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Capitalism in crisis

CAPITALISM is a ship experiencing bad weather. Across the globe, the economic crisis has either not yet abated fully, or is – like in Europe – seemingly picking up speed again.

If we may believe the waterfall of statistics compiled by the French economist Thomas Piketty in his book Capital in the 21st Century, the chasm between rich and poor is widening again. His thesis, perhaps over-simplified, is that the historically huge income differences diminished during the previous century, but that this was an aberration.

The rich are once again becoming richer, he says, while the poor are losing out. And the middle class, traditionally the pillar of social stability, is being eaten away.

The Dutch Professor Ewald Engelen, a prolific writer on economic affairs, has now added a fascinating view to Piketty’s in one of his columns. Engelen, professor in financial geography at the University of Amsterdam, wrote in the Dutch weekly intellectual magazine Groene Amsterdammer.

He cites a passage from a book by the economist John Maynard Keynes, The Economic Consequences of the Peace, written in 1919 about the Peace of Versailles. (In this book Keynes uttered severe criticism of the rough treatment the victors of the First World War meted out to Germany. He called it a “Carthaginian treaty” after the Roman Republic’s pitiless approach towards the rival city of Carthage, which the Romans eventually levelled with the ground.)

The passage reads (Engelen quoted the Dutch translation, but this is the original English): “Europe was so organized socially and economically as to secure the maximum accumulation of capital. While there was some continuous improvement in the daily conditions of life of the mass of the population [between 1870 and 1914], Society was so framed as to throw a great part of the increased income into the control of the class least likely to consume it.

New rich preferred power to conspicuous consumption

"The new rich of the nineteenth century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption. In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and of capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the Capitalist System. If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a régime intolerable.”

Actually, Keynes added a further sentence: “But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.”

What Keynes is saying here, according to Engelen, is that pre-1914 capitalism rested on a social contract: “The proletariat allowed the capitalists to get the biggest part of the economic cake, provided that they invested rather than consumed it.”

Engelen then flashes forward to 2014: “The thousand biggest non-financial, stock market-quoted enterprises in the world are sitting on historically unprecedented high cash reserves of more than $3 500bn, partly kept offshore. Against this there are low investments, especially by the 20% with the biggest cash reserves – think of Apple.

“Instead, stock market-quoted enterprises spend a growing part of their reserves on buying back their own shares to drive up the price and to inflate the bonuses of managers. From value creation to value extraction, in the words of political economist [William] Lazonick [University of Massachusetts].

“A growing number of studies, among which those of Piketty and his friends [Anthony] Atkinson and [Emmanuel] Saez, show that the shareholders’ ideology contributed sharply to rising income and assets. Managers, bankers, lawyers, hedge fund and private equity fund managers populate the uppermost layers of the income building.

“In the year 2014 the new rich do not build factories or libraries, but spend their money on a triptich of Francis Bacon to the tune of $142.4m, to apartments in Hyde Park of £20m, on yachts of €15m, on Loro Piano gentlemen’s vests lined with beaver fur, on Julien Macdonald dresses of £18 000, on Patek Philippe gentlemen’s watches of £44 000, and on unforgettable holidays in the Maldives.”

Social contract between rich and poor long broken

The implicit social contract between rich and poor, Engelen concludes, is long broken.

This, in a nutshell, explains a large part of the crisis in which capitalism is finding itself at the moment. The crisis of 2008, it has been shown in many studies, was primarily caused by managers and “banksters” who cared nothing for the general good, who did not realise that their own interests would in the long run only be served when done in a way which also served the interests of society as a whole.

This conclusion is confirmed by American economist Professor Joseph Stiglitz, who recently said that 95% of the recovery gains in the USA has gone to the top 1% of the population. Does one hear echoes of BEE – and some white capitalists – here?

Greed, the new rich seem to think, is good, and – as King Louis XV of France once cynically said – Après moi, le déluge (after me comes the flood).

The problem is: if (or, perhaps, when) capitalism crumbles, they will also be swept away. Does one hear rumbles of Irvin Jim and Juju in the distance?

 - Fin24


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