, to the world's hustling to make up for the dearth of construction of all kinds - durables, buildings, roads, the works. An odd omission indeed. And Shutt decries at length and with feeling the curse of budget deficits. Clearly he completed his book just before the United States, even at many city, county, and state levels, moved into budget surplus. And many if not most of the nations of the world have seen their deficits somewhat eased of late. Changing times.

The chief bogeyman Shutt fears is global economic instability. One infers that it can result in wars, crime, countries' collapse. Even as I write, Russia has gone into a general default and, with Japan's passivity, may bring on a worldwide panic. Shutt's book, in a word, falls into a growing genre of recent books of economic alarm, the varied books of the "declinists" and "catastrophists," from, say, Jeremy Rifkin's The End of Work and Edward N. Luttwak's The Endangered American Dream to William Greider's One World: Ready or Not, a round dozen or more, each different, all spooky.(1) At least one cliche they all demolish is the canard "A rising tide lifts all boats." Inequality, it may be said, is the fundamental plight that engenders instability.

To rectify the problem of low economic growth, Shutt pronounces that neither Keynesian deficit financing nor reversion to fiscal laissez-faire orthodoxy has the capability. Indeed, he is clever in the detailed accounting he gives of the failures of each camp. One of his more original (eccentric?) examples of policy decisions is when he addresses the problem of market saturation by the 1970s, resulting in static demand for goods and services. He avers that in the United States, the government remedy was to relax restraints on new goods and services, specifically, to my surprise, "the abolition of legal restrictions on pornography in 1973." The consequence has been "explicit depictions of violence in television and motion pictures," as well as in Britain, he claims. To what extent this has fostered economic growth is not made clear. By the way, his citation of 1973 is interesting: What a pivotal year! Every book agrees on 1973 as the turning point downward. Kicked off by the Organization of Petroleum Exporting Countries' quadruple oil price hike (though only Jeffrey Madrick's book End of Affluence spells this out convincingly), 1973 deserves a book of its own.

Shutt is ambivalent about the state's intervention into national economic affairs. On the one hand, he seems to decry excessive state involvement, describing how intrusive it always is, even in the allegedly laissez-faire Reagan and Thatcher era. On the other, while therefore ridiculing the ideology of free market deifiers as bogus, he accepts the reality that the private sector is inescapably dependent on state support to maintain the social welfare budget, as unemployment and social deprivation rise. Thus he posits a genuine dilemma: damned if you rely on the state, damned if you don't.

The best that Shutt can do, it appears, is to caution us about all the stratagems that fail to stimulate economic growth - privatization of state-owned companies to help absorb the excess surplus of capital (capital glut and shrinking investment outlets are a Shutt nightmare); lower corporate taxation; highly leveraged takeovers; state bailouts of failed financial institutions (the incredibly costly cure for the S&L crisis in the United States); "creative accounting," such as share buy-backs to manipulate companies' own share prices; state subsidization of increased investment in securities. And, alas, the new technology, computers et al., despite all the razzle-dazzle, has not yet kicked in to enhance economic growth. Though not quite a Luddite, Shutt is ever leery. Note that the epigraph on page 1 of his book is a quotation from H.G. Wells: "So the inevitable end of a search for profit in production was a steady reduction of costs through increased efficiency - that is to say, a steady decrease of the ratio of employment to output."

The era of profit-maximizing capitalism must give way, but to just what is unclear. One hint appears in Shutt's closing section, "A New Globalism." After scolding the United States for insisting, as the world's only remaining superpower, on acting as the world's ultimate arbiter, he writes, "Amid this general dispiriting scene the most hopeful prospect is arguably provided by the European Union . . . [which] has the potential to evolve into a new global economic model," countering the excesses of nationalism that have bedeviled Europe in the twentieth century. And "Once it is accepted that in a low growth global economy maximization of profit can no longer be the main basis for allocating resources and other criteria must be established," it follows that the inequality gap must be reduced. "Some limitation of the disparities and reward between the highest and lowest paid" is essential. As a specific example, no longer can we tolerate highly leveraged takeover transactions wherein the huge fees to the buyout company and its financial intermediaries and the rewards to management necessitate big layoffs, reduced employee health coverage, even the raiding of employee pension plans. (One estimate is that, from 1985 to 1990 in the United States, more than half a million people lost their jobs thanks to high-leverage takeovers.)

Is Shutt's subtitle, "An Enquiry into the Causes of Global Economic Failure," justified? Yes, in the sense that he shows a world replete with economic inequalities and fearsome mass deprivations so overwhelming in the southern tiers. But hold on: When wasn't it unfair, inequitable? "Failure" is a relative term here. Shutt does present a plausible case for the causes of global economic failure. Has it already overtaken us? Not quite. There is still an extraordinary dynamism in global economics that should spare us from Shutt's fatalism.

