financial crisis
London Docklands. (Credit: chrisd2105/bigstockphoto.com) (via: bit.ly)

The past year, 2018, brought reminders of the global financial crisis, not only through its tenth anniversary but also in material terms. The falls in the Dow Jones and NASDAQ share indices at the end of the year proved to be the most significant since 2008. Pre-Christmas indicators for global stock markets came close to the worst December figures since the Great Depression at the end of the 1920s. In 2018, world markets lost almost $7 trillion, making it their worst year since the financial crisis of 2008. In the third quarter of last year, household debt in the US reached a record $13.5 trillion. Almost 80% of Americans now live from one pay cheque to the next. The last time household debt was nearly as high was in 2007, not long before the Great Recession.

Recent months have seen increasingly authoritative reports on the impending downturn in the global economy. Emphasising various nuances of the current situation, well-known figures in the contemporary political and financial worlds such as Gordon Brown and Ray Dalio speak primarily of the future, not the past, and of the dangerous consequences of a new economic collapse.[1]

The threat of the new economic crisis lies not so much in stock-market fluctuations as in the deepening political crises in countries that form the nucleus of the global economy. Judging by the aforementioned articles, this realisation is very slowly approaching. The situation is alarming: just as the need for action is becoming clear, an increasing number of questions have no defined answers.

The misunderstood crisis

Over the last ten years, key causes of the 2008 crisis have failed to be eliminated. On the contrary, their influence has only grown stronger. The G7 and G20 met, and there were endless rounds of summits, talks, and bold statements, especially in the aftermath of the crisis. But overall, the lessons of the 2008 crisis have not been learned and its causes have not been eliminated. The main problem is that the crisis was not properly understood: it was simply extinguished with massive injections of government cash into the private banking sector. In other words, instead of a solution to the problem, it was only the appearance of a solution that was created.

And so now, the economic crisis is once more but a step away.

To understand the causes of the crisis and to look for solutions to global economic problems, the scope of discussion needs to be qualitatively expanded so that it is not solely based upon stock market data and financial reports. A series of key problems with the contemporary global economy need to be revisited. A decade ago, these problems had already led to the Great Recession; but just as before, governments of both developed and developing countries, along with the global economic elite, are turning a blind eye. Without proper thought and step-by-step solutions to these problems, it will be impossible to exit this endless cycle of economic crises.

Hidden causes

The key problems with the contemporary global economy, which constitute the hidden causes behind repeated crises that governments of the world’s leading countries are unwilling to solve, are as follows.

1. The continuing growth of the financial sector in both absolute and relative terms. The financial sector has changed from being a servant of economic requirements to a stand-alone sector generating some of the world’s highest individual managerial incomes. The financial sector has become something akin to a bureaucratic structure, which under the pretext of fulfilling social functions soaks up more and more resources and people, for which new functions are thought up, to which people and resources are repeatedly and unendingly attracted. Society has long lost control over the financial sector. In fact, it is the financial sector that is gaining the ability to control politicians and corrupt them in its own interests; it is very difficult to resist the temptation of making money out of nothing.

2. The influence of interests primarily linked to the financial sector is growing over the mass media and the political, educational, and academic elite. The agenda and tone of discussion in each of these environments have manifestly shifted towards the interests of groups who have opened up new niches for their own enrichment over the last ten years. In the Western public media space, the idea that ‘the economy of the future is the economy of knowledge and innovation’ is viewed as an incontrovertible truth.

The supposed primacy of knowledge and innovation serves to justify a redistribution of income to businesses dealing in innovative intellectual activity like financial engineering, consumer services in communications and entertainment, and various content for consumer electronic devices. As a result, in the picture of the world painted by the ‘mainstream’ media and education system, the traditional values of social progress have been placed in the background and new values of ‘creativity’ and ‘innovation’ have moved into the foreground.

