We established in the previous chapter that industry is still crucial in our economy, and still drives the fundamental dynamics of capitalism, both in relative terms (via the balance of payments) and in an absolute terms (for its superior ability to generate growth, an indispensable requirement for the capitalist system). In addition to the economic dynamics of capitalism, technology also determines its military and geopolitical dynamics, for obvious reasons. In this chapter we will investigate further the issue of technologically driven economic growth. We will see that, if industry and technology are the hardware of our economic system, then every so often this hardware changes, gets upgraded and expanded, giving life to new industries and new built environments, and making possible improved standards or living. Continuous technological development is the basis not only for perennial GDP growth, which keeps the capitalist system working, but also – and this is something that most people don’t suspect at all – for its mutation and evolution.
Hence this chapter will be a long historical (and in part theoretical) detour tracing back the way technology and with it capitalism have been evolving in the past two centuries, gaining complexity over time, acquiring ever more hardware, but also ever more software (rules and institutions) as time goes by. The capitalist system, in other words, constantly expands and mutates, thus moving further and further away from the anarchic (and idealised, for some) picture of it that we have in our minds. This picture reflects the way it used to be (at least in some respects) at the beginning of its history as a mode of production (started by the first Industrial Revolution) and also the way it was theorised back in the nineteenth century, but it bears very little resemblance with the current state of affairs. Therefore, if we want to understand anything about the way our economy works (and what needs to be done in order to go back to a healthy economy), we need to look at how industry and technology have been evolving up to now.
Most of what follows will be based on chapters 2 and 3 of the book ‘Post Capitalism’ by Paul Mason – I have heavily borrowed from these two chapters, but rearranged Paul Mason’s narrative in a – to some extent – different way. Following Paul Mason’s reasoning, but expanding upon it, we will take a historical detour, in order to understand how technological innovations are at the heart of the development and mutation of capitalism. We will see that industrial capitalism has been able to overcome its contradictions, to avoid the collapse predicted by its critics, to achieve long term economic growth and to become ‘established’, so to speak, by means of incremental development, both technological and institutional: in other words, by going through a series of techno/economic cycles, also named Kondratieff cycles (after the Russian economist who first observed this pattern). We will discover that investing in industry is not only the way to achieve and maintain a viable economy for each country, but it is at the very heart of how the whole system has managed to evolve, mutate and survive. Industrial development intertwined with institutional development have been the keys to its survival.
The Kondratieff cycles – an overview
If we look at the historical record we can see that industrial capitalism (we need to emphasise here that we are concerned with the last phase of capitalism, dating from the First Industrial Revolution to the present time, because capitalism in the broader sense of the term, as a mode of accumulation – as opposed to the narrower sense, mode of production – dates back a few centuries earlier) has been evolving by going through a series of techno/economic cycles (not to be confused with the much shorter and familiar business cycles ) each lasting approximately 50/55 years. Each cycle or wave consists of an upswing, featuring a cluster of technological innovations with associated economic growth; then, when the economic boom associated with these new technologies runs out of steam, a downswing follows, a phase of recession and adaptation, out of which a new cycle is eventually born. The first scholar to notice this pattern and to introduce this sort of analysis was Nikolai Kondratieff (1892-1938), a Russian economist who worked in the first half of the twentieth century.
According to his theory (and quoting from Paul Mason’s book), ‘the first technological cycle begins with the emergence of the factory system in Britain in the 1780’s and ends around 1849. Then a much clearer second wave starts in 1849, coinciding with the global deployment of railways, steam ships and the telegraph, before entering its downswing phase, with the so-called ‘Long Depression’ after 1873, and ending sometime in the 1890’s’. The third cycle is quite an important one, it emerges after 1890 with the introduction of a cluster of radical technological innovations (also known as the Second Industrial Revolution) and it involves also a big mutation of the capitalist system.
‘More insights into these cyclical patterns are added by an Italian physicist, Cesare Marchetti, who analysed historical data on energy consumption and infrastructure projects. In 1986 he concluded that the clearest evidence for long economic cycles, [what we have called here techno/economic or Kondratieff cycles] lies in the pattern of investment in physical communication ‘grids’. Taking canals, rail, paved roads and airline networks as his examples, he showed how the build-out of each peaked roughly fifty years after the previous technology had done so. On this basis, he predicted that a new type of grid should appear around the year 2000, he could not guess what it would be, but today we have the answer: the information network. There is, then, physical and economic evidence that a fifty-year pattern exists’. Paul Mason notes that it is quite astonishing that in 1986 Cesare Marchetti had no idea what the next network would be, but I think there is an explanation for this: he had in mind a physical network. (We will not emphasise, for the moment, this aspect of the presence, in each cycle, of a new ‘physical communication grid’, but it will become important later on, in order to understand the current cycle, the fifth one, as well as possible future developments.)