Note

1. See also Stanley Aronowitz and William DiFazio, The Jobless Future: SciTech and the Dogma of Work (Minneapolis: University of Minnesota Press, 1994); Paul Omerod, The Death of Economics (New York: St. Martin's Press, 1995); Wallace C. Petersen, Silent Depression: The Fate of the American Dream (New York: Norton, 1994); Sheldon Danziger and Peter Gottschalk, America Unequal (New York: Russell Sage Foundation, 1995); Todd Gitlin, The Twilight of Common Dreams: Why America Is Wracked by Culture Wars (New York: Metropolitan Books, 1995); Kirkpatrick Sale, Rebels Against the Future: The Luddites and Their War on the Industrial Revolution (Reading, MA: Addison-Wesley, 1995).

EDWARD CHASE is a former editor in chief of New York Times Books and of the New American Library and a frequent contributor to a variety of magazines and journals.

COPYRIGHT 1999 M.E. Sharpe, Inc.
COPYRIGHT 2000 Gale Group
http://www.findarticles.com/p/articles/mi_m1093/is_1_42/ai_
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Why is Shared Capitalism Needed?

 

The trouble with capitalism," author and attorney Jeff Gates told 300 participants at the 1999 Ohio Employee Ownership Conference, "is that it doesn’t create enough capitalists."

The gap between the haves and the have-nots is widening, resulting in what Gates calls a "disconnected capitalism" that has already created a virtual two-tier society. In his address to the Conference, Gates used statistics and political cartoons to bolster his contention that "current trends in economic inequality, both domestically and abroad, pose dangers to human dignity, democracy, political stability, fiscal sustainability, social justice, freedom, civil society, physical/mental health and environmental sustainability."

Although space prohibits the recitation of all the statistics Gates presented, the following will give the reader a pretty good flavor for the points he was making:

Despite the boom of the 1990s, inequality in the United States has continued to grow

 

• As of 1995, the top one percent of American households had wealth exceeding that of the bottom 95 percent.

 

• Between 1989-1997, 86 percent of the stock market gains went to the top 10 percent of households; 42 percent of that went to the most well-to-do one percent.

 

• Adjusting for inflation, the net worth of the median household declined by 10 percent between 1989-1997.
• By 1995, the middle class had only enough savings to maintain their current standard of living for 1.2 months, down from 3.6 months in 1989.

 

• Though average household income rose 10 percent between 1979 and 1994, 97 percent of that gain was claimed by the upper 20 percent.

 

• Between 1983-1995, the bottom 40 percent of households lost 80 percent of their net worth; by 1995, 18.5 percent of households had zero or negative net worth.

 

• The two richest men in the country — Warren Buffett and Bill Gates (no relative of Jeff’s) — own more productive assets than the bottom 45 percent of Americans.

86 percent of the stock market gains went to the top 10 percent of households of which 42 percent of that went to the most well-to-do one percent.

Globally the situation , of course, is even worse

 

• In 1998, the world’s 225 richest people had a combined wealth of $1 trillion, equal to the combined annual income of the world’s poorest 2.5 billion people; the wealth of the three richest individuals exceed the combined Gross Domestic Product of the 48 least developed countries.

 

• At present, 3 billion people live on less that $2 per day and global population is expanding 80 million per year. World Bank President James Wolfensohn cautions that, unless we address the "challenge of inclusion," in 30 years we will have 5 billion people living on less than $2 per day.

 

• In 1998, the 20 percent of the world’s people living in the highest income countries accounted for 86 percent of total private consumption expenditures while the poorest 20 percent accounted for 1.3 percent.

The statistics presented by Gates were enlightening while at the same time startling and rather depressing. It is quite clear that there are a great many serious problems that need to be dealt with in something other than the conventional way they have been approached up to this point.

It behooves the policymakers of the world to seriously consider Gates’ message to more fully embrace the concept and practice of widespread employee ownership. In Gates’ view, that is the only way to restore the middle class and eliminate the massive inequities in the distribution of wealth that exist in today’s society.

 

<>Jeff Gates has been deeply involved in what he terms "ownership engineering" since 1973 and is the author of the critically acclaimed book, The Ownership Solution: Toward a Shared Capitalism for the 21st Century<> (Addison-Wesley, 1998).

The Ownership Solution goes beyond an analysis of why broadening ownership is necessary to accomplish this end. It’s available from your local bookstore for $27.50 hard back and $16.00 in paperback.

Gates is President of the Shared Capitalism Institute. According to its website, (www.sharedcapitalism.org), the Institute’s mission is "to explore and explain the impact of ownership patterns and to press for changes that will result in a more inclusive and sustainable free enterprise system both in the United States and abroad."

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Review of Harry Shutt's The trouble with capitalism: an inquiry into the causes of global economic failure, Zed Books 1998.