3. The ‘brand economy’ is growing exponentially in comparison with the ‘economy of goods’. Businesses connected with manipulating consumer consciousness and establishing control over marketing channels are growing far faster than production capabilities. Investment in advertising and distribution channels yields substantially greater returns than investment in production. This simultaneously creates unprecedented opportunities for both profits and for the unpunished abuse of power.

Competition is not disappearing completely but is degenerating into an oligopoly based upon intellectual property: ownership of brands, longstanding marketing channels, and control over regulatory authorities. Enormous revenues are brought in by ‘intellectual’ and traditional annuities – revenues generated regularly by economically developed countries and the biggest multinational corporations, ‘for life’, through ownership of brands, trademarks, patents, and traditionally large shares in global markets. These economic phenomena spread in the second half of the 20th century and played a significant role in the deepening inequality of globalisation.

4. The ‘new economy’ is expanding. It has become less transparent than traditional sectors in that it is virtually impossible to determine either the real costs or the characteristics of many consumer products objectively; the production process is a black box, the contents of which do not lend themselves to being controlled.

The ‘new economy’ is largely virtual, i.e., its functioning is not associated with consumption, accumulation, or even the physical movement of productive resources. In essence, it does not so much consist of ‘production’ as an exchange of money for virtual goods, which more often than not only exist in the mind of the consumer via images, objects of desire, and dreams, rather than existing in reality. This new economy does not lend itself to the influence of regulators, insofar as the objects of regulation are largely undefined – it is difficult to classify, develop, and apply rules and standards – and avoiding regulation is much easier than in traditional sectors.

5. The ‘intellectualisation’ – or even the ‘softwarisation’ – of the economy is also becoming more complex. The more links in the chain there are between original resources and end users, the harder it is to understand the connections between activities and their results. The plethora of intermediary links and processes creates a favourable environment for intellectual manipulation and the creation of new ways of deriving profit ‘out of thin air’. Business is being penetrated by the parasitic practices of unchecked bureaucratic structures, growing and multiplying by way of an artificial stimulation of needs, closing off external control, and creating an air of mystery around their own activity. Products and production are becoming increasingly complex and immaterial, which results in a lack of transparency for most people.

In part, the higher proportion of ‘intellectual’ components in final costs reflects a genuine growth in expenditure on R&D, obtaining patents, etc., as part of the production cost structure. More significantly, this shift reflects a change in the structure of consumer demand, which is evolving in the direction of services and ‘innovative’ goods. This trend is not spontaneous. It results from the influence on collective consciousness – in this case, consumer consciousness – of large multinational corporations with the means to roll out powerful promotional campaigns and create global distribution networks for their products.

6. The new international division of labour is deepening. The ‘new economy’ is located in rich and prosperous countries, while less profitable traditional industries are moving to countries with cheaper workforces and less stringent environmental regulations. Intellectual property – trademarks, patents, and exclusive rights to provide certain services – is increasingly significant to the prosperity of wealthier countries. This also affects the prevailing ideology in the West. In place of aspirations for equal opportunities and a narrowing gap between countries, there is meritocracy, a minimising of redistribution, and exceedingly liberal economic relational terms applied to the international economy.

7. Individualism is spreading just as ideas of justice and equality are losing force in the international arena. Whereas the threat of war has previously been seen to steer societies towards a limitation of individualism in the face of common goals and towards greater discipline and controls in the interests of survival, in the last quarter-century, the illusion of the absence of an external enemy has given free rein to ‘convenient’ foreign policy that pays no attention to either the longstanding rules of the game in international relations or formal legality.

The last decade has shown that the destruction of the bipolar world has reduced the promulgation of ideas like justice and equality. Even though there was previously much hypocrisy in this respect, it was nonetheless important. We now see propaganda in support of absolute meritocracy that stretches credulity: for example, ideas like ‘the poor are to blame for being poor’; and ‘wealth is a natural reflection of the worth of individual people and entire nations’. Furthermore, it is no longer important how and by what means riches have been obtained and the receipt of unearned income through speculation is somehow seen as honourable and dignified, being seen in terms of ‘creativity’, whereas usefulness and effectiveness would previously have been more socially valuable.