Following Kondratieff’s analysis, and extending his sequence of long cycles to the present time, Paul Mason draws the following outline, which includes four long cycles, leading to a fifth (the current one) whose takeoff has stalled:
‘1790-1848: The first long cycle is discernible in the English, French and US data. The factory system, steam-powered machinery and canals are the basis of the new paradigm. The turning point [when the decline starts] is the depression of the late 1820’s. The 1848-51 revolutionary crisis in Europe, mirrored by the Mexican War, forms a clear punctuation point [for the start of a new wave].
1848 – mid 1890’s: The second long cycle is tangible across the developed world and, by the end of it, the global economy. Railways, the telegraph, ocean-going steamers, stable currencies and machine-produced machinery set the paradigm. The wave peaks in the mid-1870’s, with financial crisis in the USA and Europe leading to the Long Depression (1873-96). [This coincides with the start of the decline of British hegemony and the challenge coming from new rivals. Most notably Germany, but also the USA and Japan]. During the 1880s and 90s new technologies are developed in response to economic and social crises, coming together at the start of the third cycle.
1890s – 1945: In the third cycle heavy and chemical industry, electrical engineering, internal combustion engines, the telephone, scientific management and mass production are the key technologies. The break occurs at the end of the First World War; the 1930s Depression, followed by the destruction of capital during the Second World War terminates the downswing.
Late 1940s – 2008: in the fourth long cycle transistors, synthetic materials, mass consumer goods, factory automation, nuclear power and automatic calculation, electronics, radar, jet engines [also synthetic materials and microwave technology] create the paradigm – producing the longest economic boom in history. The peak could not be clearer: the oil shock of October 1973, after which a long period of instability takes place, but no major depression.
In the late-1990s, overlapping with the end of the previous wave, the basic elements of the fifth long cycle appear. It is driven by network technology, mobile communications, a truly global marketplace and information goods. But it has stalled. And the reason why it has stalled has something to do with neoliberalism and something to do with the technology itself.’
‘Each cycle is characterised by: capital accumulation, a cluster of technological innovations and new sets of rules and institutions forming a techno-economic paradigm’. For what concerns causation, Paul Mason reviews the interpretations of various analysts, starting obviously with Kondratieff himself. In brief: Kondratieff thinks that the main driver is capital accumulation; another famous economist, Schumpeter, thinks that the main driver is technological innovation; while more recently Carlota Perez, a living Schumpeterian economist, adds government intervention as a major factor. Paul Mason concludes that all these interpretations contain a grain of truth but things are more complicated than a simple cause-effect pattern, and that we need to introduce the concept of mutation. In order to understand what drives these cycles, and with them the mutations of capitalism, Paul Mason finds useful to go back to classical Marxian theory:
‘These cycles have a lot to do with the fact that capitalism mutates. What drives the mutations? To understand it, the best we can do is to go back to Marxian theory of crisis […] and to look out for what within the economy drives the mutations, and what might limit them. Marx understood that capitalism is an unstable, fragile and complex system (although his followers underestimated capitalism’s capacity to adapt). Complex adaptive systems tend to be ‘open’ – that is, they thrive on contact with the world outside. Second, they respond to challenges by innovation and transforming in unpredictable ways, with each innovation producing an intricate and new set of opportunities for growth and expansion within the system. Third, they generate ‘emergent’ phenomena, which can only be studied at a higher level. Not all layers of reality are a simple expression of the layers beneath them’. Marx describes how market mechanisms tend to break down. His theory of crisis provides a better explanation than Kondratieff’s for what drives the major mutations – and why they might stop occurring.’
Paul Mason on Marxian theory of crisis: ‘According to Marx a market economy creates inherent instability. For the first time in history, there is the possibility of economic crisis amid abundance. This is due to the presence of many inherent contradictions inbuilt in the capitalist system. The contradiction most relevant for our purposes [explaining the Kondratieff cycles] is the fact that the ultimate source of profit is work; specifically, the extra value coerced out of employees by the unequal power relationships in the workplace. But the system has an inbuilt tendency to replace labour with machinery, driven by the need to reduce costs by increasing productivity’.