-- G. Chris Rodrigo

 

The historical backdrop

Harry Shutt's objective in this book is to expose the grim realities of the evolution of the global capitalist system over the last half century and thereby dispel 'the illusions which lie behind the neo-laissez-faire prospectus,' as stated in the introduction. The objective of this book review is to ascertain whether his analysis captures essential aspects of the economic reality and the extent to which it does that. Given the rather large scope of the subject, it is unreasonable to expect a full, comprehensive coverage of this complex subject in a volume of 238 pages. The task undertaken here is to identify the strengths of his analysis, flag arguments not well grounded in contemporary economic research and also indicate important issues ignored or mis-diagnosed. The reviewer subscribes to  Shutt's broad claim that the reality of globalization falls far short of the rose-tinted rhetoric of the apostles of globalism.

The book starts with a brief  review of the emergence of the modern capitalist order in Western Europe, the USA and Japan in the late 19^th and early 20^th century period. This is followed by an account of the worldwide depression of the 1930, the events leading up to the second world war and the post-1945 world order under US hegemony. He briefly traces the political and economic institutions set up, nationally and globally, to rebuild a and stabilize the international capitalist system in the wake of the cataclysmic events of the preceding years. Shutt describes and explains the reasons for the particular institutions and policies adopted and how they laid the foundations for the long post-war boom. Key features of the new order were the international financial system based on the dollar-gold exchange standard, a commitment to trade liberalization in the long run and political stability for the capitalist nations underwritten by American hegemony.

Shutt shows how post-depression and post-war reforms led to a strong, proactive role for the state as ultimate guarantor of economic stability and social security. Crises, instabilities, such as those that beset advanced countries in the previous period, would henceforth be managed by the new Keynesian stabilization policies. The new technologies launched from 1900-45 were linked to rapidly growing mass markets after 1945, which generated a near two decade upswing in productivity which supported rapidly rising incomes that served to further stabilize the new high-productivity, high-consumption economy. Many then believed that the capitalist system had permanently stabilized itself through new, superior institutional and technological innovations and the use of Keynesian demand management policies to prevent or curb slumps.

However, in the 1970s, instabilities re-emerged and growth slowed down throughout the world capitalist system. Keynesian policies also ceased to work as demand stimulation merely led to high inflation appearing alongside sluggish economic growth, the phenomenon of  'stagflation.' Other symptoms of the breakdown of post-war stability were the collapse of the Bretton Woods fixed exchange rate system and the oil-price hikes. Apart from the first two chapters, Shutt's book is primarily an analysis of the unravelling of this post-war system of regulated capitalism. In particular, he examines the theoretical and political responses to these events and how these have forged the neo-liberal consensus that has dominated establishment thinking from 1979/80.

The neo-liberal reaction (from 1979/80)

Keynesian policies gave way to monetarism, market liberalization and the privatization of public enterprises in the UK and US. However, monetary targeting was quickly abandoned and inflation brought under control only by raising interest rates and precipitating the deep 1980-2 recession which did considerable damage to the real economy. Shutt's argument is corroborated by the famous economist Paul Krugman (1994; ch. 1), but Shutt brings out the inconsistencies in the neo-liberal ideology more clearly. Unfortunately, Shutt persists in using the term 'neoclassical' when he likely means 'neo-liberal,' making a distinction between 'neoclassical' and 'Keynesian.' In the US, the term 'neoclassical' is commonly applied to mainstream economic thinking which includes the Keynesian-neoclassical synthesis and even more recent schools of macroeconomics (see Weintraub at http://www.econlib.org/library/Enc/NeoclassicalEconomics.html#further).

The 1980-82 recession and the elevated interest rates also gave rise to a chain of debt defaults in Latin America, starting with the Mexican debt crisis of 1982, which ushered in the famous 'lost decade' of the 1980s for many developing countries, a point taken up later in the book.

Shutt goes on to describe how other aspects of the neo-liberal agenda were pushed through by the Thatcher and Reagan administrations. These were then taken up widely abroad starting with the nominally socialist governments of Australia and New Zealand. Again he points out the practical and conceptual inconsistencies in the policies followed and the great difficulties encountered in scaling back the role of the state. The Thatcher government was able to reduce fiscal deficits on account of North Sea oil. Not having a similar windfall, the Reagan administration presided over massive increases in budget deficits as its supply-side tax reduction policies failed to stimulate growth sufficient to offset the tax reductions and increases in defence spending.