8. The pictures painted for society by mainstream economics and the social sciences more broadly bear less and less resemblance to reality. As a rule, such pictures ignore the fact that the economic system itself must rest upon in-built non-economic moral imperatives in order to function normally. If the world did not have non-market values like honesty, respect for the individual, and aspirations to create social entities, there would not even be a market in the modern sense. An overwhelming number of economists are embedded in the system. The result of this is that the so-called ‘expert community’ has become no less venal, partial, and inclined towards profiting from people’s ignorance and weaknesses than have business and bureaucratic groups. Discernible in the background are common tell-tale signs: a comfortable existence, nice monetary ‘supplements’, good positions, and a certain level of social status and recognition.

9. Movement is accelerating from post-industrialisation to postmodernism, by which we can understand aspirations to discard intelligibly concrete meaning and to transform means into ends. In economic terms, this means that production and consumption are changing places: it is not the producer that exists for a consumer that is independent of production, but the reverse; the producer now creates the consumer it needs, shaping the need for a given product, whether goods or services.

The economic mainstream proceeds according to the following logic: any activity generating income counts as real economic activity and thus as a fully-fledged social product. In other words, anything that generates a profit is therefore effectively moral and useful. The principle of ‘anything helpful or beneficial should be appropriately paid for’ has been replaced with ‘anything that is paid for is helpful or beneficial and therefore appropriate for payment’.

Furthermore, insofar as effective profit-making occurs by receiving maximum revenue at minimal expense, it seems the very height of efficiency, or in other words, the ideal business activity, is to receive income from ‘intellectual property’ like trademarks, technology, and techniques for shaping consumer consciousness, needs, and standards artificially embedded in consumer behaviour. In these instances, the costs for the ‘producers’ of such products can tend towards zero and the income can be infinite. Accordingly, efficiency – understood as the relationship between income and outgoings – can attain truly fantastic proportions as well.

The last half-century shows that it is not only the individual but society as a whole that has become susceptible to targeted marketing. The entire ‘new economy’ is essentially built upon the belief that the needs and preferences of the consumer are not fixed and that they can be affected and even be shaped as one sees fit. Consequently, business is not obliged to adapt itself to society. On the contrary, society can be significantly adapted to business.

Initially, it was advertisers who discovered that consumer ‘needs’ could be manipulated, although they did not endow their findings with a theoretical structured. Then it turned out that political mechanisms, and afterwards vast new markets for business as well, could be built upon insight, as long as dealings with the consuming masses were properly organised. Whence came both the irrational cult of high-tech innovations and the thesis that the only necessary commodity is emotion, because the consumer essentially pays not for ‘bits of hardware’ or ‘rags’ but for the satisfaction of owning the source of his own ‘coolness’.

This analysis is yet to crystallise among society at large, but once clearly understood, it will mark the advent of an epochal revolution in the economic history of humanity. This revolution is comparable to the transition from the hunter-gatherer society to that of agriculture and settlement.

10. Against the background of the growth of ever more diverse kinds of consumption, points of reference like career, status, and reputation within professional communities see increasingly reduced significance. The occupational and social structure that developed in the second half of the 20th century is disintegrating, along with its corresponding traditions, conscience, rules, and ethics. Old communities are disappearing – professional, territorial, and cultural, as well as those based upon shared economic life – while new communities are fluid, virtual, and not profound enough to steer life towards a set of intelligible rules. In the West, several generations have grown up for whom the struggle for existence through hard physical labour is an abstraction. The traditional work ethic and the sense of personal responsibility for providing life’s basic material conditions have seen waning influence over society.

Meanwhile, a new mass economic class of IT specialists – programmers, systems administrators, hackers and so on – is emerging. As the proliferation of new technology continues apace, individuals and companies find themselves dependent upon IT specialists. Thus, a new social distinction is arising between those with sacred technological know-how and everyone else, a knowledge gap that can lend itself to different kinds of fraud, making the distinction somewhat criminogenic.