This is how capitalism works in very simplified terms: capitalists compete against each other, and the most obvious thing each of them can do in order to decrease prices and win the competition is to decrease wages; as wages are driven down, the workers have less and less spending power to buy the goods that are on the market, and this causes a crisis of under-consumption (also called crisis of over-production). If the crisis spins out of control, it could lead the system to grind to a halt (this is our familiar race to the bottom). We will see later how the system counteracts this tendency and avoids collapse.
Another way for the capitalists to compete, which allows them to avoid wage decreases (and therefore the eventual collapse), is to improve production technologies in order to increase productivity. Technological improvements allow capitalists to produce the same amount of goods with fewer workers, and thus to lower their production costs and their prices. This works well for the first capitalists who introduce the new technology, but once all competitors catch up they are back to square one. This creates the necessity to come up with yet more technological improvements. This process over time drives up the cost of doing business or, another way to put it, causes the tendency of the rate of profit to fall. In fact, ‘since labour is the ultimate source of profit this technological race will tend, as mechanization spreads across the whole economy, to erode the rate of profit for the whole economy. This is the ‘most fundamental law of capitalism’. And this as well (in addition to under-consumption), could lead the system to grind to a halt, as capitalists tend to give up production, if the rates of profit are unsatisfactory or even non-existent. However, the system reacts to this threat spontaneously: it creates institutions and behaviours that counteract the tendency of the profit rate to fall. These are the remedies the system tends to resort to:
- Investors switch to new markets where profits are higher;
- labour costs are driven down by cheapening consumer goods and food;
- managers search for new sources of cheap labour in foreign countries;
- or they produce machinery that costs less in labour terms to make;
- or they move out of machine-intensive industries and into labour intensive ones;
- or they pursue market share (profit size) instead of margins (profit rate).
[It has to be noted that many of these remedies imply expansion into non-capitalist territories or previously non monetised activities]
- Marx identified the rise of finance as a more strategic counter-tendency: a proportion of investors begin to accept interest – rather than the outright entrepreneurial profit – as the normal reward for owning large amounts of money. Large parts of the system are geared to survive on low-risk, low-reward investments via the financial system – which allows capitalism to go on operating when profits are depressed.
[It has to be noted as well that many of the above remedies can work also to alleviate the problem of under-consumption]
For Marx these counter-tendencies operate constantly. A crisis happens only when they become exhausted or break down. In summary, crisis is the pressure valve for the system as a whole. It can be seen that Marx is modelling capitalism as a complex system: there is a spontaneous breakdown process counterbalanced by numerous spontaneous stabilizers. Crisis theory explains when and why these stabilizers stop working. Across the three volumes of Capital, Marx describes several forms of crisis:
- The first is the overproduction crisis [described in volume II of Capital], when too many commodities are chasing too little demand. As mentioned earlier this results from one of the most basic contradictions of capitalism: the inherent tendency that capitalists have to drive wages down, means that the workers are unable to buy the goods they produce, and the system will tend to grind to a halt for insufficient demand. This tendency to crisis can be counteracted in various ways, as we will see later – and one of them is to extend credit, both for consumption (prevalent in our times) and for investment (prevalent in the nineteenth century) – however this can lead to another type of crisis, the financial one.
- In volume III of Capital, Marx describes how financial crises happen: credit becomes massively overextended, and then speculation and crime drive it to unsustainable limits where the bust inevitably overcorrects the boom – pushing the economy into a multi-year depression
- Another crisis emerges from the inefficient flow of capital between sectors, Marx lived through numerous crises where heavy industry had grown out of step with the consumer-goods producing sector; [presumably this is less important now that capitalism has become highly managed and vertically integrated, as we will see later]
- The most important crisis for our purposes here –explaining what drives the Kondratieff cycles – is the crisis triggered by the failure of the tendencies counteracting the falling rate of profit listed above, leading to a tangible collapse in the profit rate, an investment freeze, layoffs and falling GDP.’ [=due to insufficient profits, capitalists ‘go on strike’ and park their money in non productive assets, financial or real]
However, Paul Mason observes that Marxian theory of crisis is incomplete and it contains logical flaws and needs to be fine tuned and corrected ‘so that it includes features common to complex adaptive systems which it has struggled with: openness, unpredictable response to danger, and long cycles (which lie between a normal business crisis and the hypothetical final collapse of the system). But even when corrected, a theory of cyclical crisis is not enough when faced with the survival-level changes we are exploring at the moment. Marx never explained how the necessity to avoid crises could create the conditions for capitalism to mutate.