While fiscal orthodoxy and monetary restraint figured strongly in the neo-liberal rhetoric, Shutt shows that it was more about institutional reform, trade and financial liberalization, privatization and deregulation. While these policies failed to roll back the state, the broader market-promoting reform agenda gathered momentum and has now spread widely across the world as official policy if not actual practice. Shutt, however, fails to identify adequately the cogency and coherence of the political-intellectual current that supplied the underlying rationale for this fundamentalist, neo-Austrian alternative to Keynes, developed by Friedrich von Hayek. While the Thatcher and Reagan administrations had already been won over to the neo-Austrian agenda by 1980, China's increasing turn to markets and the collapse of 'Socialism' in the Soviet Union and East Europe by 1990 strengthened and widened its appeal. By century's end, a sea-change in economic policy has been carried through by pressures exerted over various channels. The story of that revolution in ideology is related with some neo-Austrian bias by Yergin and Stanislaw (1998).

What Shutt does well is to highlight the practical and theoretical contradictions arising out of the above policies, problems blithely ignored in neo-Austrian market triumphalism. He shows that despite rhetoric about shrinking the state, corporations and conservative governments turn to the state to resolve these contradictions. A prominent example is the Savings and Loan crisis in the USA which has its roots in earlier financial liberalization; the bankrupt financial institutions were bailed out by the Federal government.  In fact the role of government in the economy has grown steadily from the 1930s to the present directly in response to various market failures which have been identified and addressed by governmental action and new regulatory institutions.

Financial liberalization and rising instability

An important outcome of the Reagan-Thatcher reforms well described in the book is deregulation of financial markets and its consequences. With safety constraints removed, such as separation between commercial and investment banking, banks have undertaken much riskier behavior in the drive for higher profits, including highly speculative investments in property development. The Savings and Loan debacle in the USA, described above, is one example. Another was the activities of corporate raiders. Many companies have also been induced to take on excessive debt which undermines financial stability. Overall, Shutt points out that a new speculative climate has been created in which the viability of major companies and the livelihood of millions of workers have been mortgaged to give free rein to speculative orgies bordering on financial piracy. Though not so apparent at the time the book was published (1998) these warnings have been amply borne out by recent scams at Enron and other major companies.

Another consequences is the enormous expansion of speculative foreign exchange transactions, which destabilize entire countries. A particular problem is the short-selling of wobbly currencies by hedge funds which try to make very large profits from forced devaluation of target currencies. Shutt also notes the proliferation of offshore financial centers which facilitate money laundering, organized crime and large-scale corruption. Caught up with the imperative of maintaining laissez faire conditions for international financial transactions, the G7 countries often wring their hands about these abuses but fail to take any concrete action.

Implications of technological change

One of the most important issues raised by Shutt is the effect of technological change on demand for labor and capital. He observes that from around the early 1980s a great deal of investment in the services as well as in manufacturing, has been directed at cutting cost - that is raising labor productivity - without expanding capacity very much. As a result the real demand for capital and labor to support any particular expansion of output, has fallen from the norm for earlier  periods in all industrial countries. This has led to 'jobless growth' and contributed to a glut of financial capital. These are well known consequences of the revolution in information technology that has been sweeping through the world.

The new technologies associated with computers, communication and the Internet, identified as the 'information technologies,' are radically changing the organization of business, the demand structure for skills, business information patterns and productivity in service and manufacturing operations. Managerial hierarchies are being flattened and personnel previously engaged in the processing of business information are drastically cut in numbers since now much of this work is done by computers running resource planning software. While the demand for personnel skilled in computer-related operations has risen, the demand for run-of-the-mill managerial, clerical and even manufacturing jobs has fallen. We see countries such as Germany and the USA seeking software engineers in India and Russia, while aggregate unemployment rises. This is because displaced workers cannot be absorbed in the new jobs being created since they do not have the training or even the aptitude for it. Shutt notes accurately that retraining schemes have generally failed to have any significant impact in bridging this skills gap.

The long-term changes described by Shutt are characteristic of transitions in the techno-economic paradigm (see Perez 2002) when the core technologies underlying the economic system undergo a fundamental change, such as from the age of steam and coal to the internal combustion engine and electricity and now to the information age. The old sets of skills are devalued and new skills are required. But since the re-investment in new 'human capital' takes much longer, an increase in structural unemployment results. Shutt does not identify this phenomenon in these terms. But he correctly identifies a new feature, i.e. reduced demand for investment in physical capital with reduced incremental capital/output ratios. The other feature is that computers and new software systems are significantly raising productivity in service operations and even managerial activity which reduces employment and flattens managerial hierarchies. 

These trends are seen not just in Europe, Japan and the United States, but all over the world. This is one reason why globalization with its intensified drive for higher productivity in all production and service operations that are internationally competitive, is so unpopular: unemployment rises along with productivity. Even in fast growing China where East Asian-style productivity growth is transforming millions of rural folk into industrial workers on a scale not seen before in history, there is rising frustration directed against the Party leadership. In the drive for productivity the social support system of the 'iron rice bowl' has been removed; the least skilled and least capable workers are thrown on the scrap heap to roam around its big cities, vainly looking for  work.