11. For more than half a century now, morality has avoided the attention of politicians, society, business, and the media. This is not a question of individual morality and personal qualities but rather social morality, as in the totality of informal rules that need to be observed in the interests of survival, self-preservation, and success in life. This is key to economic growth and development because of the simple axiom that morality is the most important part of economic life. Unfortunately, the attitudes couched within this axiom have been subjected to constant degradation over the course of the last 50 years.

Social morality – as a rule of life – and economic mechanisms are inextricably linked: each is part of the other. Market capitalism is tightly bound to social morality through trust in social and economic institutions. Without trust, the market only functions in the most primitive of ways. Without trust, the currently complex economic system finds itself paralysed, something which reveals itself most starkly in times of crisis. Conversely, the higher the level of trust in institutions, the more active and efficient the workings of the economic machine. Trust, to an extremely significant degree, is a product of social morality. Via a system of moral restraints, trust prevents society from committing dishonest acts, without necessarily involving law-enforcement agencies. Accordingly, the decline in morality lessens the effectiveness of the system. Furthermore, the link between these two phenomena has a dynamic character: when the economic situation begins to worsen and the crisis is brewing, the conditions of social morality, as a rule, also worsen, which in turn only brings the crisis even nearer.

The recession of capitalism

These observations follow from the financial crisis of 2007–2009. Of course, the crisis of a decade ago had objective background elements: both the cyclical price movements and market bubbles, which periodically and inevitably arise – and which burst just as inevitably. But if everyone had done what they were supposed to have done, as prescribed by a sense of duty and conscience, such a crisis never would have occurred. Candid recognition of this fact can be found in the well-known landmark report from the Financial Crisis Inquiry Commission.

Furthermore, virtually everyone who wrote seriously and in detail on the financial crisis remarked that the scale of abuse and downright deception in this sphere had grown openly and substantially over the course of the two decades leading up to the crisis. Today, at the start of 2019, the main point is that all the monstrous phenomena identified as the direct causes of the financial crisis ten years ago – which includes the dependence of jobs and income in developed countries on the volatility of financial markets, feeble regulation, the dominance of the financial lobby, and the irresponsibility and impunity of senior management – are not only still in place but are also growing.

This points to the fact that the roots of the problem remain and that the situation, for all intents and purposes, has not changed.

Therefore, it needs to be acknowledged that in this time of a fourth industrial revolution and the profound qualitative changes in the socio-political life of society, the economic and social model that now holds sway in the developed world is far from being as perfect as one might be led to believe. If society and the state are incapable of fulfilling their functions to secure a safe and prosperous future, it is not because people have become worse, in that ‘they’ve left God behind’, ‘they have no conscience’, and so on. It is because the economy is now different and the outside world has changed, yet politicians and ruling elites, judging by the decisions they have made, have not only failed to eliminate the causes of previous crises but have also qualitatively failed to grasp the new trends in global economic and political developments.

To put it quite succinctly, the root cause of the approaching financial crisis is not only to be found in cyclically recurring problems but also in the qualitative shift that has changed the face and the nature of capitalism today.[2] These upheavals do not only leave their mark on the economy. In combination with the fruits of the fourth industrial revolution, they are altering humanity itself. The failure to acknowledge these upheavals makes it impossible to avoid global economic crises, or even to rule out the possibility of large-scale war. It also makes it impossible to engage in conscious construction and active creation of our future.

 

[1] Gordon Brown, ‘The world is sleepwalking into a financial crisis’; Ray Dalio, ‘The economy looks like 1937 and a downturn is coming in about two years’, ’Billionaire Bond Guru Dalio Says Conflict Gauge Is at Highest Since WWII’; forecasts by USB Securities and JP Morgan.

[2]  For more about these changes, please see The Recession of Capitalism. Hidden Causes [Рецессия капитализма. Скрытые причины], Higher School of Economics, 2014; and Realeconomik: The Hidden Cause of the Great Recession, Yale University Press, 2011.

 

You may also like:

Democratic capitalism and its discontents