How Will Capitalism End?

Wolfgang Streeck is featured in the latest episode of CBC Ideas, talking about his recent book, How Will Capitalism End?, in which he argues that the end of the democratic-capitalist experiment is nigh. The episode is called Surviving Post-Capitalism: Coping, hoping, doping & shopping.

The end of capitalism can then be imagined as a death from a thousand cuts or from a multiplicity of infirmities, each of which will be all the more untreatable as all will demand treatment at the same time. (2:05)

The whole episode is worth a listen. One part I found particularly interesting is Streeck’s ‘long view’ of capitalism as a pendulum swinging desperately between crisis, solution, and solutions that turn into crises of their own. In a nutshell, Streeck argues that

  • capitalism drives conflict between capital and labour
  • which, in turn, is solved by inflation
  • which, in turn, is solved by excessive public debt
  • which, in turn, is solved by unregulating private debt
  • which, in turn, is solved by basically printing more money

How long can this dicey game of ping-pong continue? Not much longer, according to Streeck. Capitalism is facing the same challenges it encountered at the end of post-war growth, but this time around it has already exhausted the ‘solutions’ used to divert collapse in the past. Beginning at around the 15:33 mark of the podcast, tells the story:

To be precise, three crises followed one another: the global inflation of the 1970s, the explosion of public debt in the 1980s, and rapidly rising private debt in the subsequent decade, resulting in the collapse of the financial markets in 2008. This sequence was by and large the same for all major capitalist countries, whose economies have never been in equilibrium since the end of post-war growth at the end of the 1960s. All three crises began and ended in the same way, following an identical political-economic logic. Inflation, public debt, and the deregulation of private debt started out as politically expedient solutions to distributional conflicts between capital and labour, until they became problems themselves. Solutions turned into problems requiring new solutions, which however, after another decade or so, became problems themselves, calling for yet other solutions that soon turned out to be as short-lived and self-defeating as their predecessors.

Coming out of the 1960s, post-war growth slowed down. This resulted — in all major capitalist societies — in increasing distributional conflict between capital and labour. The 1970s were a period of very high strike rates in almost all of our countries. Now what did governments do? In order to pacify such a conflict, as you can say in technical language, [they] accommodate[d] overshooting wage demands by allow[ing] for an increased rate of inflation. Now both sides basically think that they are doing fine. There’s more money around. Prices are rising, but this is sort of a secondary consideration: unions can always go out and ask for another wage round, in which they can increase their wages in order to compensate for the same inflation that resulted from the previous wage round.

Now, for governments this can be a comfortable way of dealing with intensified conflict. But over the years, if this continues, inflation has all sorts of negative consequences for the economy as a whole: it distorts relative prices, and it makes investors cautious about putting their money into a world where money is losing its value. Inflation, for a while stabilizes employment, in the longer term it results in high unemployment. In the late 1970s, after the very high inflation rate of the mid-70s, this began to show.

Then governments, seeing this, began to stabilize money. This begins in the 1980s in the United States, with the ‘Volcker revolution‘ as you can call it: interest rates, resulting in inflation no longer being a problem.

But the result was the beginning of deindustrialization in many countries. That is, the unemployment that could have taken place in the ’70s now took place in one big wave in the 1980s. And in order now to deal with this conflict, governments began to increase spending without being able to cover the spending by taxes. There were tax revolts also. And that resulted in a new solution, which was an increase in public debt. And this also applies to all the major capitalist countries: debt begins to increase the moment inflation goes down. And that’s another way of managing conflict.

Now, [you begin to think that] public debt is fine. You don’t have to tax your rich citizens or even your middle class citizens. And you can nevertheless pay for unemployment benefits, which begin to increase after the 1970s. But at some point, those that lend you the money — let’s call them the ‘financial markets’ — begin to wonder whether the steady increase in public debt that you observe in the 1980s will lead to a point where governments will be unable to service the debt. The 1990s were a period when this became so urgent that under the leadership of the Clinton administration, and then the OECD, the World Bank, and so on, that a period of consolidation began. We have to consolidate public budgets and we have to contain public debt, which was quite successful if you look at the curves in the 1990s.

But at this point, another problem opened up. You had to cut social welfare benefits, you had to cut public spending, and public services, which resulted in two things: (1) a gap in [effective demand]( (states spending less, that had a negative affect on growth) and also (2) the dissatisfaction among citizens, who now didn’t know how to pay for the education of their children. What do you do? In response, you deregulate the financial markets in order to enable more people to take up credit in order to fill that gap. What you see in the 1990s is that as public debt goes down, private debt shoots up. And again: this is not just in one, or two, or three countries — this is a global phenomenon; the curves are very, very similar.

Now to continue the story of the solutions that become problems, deregulating finance means basically, technically, that you allow evermore risky credit being taken up or given to borrowers, so [now] you move into the sub-prime sector, where the risks that are associated the risks that are associated with credit become accumulated in the financial system. In 2008, all the private sector techniques of risk management broke down, and this was the end of the private sector debt solution to the distributional problem.

Now, what are we doing? We are in phase four, I claim. Where the solution is simply the printing of money. And this is where you can ask, “Will this last longer than ten years?” Because all the other things were basically ten years and then they had to be replaced by something else. I argue, no. It can’t continue forever. And I’m in very good company there. The Bank of International Settlements, which is the central banks of central banks so to speak, every year in their yearly report they say, “This has to have an end because nobody knows what is going to happen next.”

I found this analysis to be an interesting ‘action/reaction’ sequence of logic; a reconstruction of capitalism’s crisis/corrections/crisis cycle over the past four decades. What do you think?

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