The glut of financial capital

A central problem is that capitalism does not smoothly move from the initial phase of a transition in the techno-economic paradigm (a concept that is not clearly identified by Shutt) to a later and more mature phase in which rapid economic growth and increasing education and training lead to rising employment and even an excess demand for immigration. In the previous transition, the new technologies that were introduced in the early 20^th century coalesced into a mature phase of high demand for labor only after 1945. This was preceded by social chaos, systemic breakdown in the worldwide depression of the 1930 and the second world war, which eventually cleared the economic and social ground for the new techno-economic paradigm to establish foundations that were resilient.

Of course, conditions were vastly different at that time: capitalism had been in political crisis from the First World War itself and the Russian Revolution; liberation struggles had broken out in most of the colonial world and the legitimacy of capitalism was threatened by the worldwide rise of interest in socialism. It is well understood today that capitalism survived the social-political crisis mainly because working people in Europe, North America and even in the colonies, saw the need to join with the ruling classes in the struggle against fascism and also because the barbaric nature of Stalinism effectively killed any interest in moving towards similar political experiments. Stalinism remained attractive only in emerging Third World revolutions where a new class of Jacobinist radical intellectuals seized state power and created authoritarian political systems which paid lip service to socialism but recreated medieval-style autocracies.

All that is past now, as global capitalism enters the present crisis. But new contradictions have arisen and Shutt traces some of these competently. A central theme in his book is the oversupply of financial capital which from the mid-to-late 1970s has been finding inadequate opportunities for profitable investment in the heartlands of industrial capitalism. What this means is that the supply of new technological innovations within the prevailing techno-economic paradigm is not adequate to absorb the mass of finance seeking investment opportunities. Additionally there is the problem of maintaining adequate returns on existing investments; these returns tend to be driven down over time by rising competition from new domestic investments and international sources as trade gets liberalized. Shutt's analysis is particularly useful here because the systemic problems relating to global finance are rarely raised in mainstream analyses and even when they are, the true nature of the problems are shrouded in arcane terminology. Another irritant here is Shutt's failure to distinguish carefully between financial capital and physical capital.

Shutt also describes other ways in which surplus funds have been used. From the late seventies there had been a flow of funds to many 'emerging markets' particularly in Latin America. After the Mexican default of 1982 there was an abrupt drop in capital flows to Latin America which led to the 'lost (development) decade' of the 1980s. Capital flows  revived again in the early 1990s until the 1994-5 crisis is Mexico and elsewhere. These flows of short-term capital were then directed to East Asia where their abrupt withdrawal in 1997 again led to the Asian crises of 1997-8, just as in Latin America. These triggered the currency crises in Russia (1998) and Brazil  (1999). The Brazilian crisis contributed to economic collapse in Argentina in December 2001. Shutt identifies the problems posed by this excess of footloose funds sloshing around the world economy, but does not adequately analyze the destabilizing effect of short-term capital flows on vulnerable 'emerging economies' possibly because at the time this book was being written, the problem was not well recognized. Today, however, the destabilizing effects of short-term capital flows are being hotly debated in many international fora (for details see Economist, 2003).

An important distinguishing feature of Shutt's analysis is the linking of the wave of privatization to the need to find adequate investment opportunities for excess financial capital. There are other reasons as well, such as the need to plug gaps in public finance. He shows that privatization has been sold to the public as necessary to raise productivity in the privatized sectors, but questions this justification. He notes that rising public sector debt deriving from declining tax revenues and rising fiscal deficits brought about by neo-liberal policies, have also served as another investment opportunity for footloose finance seeking adequate returns. Other investment opportunities have been created by allowing private investment to fund public infrastructure and move into services such as postal, prison and garbage collection services, hitherto confined to the public sector. In the US, companies can now buy back stock, thereby raising the stock price to the advantage of top executives who are compensated partly with stock options.

There are some problems with this utilitarian justification of the neo-liberal programme started by the Thatcher and Reagan administrations. It is commonly known today is that this missionary free-market zeal was inspired by neo-Austrian thinking transmitted to Thatcher via Keith Joseph. Shutt's story needs to be supplemented by the saga of ideological evolution told by Yergin and Stanislaw (1998) which has been briefly stated above. This reviewer believes that history is made as much by ideological waves as much as by perceived material interest. Otherwise it is hard to explain the short-sightedness of capitalist ideologues and Stalinists, whose gross misperceptions eventually undermine their own long-term interests. Ideas are certainly influenced by the concrete material conditions in which they arise, but they cannot be explained comprehensively by these conditions in a deterministic way. Thus ideological currents owe as much to the peculiar ideas of their founders as much as the material challenges they confronted. Shutt unfortunately largely ignores the ideological dimension as noted earlier; thus his explanations remain incomplete.