After Marx died, his supporters assumed that overproduction [and other] crises could not be alleviated for long by finding or inventing new markets. The inherent instability of the system was so obvious to them, and its effects so visible, that they expected short-term crises to gather momentum and snowball into total collapse. However, little did they realise that many forces were at work to prevent disaster, in different ways and from different countries. As we now fully realise, the start of the third long-cycle saw capitalism mutate. Its adaptive nature enabled it to:
- Suppress aspects of the market for the sake of its own survival. [as a remedy to the falling rate of profit crises]
- Create markets internally even when the scramble for colonies reached a dead end. [as a remedy to overproduction crises]’
At this point, in order to understand how these cycles work (that is, what drives them), we need to go a bit deeper into the third cycle and analyse the profound changes, amounting to a full mutation, that took place at that time, saving the whole system from collapse. This was a major turning point in the history of capitalism, in which the system changed profoundly and acquired its modern form. So far we have seen: a) the general patterns of these techno-economic cycles; b) we have seen that the system is prone to have frequent crises and made a list of them; c) then we have seen that the system produces also many counteracting tendencies to avoid crisis; d) finally Paul Mason has introduced the concept of mutation: when the counteracting tendencies all start to fail, logic would suggest that the system would tend to spin into collapsing mode. However, this is not what happened. Capitalism has proven to be very resilient and able to evolve by producing mutations. Now we need to analyse the most important mutation, which occurred during the third cycle and which radically changed how the system works (from ‘largely anarchic’ to ‘fully managed’). After looking at this third cycle in more detail we will have gained enough additional insights to go back to analysing the whole sequence of the Kondratieff cycles and be able to ‘solve the mystery’ of what causes them.
1890-1920’s – the advent of ‘state capitalism’
It is widely known that at the turn of the twentieth century a Second Industrial Revolution took place, but it’s not generally understood that the changes it brought about had momentous importance. First of all we need to look at the changes (both technological and institutional), and then we will highlight what makes them special, why they constitute a quantum leap, as the capitalism that emerged out of them is substantially different from the previous one – a fact that still is not fully comprehended by most analysts of our economic system.
Technological changes – the Second Industrial Revolution – To use the words of Ha – Joon Chang (Economics: the User’s Guide p. 65): ‘Clusters of new technological innovations emerged between the 1860s and the 1910s, resulting in the rise of the so-called heavy and chemical industries: electrical machinery, internal combustion engines, synthetic dyes, artificial fertilizers, and so on. Unlike the technologies of the first Industrial Revolution, which had been invented by practical men with good intuition, these new technologies were developed through the systematic application of scientific and engineering principles. This meant that, once something was invented, it could be replicated and improved upon very quickly. In addition, organization of the production process was revolutionized in many industries by the invention of the mass production system. The use of a moving assembly line (conveyor belt) and interchangeable parts dramatically lowered production costs. This system of production is the backbone (if not the entirety) of our production system today, despite frequent talks of its demise since the 1980s.’
Paul Mason: ‘What strikes today is the audacity and speed of technological change: steel replaces iron; electricity replaces gas; [the internal combustion engine replaces the steam engine]; the telephone supersedes the telegraph; motion pictures and tabloid newspapers are launched; industrial output surges; spectacular steel-framed buildings appear in the capital cities of the world, and motor cars drive past them.
Institutional changes: the mutation from ‘anarchic’ into ‘monopoly’ capitalism – With technology becoming a lot more complex, in the advanced sectors only big businesses can survive. Acknowledging this situation, many institutional changes are introduced, most notably the limited liability company and new bankruptcy laws. The limited liability company makes possible unprecedented scales of investments while the new bankruptcy laws, by limiting the negative effects of bankruptcy, considerably reduce the risk of starting a business. We are in a new phase of capitalism, the scale of the economic game has increased: the lone entrepreneur tinkering in his workshop is fast replaced by big corporations, run by an entire bureaucracy of managers.
