GLOBAL: The global crisis of capitalism

The global crisis of capitalism, has been brewing for some time and is a structural crisis of "informational capitalism" It will not bring down capitalism, according to renowned scholar Manuel Castells, "but is going to change it fundamentally".

The responsibility of scholars "is to help define the roots of the crisis and explore possible paths towards a more sustainable world."

Castells lectured on the crisis of capitalism at Stellenbosch University during a trip to South Africa as a guest of the Cape Higher Education Consortium, the Stellenbosch Institute for Advanced Study and the Centre for Higher Education Transformation.

He said capitalism had been transformed over the last three decades and it was important to try to understand the dramatic moments of this transformation in terms of the current, new form of financial and economic crisis.

The economic crisis of the 1930s resulted in World War II and a new form of 'Keynesian' capitalism characterised by the end of pure laisser-faire, the intervention of the state, increased government spending and to some extent the creation in many countries of the welfare state and mass consumption based on new technologies.

The 1970s brought another crisis, blamed by some on rising oil prices - though oil only accounted for about 20% of inflation - which ushered in a new and revitalised form of capitalism. "A massive process of deregulation, liberalisation and privatisation affected the institutional basis of capitalism," Castells said.

The new "global informational capitalism" was decisively supported by an independently-occurring technological revolution centred on information and communication technologies.

While capitalism was restructuring, new ICTs provided "extraordinary tools" that helped to set up a worldwide system of computerised networks - of information, of transport, of exchange and of people that could operate globally in real time.

The new technologies also drove a substantial increase in productivity, Castells continued, and "a massive expansion of markets across the planet, the incorporation of new countries and new markets into the global capitalist economy - and at the same time the disconnection of people, regions and countries that were not able to connect to these global networks.

"So there was dynamism, productivity, work-generation and distribution of wealth among the middle classes of Brazil, India and China - massive development - and at the same time extreme poverty in many other countries," with Africa worst hit.

"The weak point of triumphant global informational capitalism was the extreme volatility of the global financial markets and the inability of the system to regulate the whole series of mechanisms that had been unleashed by the deregulated, liberalised rise of productive forces that were represented by massive technological investment."

This was analysed in the first volume of Castells' The Information Age, and in 2000 he and others - such as George Soros and Paul Volcker - contributed to a book edited by Anthony Giddens and Will Hutton, On the Edge: Living with global capitalism, which described the new capitalism and the social, political and cultural changes of globalisation.

Castells' analysis of the crisis of capitalism centres on the United States, "because the crisis started there and the US remains, at least for quite a while, the key component of the globally interconnected economy. Everybody talks about China. I simply remind you that China represents 5% of global gross domestic product, the US 25%."

Five contributing factors

He argued that the current crisis was the direct consequence of five factors that combined and were "mediated" by new information and communication technologies (ICTs).

"The first factor was the liberalisation and deregulation of financial markets and financial institutions, allowing the quasi free flow of capital across the world and overwhelming the capacity of national regulators to control the global interdependent market." Computer networks and advanced information systems enabled the flow of information and capital.

Second was 'securitisation' of economic activities, organisations and assets. "Financial evaluation became the paramount standard to assess the value of firms, governments or even entire countries. It doesn't matter much how productive or well managed your firm is. Whatever the financial market tells us about your firm, that's what you are.

"But who is the financial market?" asked Castells.

New financial technologies and computerised mathematical models enabled the invention of exotic financial 'products' such as derivatives, options, futures and even more complicated securitised insurance and credit default swaps - "one of the main culprits of the crisis".

Complex, synthetic securities could bring the future price of copper together with a mortgage in California and the value of a currency and of the shares of IBM and Apple - "the endless virtualisation of financial assets" until all connection to their value is lost and there is massive circulating capital that bears no relationship to actual assets.

"The technological transformation of finance provided the basis for the constitution of the global financial market and equipped financial institutions with computational capacity to operate advanced mathematics models." People managed the increasingly complex global financial system through electronic transactions at lightening speed. No one really understood what they were doing, but assumed it was OK because money was being made.

The problem with the increasing complexity and transformation of everything into securities, said Castells, was the elimination of transparency, which made accounting impossible. Other problems included the so-called "irrational exuberance" of people betting in the market, and markets operating on perception rather than reality.

The third major factor was increasing imbalance between capital accumulation in newly industrialising countries such as China and the oil producing nations, and capital borrowing in rich economies such as the US. It appeared possible to borrow indefinitely, which led to a borrowing spree among countries and banks and a lending spree to consumers, who were also brought in to that logic. China continued to feed the US money so that Americans could consume more products and the Chinese economy could expand.

The fourth factor, said Castells, was financial markets functioning partly according to the logic of supply and demand, and also being shaped by information turbulences. "Markets can easily get out of control". An example was the 2007 bursting of the US real estate bubble. Many people could no longer pay their mortgages and so defaulted on mortgages, collaterals and other financial assets. The impacts diffused rapidly through the economy and, because of the size of the US economy, in time to inter-connected financial markets everywhere.

The fifth factor was lack of proper supervision of securities trading and financial practices, which "led to adventurous brokers pumping up the economy and their personal bonuses by increasingly risky lending practices". If people are paid to raise the value of shares in one quarter, they care only about the immediate value of the shares - not the long term interests of shareholders or the company. In many cases, financial trading was outright criminal, leading to scandals also involving large accounting firms - the supposed protectors of financial integrity.

These factors combined to send the entire financial system out of control. "The crisis brewed in the cauldron of the new economy," Castells pointed out.