Transitional economies and the Third World

Shutt also analyses the recent evolution of the former planned economies into more 'emerging markets' and the 'emerging' or more often 'submerging' markets of the Third World. He does identify many weaknesses of the Soviet System and other planned economies. These include use of administratively determined priorities and quantitative targets rather than signals emanating from the market, poor cost accounting and control, unwieldy organizational hierarchies and distortion of information flows, corruption, suppression of criticism and other bureaucratic ills. He also points to crumbling public infrastructure, capital stock that has not been renewed for decades, increasing fiscal anarchy in public enterprises and the rise of organized crime, as major causes - and symptoms - of social breakdown. Rising defence expenditure was the crucial burden that broke the camels back and this derived largely from competition with the US in global power politics. Yet for this reviewer at least, he misses the most crucial issue leading to Soviet decline, the inability of that society to generate endogenous technological innovation unlike the more successful capitalist societies. This major lacuna in Shutt's conception of economics is discussed elsewhere in this review.

Shutt discusses the different modes of transition to market economies exhibited by Russia, China and Eastern Europe. He shows how 'shock therapy' liberalization in Russia, inspired by illusions about market forces being able to instantly spring into action and operate as in mature capitalist nations, led to a disastrous collapse of production from which the country is still recovering. In the meantime, mismanaged privatization has led to oligarchic control over industrial companies and set back the process of democratization. The lesson is that market forces operate best within a strong institutional structure which takes decades to build up, a point that appears to have been unknown to the various Western gurus that guided shock therapy strategies. Additionally, Russia has generated an extraordinary amount of lawlessness, including organized crime, which will be very hard to shake off now on account of the political and economic power amassed. He also shows that the transition worked better in Poland and the Czech Republic because policies there were quite different. He points out that China, the best performer of all, has totally ignored shock therapy ideas and gradually liberalized markets, concentrating on promoting FDI and exports without dismantling the administrative structures of the bureaucratic state. China was of course helped a great deal by the proximate East Asian examples from the early 1980 and by the readiness of the Chinese Diaspora to bring productive investment to its coastal regions.
                                                                                        
In a separate chapter, Shutt covers the evolution of Third World economies over the last 50 years or so. Except for East Asia, the general picture is one of catastrophic decline, particularly after the debt crises of the 1980s. He shows that the public sector in many countries has failed to meet up to the challenges of development, the growth of population, environmental decay and the rise of lawlessness and separatism. Many of the reforms foisted on developing countries by the World Bank and the IMF have not succeeded in generating economic dynamism in the private sector in most countries. The flow of finance to developing nations and the instabilities generated by hasty liberalization of financial institutions, leading to a series of financial crises in Latin America and Asia, have been described earlier. Shutt sees the 'Third World catastrophe' as the broader playing out of the contradictions that beset the capitalist system worldwide.

While it is hard to quarrel with the broad thrust of his analysis of the Third World, he is probably somewhat over-pessimistic. Latin American nations have indeed made some progress in cutting down deficits and getting better control over macroeconomic management. Though enormous problems remain in Brazil, Argentina and Mexico, they have learnt some lessons from mistakes of the past. If one is to judge by recent postings on their web-sites, so also have the IMF and the World Bank, at long last. They are now less likely to impose disastrous policies on client states. Furthermore these countries are now much stronger exporters, so much so that Brazil faces many trade disputes with the USA, Canada and Europe. Nevertheless, Shutt is right to point to serious weaknesses in these countries, growing inequality and lawlessness. The recent privatization wave in most countries, has also generated a great deal of corruption.

Many Asian countries have made much more progress than Latin America, particularly the first tier East Asian tigers. This is another blind spot with Shutt. He argues that South Korea, Taiwan, Hong Kong and Singapore have grown on the basis of  imported capital and technology and by exploiting cheap domestic labor. Here he completely misses the scope and scale of the East Asian achievement. Since 1960, labor productivity and wage rates have grown steadily and very rapidly on the basis of the fastest building up of technological capability seen in recent times. Hong Kong and Singapore now boast standards of living higher than Spain, Portugal or Greece and Taiwan and South Korea are close behind. These four countries are developed countries by any measure and labor is highly skilled there and no longer so cheap.

Obviously any developing country must grow initially on the basis of adapted technology, but today, except for Hong Kong, they are fully integrated with the networks of technology development of the advanced industrial  world (see Rodrigo, 2001 for details). One has only to see the products exported by South Korea and Taiwan to see the extent of their technological mastery. Finally these nations have exhibited the highest savings rates in history and are a large source of capital and FDI for the rest of the world. They also have the largest foreign currency reserves in the world, next to Japan and China. It is hard to understand how someone as critically observant as Shutt could be so profoundly wrong about East Asia. In his eagerness to develop the case for general capitalist collapse, he dismisses East Asia without any serious assessment of their achievements.
 