Paul Mason: ‘At the time, however, business leaders took all this [change] for granted. What concerned them was the relationship between large-scale companies and market forces. If possible, they concluded, market forces should be abolished. Competition, argued the business magnates, brought chaos to production and depressed prices to the point where new technology could not be rolled out at a profit. The solutions were to be found at three levels: monopoly, price fixings and protected markets. The means to these ends were (i) mergers, fostered by aggressive new investment banks; (ii) the creation of cartels and ‘concerns’ to set prices; (iii) government-imposed restrictions on imported goods. The United States Steel Corporation was formed in 1901 out of 138 different companies, immediately controlling 60 per cent of the new market. Standard Oil had 90 per cent of the USA’s refining capacity. Bell Telephone enjoyed a total telecoms monopoly until the mid-1890s, and regained it in 1909 when JP Morgan teamed up with Vail to buy up the competition. In Germany, where price-fixings cartels were politically encouraged and legally registered, their number more than doubled between 1901 and 1911. Just one of these cartels, the Rhine-Westphalia Coal Syndicate, involved sixty-seven companies, had the power to set 1400 different prices and controlled 95 per cent of the region’s energy market. This was a system where supply and demand did not set prices: millionaires did. By 1915, two industrial giants dominated the German electrical sector; the chemical, mining and shipping industries likewise each had just two dominant players. In Japan the whole economy was dominated by six zaibatsu, conglomerates that had begun as trading companies but evolved into industrial empires, vertically integrated around mining, steel, shipping and weapons with a powerful banking operation at the centre. By 1909, for example, Mitsui produced at least 60 per cent of Japan’s electrical engineering output.
To create these massive companies, finance was organised in a new way. In the USA, Britain and France, the stock market and investment banks drove the process. In 1890 there were ten industrial companies quoted on Wall Street; by 1897 more than 200. In Japan and Germany, where industrial capitalism had been created ‘from above’ [due to the necessity to catch up with Britain] under authoritarian governments, finance was mobilised not so much through the stock market but via the banks, and even the state itself. (Russia, a late comer, would adopt a hybrid model, with much of its industry foreign-owned)’.
This is how Michael Hudson describes the German model: ‘The most productive industrial financing practice emerged on the European continent, especially in Germany where banking developed the closest linkages with the government and heavy industry. The relative absence of large fortunes made a virtue of necessity. Germany’s lag in industrial development obliged its banks and government agencies to take a long-term view based on building up strength over time. Rather than following British and Dutch banks by making straight interest-bearing loans (against collateral already in place), the Reichsbank and other large banks engaged in a broad range of activities (‘mixed banking’), including equity cross-holdings with their major customers’.
Paul Mason: ‘The Anglo-Saxon model and the German-Japanese model, therefore, looked very different, and that would provoke a hundred year-long debate over which was best. The debate is complicated by the fact that the US model evolved after 1911, away from outright monopolies towards a system of regulated competition between big industrial firms, with the real monopoly power concentrated on Wall Street and the newly created central bank, the Fed. But within each model lay a variant of the same basic idea: finance took a controlling stake in industry, carving out monopoly positions where possible, suppressing market forces – and the state was directly allied to the whole project. The market had, in short, become organised. Now it had to be protected’.
To clarify the differences between the two models:
It has to be noted that whether it is Wall Street to create monopoly capitalism, or an alliance between the state and national banks, it is an important distinction. This is because in the Anglo-Saxon countries finance tended to be in the hands of an exogenous, transnational elite, whereas in the other countries the financial system – both private and public banks – was an expression of ‘national’ interests, and the whole arrangement saw heavy state involvement in what Michael Hudson calls a ‘tripartite alliance’ between the state, national banks and national industry, for the purpose of ‘building up industrial strength, in absence of great accumulated fortunes’.
This means that while the external structure of the two capitalisms (the Anglo-Saxon vs the ‘German’ model) is similar, the strategic direction is very different. They are both concentrated forms of capitalism – in the commanding heights of the economy the lone entrepreneurs studied by Karl Marx competing against each other in an ‘anarchic’ setting, have been replaced by big corporations operating in ‘controlled’ national spaces. The distinction is in the strategic direction: the national economic spaces are managed either by high finance/Wall Street or by what Michael Hudson calls the ‘tripartite alliance’ of national interests, headed by the national governments.