Productivity and debt

New economies evolve when there is a substantial surge in productivity. "That's what defines a new economy", said Castells. Usually increased productivity is linked to technology, but it is also linked to improved education, research, new managerial practices and other factors.

The information-driven economy experienced incisive gains in productivity. "We should not have had a crisis because there was a massive increase in productivity. So what happened?"

In the decade to 2008, productivity in the US grew by almost 30%. But because of new management policies, real wages grew by only 2%. "Earnings of college-educated workers in fact fell by 6% between 2003 and 2008," he added. With real estate prices soaring, lending institutions - backed by the government - provided more and higher mortgages to people who did not have the money to repay them.

These activities were based on two incorrect assumptions.

The first was that real estate prices would continue to rise. Instead, the bubble burst and the real estate edifice collapsed. The second was that the large productivity gains would raise wages as benefits trickled down. "You know what happens with trickle-down theories? They never trickle," said Castells. Instead, people controlling the money pocket it.

In the US, the financial service industry share of the economy's total profits increased from 10% in the 1980s to 40% in 2007. The value of financial institutions' shares grew in the same period from 6% to 23% of the total value of shares. But the industry accounted for only 5% of employment. It appropriated these gains through mechanisms in the securities market, and used it to generate more capital by lending to consumers and borrowers.

What has been happening, Castells argued, is an intra-capitalist war between the keepers of wealth and the propagators of wealth - "an interesting insight".

The US and other governments went on a massive borrowing and spending spree. The Bush administration created the largest public debt in America's history by borrowing in the international financial markets, especially from China, to among other things finance the $1 trillion Iraq war. The Chinese now own 35% to 40% of US treasury securities.

The debt on household disposable income and mortgage delinquency soared, and with both Americans and the government unable to repay their debts, the financial system collapsed. As a result of the crisis, the value of financial market capitalisation globally was cut in half in 2008 and people's savings were devastated. "I estimate the total losses for global financial institutions in early 2009 at 4.3 trillion dollars - about 25% of the US GDP," said Castells.

Roads to recovery

There are strategies and policies to deal with the crisis. Most involve government intervention in the financial system, bailing out or de facto nationalisation of troubled banks and major companies. For example General Motors, the symbol of American industry, is now 60% owned by the US government and 20% by unions.

Newsweek argued that America had become socialist. "The government saved capitalism - interesting," commented Castells. "We are back to Keynesianism - fiscal stimulus on a gigantic scale and public works and public infrastructure."

Barack Obama is intervening smartly, said Castells, initiating public works for 21st century infrastructure in health, education, new energies, the environment - things useful to society. Huge amounts of money are being pumped into the economy, about $800 billion. "In the middle of the crisis, universities are getting a lot of research money, with an interesting condition: it has to be used to hire new academics and so create jobs."

Castells described the emerging economy as 'informational Keynesianism'. Governments pump money into the economy in key sectors, and re-regulate out-of-control financial institutions. The US has created a new federal financial agency to protect consumers and has massively increased the powers of the Federal Reserve Bank to become a serious regulator.

But there are problems with crisis policies in America and elsewhere.

The first is the fiscal price for the state. With what money are these policies implemented? There are limits to taxation, Castells pointed out, with people not prepared to pay more and fewer wealthy people to tax. Governments will borrow more, for instance from China. "For social scientists the notion that a major communist state could save capitalism is interesting." But there is a downturn in China, millions have lost their jobs, and the country is nervous about the devaluation of the dollar and so is diversifying in currencies.

The result of the crisis, said Castells, is "the end of easy credit at all levels of the global and local economies". Without easy credit there is less consumer demand, which in the US accounts for three-quarters of economic growth and in Europe two-thirds. "If you don't have consumer demand, you don't have growth."

The most effective strategy would be to encourage innovation and develop human resources and technology to increase productivity, he added. A major wave of technology development is continuing. But entrepreneurial innovation needs capital, which it is lacking.

The problem with monetary expansion linked to public or consumer debt is inflation. But a massive, parallel increase in productivity could cancel the effects of monetary inflation and promote economic recovery. This is Obama's strategy, said Castells. A problem is that if entrepreneurs are unable to continue the innovation process now, technological progress and productivity rises will be slowed in the longer term.

Finally, said Castells, "a globally interdependent economy requires coordination". But again there are problems. China, India and Brazil have their own expansion strategies, and in any case the emerging economies cannot revive the global economy alone. Also, European countries have different and uncoordinated policies, and they are obsessed with regulation and neglecting economic stimulation. There is no effective global revival strategy in place.

Castells tentatively described three sectors emerging in a new global capitalist economy.

"First a shrunken, regulated private sector potentially helped by investment in innovation and productivity or in the stronger relation of financial and real estate industries." Second a state-controlled sector developing information and investing in research, the environment, health and education - at least as much as it can afford.

Third is an alternative barter and 'do-it-yourself' sector. An example is urban farming, a big cultural movement in the US. "People are not going to live on their tomatoes. But it's helping the family budget." There are similar developments in Europe. The non-market economy, Castells said, "is massive and nobody talks about it." For instance, cultural and information products are shared over the internet through peer-to-peer networks and downloading - "they call it 'piracy' but that's debatable. What's not debatable is that hundreds of millions of people do it". The point is, a growing sector is moving away from market practices.

A new form of capitalism is emerging, Castells concluded, and it requires policies in the same way that previous forms of capitalism did. Deregulation, which helped to create post-1970s capitalism, was a government action involving policies. Now new policies have to be designed by bank governors and political leaders - and some could be very unpopular.

Around the world there is a crisis of trust in political leaders - at exactly the moment when governments need to save and transform capitalism.