Technology as a public good: a lacuna in Shutt's conception

Another major issue on which Shutt is out of touch with contemporary research on the advance of technology is in his conception of state support for technology advancement. He see this  as another case of private companies relying on the state to bail them out. That is profoundly false. The advance of technology is a very complex kind of human activity. At the surface level we see companies developing commercially exploitable technologies to produce goods and services for profit. They are after all motivated by profit, not by philanthropic considerations. Commercially exploitable technologies, however, arise out of an underlying stratum of generic technologies, also called general purpose technologies. This stratum in turn develops out of more fundamental advances in knowledge carried out in universities and research institutions. Therefore knowledge advance in science and technology takes place at roughly three distinct but interconnected levels.

The bedrock stratum of knowledge advancement is clearly a public good or even more a global public good. The development of  scientific knowledge is clearly the responsibility of public, not-for-profit institutions like the universities and government research labs and programmes. Even if carried out by private firms, they need to be funded by public investment, since firms cannot turn these into profit-making activities. The intermediate layer of generic technologies also has many features of public goods. Even if developed by individual firms, they generate technological spillovers to other firms within the nation and also to firms outside. In short the development of generic technologies is rife with what economists call 'positive externalities' in which the social returns are much greater than the private returns that can be secured by the firm initiating the innovation. In the case of a 'negative externality' such as industrial pollution, the social costs are higher than the costs borne by the polluting firm; hence society must exact clean-up costs from the firm. The crucial outcome of this conception is that private firms will invest insufficient effort in developing generic technologies since they cannot capture most of the returns.

Hence if a society wants the optimum development of technological innovation, the public sector needs to get involved in the development of generic technologies. Ever since the late 19^th century  governments in Germany, Britain, France and the USA have shouldered this responsibility to a greater or lesser degree. Public-private cooperation in the development of generic technologies has been most spectacular in the USA during and after the second world war, under Federal, i.e. central government leadership. Thus was developed advances in semiconductors, computers, aerospace technologies, electronic communications, the Internet, biotechnology and many others. There is another important consequence of state involvement in technological change. Since the progress of technology is evolutionary,  it is rife with uncertainty, especially at the beginning of a techno-economic paradigm. Even firms that operate at the leading edge of technology are liable to make disastrous mistakes as evidenced from a casual reading of business journals. The guiding hand of the state can greatly reduce the uncertainty associated with technical change.

Hence state involvement in technology development is a necessary function under capitalism, not just a class-conspiracy as seen by critics on the left or an unnecessary interference with market forces as charged by market fundamentalists on the right. If the private sector is to be induced to undertake risky investments in innovative generic technologies, it is entirely appropriate that part of the risk and investment cost be borne by the public sector, since society will draw much larger benefits than will accrue to the firm alone.  It is hardly an accident that in the USA where public-private cooperation in the advancement of technology has been developed to a higher level than elsewhere, we also have the strongest advance of technological innovation in general. An explicit goal of the European Union project has been to mobilize public and private productive resources of the  aggregate of nations to match technological innovation in the US. One example of success is the European aircraft producer Airbus Industrie, which has now achieved competitive parity with the US giant Boeing, directly as a result of organized support from European states.

Conclusion: many strengths and some weaknesses

Shutt concludes his book by emphasizing the crisis of political legitimacy for the profit system as presently constituted, on account of its manifest inability to address the growing contradictions of the system as a whole. Thus rising inequality and technology-related unemployment in advanced and developing countries is accompanied by more frequent episodes of systemic macroeconomic instability. Corruption and internationally organized crime are definitely on the rise, with Russia and other transitional economies contributing a disproportionately large share. Additionally, there is increasing international discord over trade, investment and intellectual property rights issues and about appropriate global collective action to safeguard the environment and restore shrinking fish stocks caused by overfishing. Developed nations seem to be facing increasing difficulty in maintaining health care benefits, adequate education, social security for the unemployed and the aged, keeping crime under control and so on.

If Shutt were to be update his book today in the light of developments over the last 5 years or so since his book was published, he would undoubtedly strike a  more pessimistic note. Global problems have got intensified and a few new ones have been added. He is likely to see the rise of militant Islamic fundamentalism as a failure of  leaders of hegemonic nations to address historic injustices and resolve contemporary conflicts. Drug related crime and corruption have got worse as has the exploitation of Eastern European women for prostitution. Separatist violence has not got better and crime and violence in Brazil, Mexico, China and elsewhere has risen alarmingly. Following the stock market collapse in 2000 in the USA, recessionary conditions have appeared throughout North America and Europe. Japan continues in recession, unable to fix its major economic and institutional problems and now Germany has slipped into the same quagmire. Serious problems have arisen about malfeasance by corporate executives relating to gross manipulation of financial statements for their personal benefit, an issue that Shutt deals with briefly in his book. From the perspective of 2003, his 1998 claims seem excessively cautious.

At the very end, Shutt also discusses some of the political issues arising out of the major storm he sees on the horizon. He goes on to enumerate some guidelines for a more viable, equitable world order. This is not the place to critically review the brief framework he has laid out in his last chapter since he seems to have developed this theme more fully in a later book (Shutt,2002) which is probably well worth reading. One crucial point is worth highlighting: Shutt does not appear to suggest that a more sustainable world economic order would do away with market forces completely. Instead, he sees market forces and profit incentives being redirected squarely towards serving major social ends. This approach can be interpreted as an attempt to redirect productive activity strongly towards the production of crucially important public goods, away from the present excessive production of private goods for private consumption. At least that is the interpretation that this reviewer imputes to Shutt in accordance with his own prejudices.

To sum up, Shutt does manage to capture many of the essential features of the world economy in its evolution over the last half century. He does seem to understand economic issues much, much better than most of the critics of globalization. Because he understands the economic logic and political exigencies behind major events such as the formation of the IMF, the World Bank and the WTO, he rarely needs to conjure up fantastic conspiracy theories, such as are purveyed in some of  the left literature. This book will provide the reader a sober and plausible account of how the post-War system evolved and its major problems and shortcomings. There are some serious flaws in his analysis, particularly his conception of technological change, which have been identified above. A better understanding of this issue will explain why capitalism has so far muddled through despite serious contradictions. It is also crucial to understanding why planned economies were not able to develop the productive forces beyond a certain level.

The major weakness is the conception of technological innovation and the central, symbiotic linkage between innovation and capitalist dynamism. Though Shutt talks about technology from time-to-time and even has a chapter titled 'technological nemesis,' he seems to implicitly believe that innovation is an exogenous process, i.e. it is something that happens 'outside the system.' This is a weakness of mainstream economics as well; even most professional economists have the vaguest notion of the role of technological innovation. Neoclassical growth theory actually models technological change as if it were 'manna dropping from heaven,' using this exact phrase to explain why this is treated as an exogenous input. New growth theory, developed since 1986, tries to endogenize innovative activity. But it has hardly shed any new light on this problem, as pointed out by experts of technology such as Richard Nelson (1997).

There is a much better understanding of technology now within a small circle of economists who specialize in the analysis of technology. These include distinguished economists such as Nelson who are respected across the profession.  As a result more realistic ideas about technological innovation are diffusing through the profession. Schumpeter is back in fashion, since he was the first economist to see the central role of innovation and the entrepreneur, in the progress of capitalism. Actually, Marx was the first major economist to understand the role of technological innovation in regenerating the dynamism of capitalist processes. Schumpeter, who was a great admirer of Marx, acknowledged this. But Marx did not arrive at the more comprehensive insights of Schumpeter, possibly because the processes of innovation were in their infancy up to 1870.

A major theme that runs through Shutt's analysis is the implicit presumption that the global capitalist system is moving inexorably towards a catastrophic breakdown. While this is a distinct possibility, this reviewer takes that position that a softer landing may also be within the realms of  possibility. There are many complex, self-regenerating processes within capitalism. For example crises often lead to reforms that strengthen the system, making it more resilient. This is what has happened in South Korea and Taiwan after the 1997-8 crisis. As pointed out earlier,  capitalist  dynamism waxes and wanes over long periods of time as new technological paradigms replace existing ones. Currently we are witnessing the spread of information technology replacing and transforming the older industries at the same time that industrial capitalism is spreading rapidly into a broader swathe of developing countries, particularly in Asia and Latin America.

To make sense of these processes, it is necessary to suspend, or at least relax, some of the mental models of the past, such as the implicit belief that capitalism has been in 'permanent collapse' from the beginning of the twentieth century, which is manifestly false. The historical process is more complex than we can imagine and its prudent to be prepared for a range of possible outcomes. The transition from the present predicament of capitalism to a superior social order need not be contingent on a catastrophic collapse, though that outcome cannot be ruled out by any means. For the present this book provides a pretty good account of the problems that need to be fixed.

References cited in review

Economist (2003),  "A cruel sea of capital, " special supplement in May 3^rd  issue.
Krugman, Paul (1994) Peddling prosperity, Norton.
Nelson, Richard R. (1997), 'How new is new growth theory?', Challenge, 40 (5): 29-58.
Perez, Carlota (2002) Technological revolutions and financial capital, Edward Elgar.
Rodrigo, G. Chris (2001) Technology, economic growth and crises in East Asia, Edward Elgar.
Shutt, Harry (2002) A new democracy: alternatives to a bankrupt world order. Zed Books.
Yergin, Daniel and Joseph Stanislaw (1998) The commanding heights, Simon and Schuster.

Professor G. Chris Rodrigo,  School of Public Policy,  George
Mason University, 3401 Fairfax Drive, Arlington VA 22201, USA.

http://www.lines-magazine.org/articles/chris.htm

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