The strategic direction (either by a transnational financial elite or by national interests) is important in order to understand future developments, and the role of transnational finance in influencing world events in the run up to WWI and WWII, but for our purposes at this stage – understanding the mutation from ‘anarchic’ into ‘monopoly’ capitalism (also called ‘state capitalism’ because the state assumes an central role in the economy) – we can forgive Paul Mason for highlighting the similarity of the two models, rather than their differences. Therefore, ignoring for the moment these distinctions, we can say that at this stage the competition has been suppressed within each nation-state with the creation of monopolies/oligopolies, and has increased between the various nation-states, with countries fiercely competing against each other also in terms of colonial expansion during what has been called the ‘Age of Imperialism’. At this stage in history big enterprises operating in key advanced sectors as well as the national economies as a whole, become an important part of a higher strategic game that nations play against each other, in search for world hegemony.
Paul Mason: ‘Alongside the scramble for colonies, the great powers threw up numerous tariffs on external trade. [This is mainly because countries were engaging in technological catch up and needed to protect their ‘infant industries’]. By 1913 most industrial countries were protecting their domestic industries with double-digit import taxes on manufacturing goods.
Ha-Joon Chang: ‘The US became even more protectionist than before following the conclusion of the Civil War in 1865. Most Western European countries that had signed Free Trade agreements in the 1860s and in the 1870s did not renew them and significantly increased tariffs after their expiry (they usually had a 20 year lifetime). This was partly to protect agriculture, which was struggling with new cheap imports from the New World (especially the US and Argentina) and Eastern Europe (Russia and Ukraine) but also to protect and promote the new heavy and chemical industries. Germany and Sweden were the best examples of the ‘new protectionism’ – famously called the ‘marriage of iron and rye’ in Germany. [Ha Joon Chang – ‘Economics: the User’s Guide’]
Paul Mason: ‘The emergence of this new mutated system was not crisis-free, but if we take the whole period from around 1895 through to the First World War, progress outweighed crisis: the US economy doubled in size in the decade to 1910, while Canada trebled. In Europe, Italy’s economy grew by one third in these ten years and Germany’s by a quarter. This was the upswing of the third Kondratieff wave. This was the belle époque or the Progressive Era – a time of rapid growth, liberalization and cultural uplift – the world prospered not through the market but by the controlled suppression of it. [And also by the competition between states, as the desire to take the hegemonic space that Britain was no longer able to control, stimulated state expenditures in military technology and more generally in R&D].
Understanding monopoly capitalism as an adaptation to avert the falling-rate-of-profit crisis – ‘The Marxists, with some exceptions (such as the Austrian economist Hilferding), were unable to understand the meaning of this mutation. An interesting aspect of it, was that in the new structure many of the permanent features looked exactly like those ‘tricks’ Marx had listed as countertendencies to the falling profit rate:
- the export of capital,
- the export, via migration, of white-colonial settlements abroad,
- the pooling of profits via the stock market,
- the move away from entrepreneurship into rentier-style investing. The finance system (which in the previous century had functioned as a puny redistribution centre for business profit and an unreliable source of capital) now dominated and controlled the business world.’
[there is a subtle difference here, however, between the typical ‘rentier’ who invested in Wall Street to get a return on their money without having to get involved in production, and the very big players (the transnational elite) who had been strategically concentrating ownership of the most important enterprises and banks in their hands, and used this concentration of economic power to pursue their strategic aims, acting as a ‘state within the state’. Therefore, we can talk about ‘rentier style’ investing only for the small and medium investors, not for the very top ones.]
Aside from these considerations, and going back to the general picture, what had happened was that the counter-tendencies to crisis had become synthesized into a new, more stable version of capitalism (we could say capitalism 2.0). ‘Hilferding’s book, ‘Finance Capital’ (1910), which was massively influential for the left, was among the first to dismiss the expectation of snowballing crisis so dear to the Marxists. The book argued that the new structure of capitalism could suppress cyclical crisis. Big firms and big banks could survive for long periods on low or zero profits. And investors would rather accept prolonged stagnation than see a sudden crisis destroy firms like Siemens, Bell or Mitsui [Even more so the ‘strategic’ investors at the top, the transantional elite, who would be able to finance the companies owned by them for a very long time and weather any storm….and also provoke them….]. As a result, according to Hilferding, crisis periods under ‘finance capitalism’ [= ‘monopoly capitalism’ directed either by Wall Street finance or state finance – depending on the country] would be long and stagnant rather than sharp and traumatic. Banks would suppress speculation because they understood its destructive power. Cartels would suppress the operation of market forces – and therefore crisis – for major firms, dumping the losses on less powerful sectors of the economy. Small firms would bear the brunt of any recessions, hastening their acquisition by monopolies.
So far we have looked at how ‘anarchic’ capitalism mutates into ‘monopoly’ capitalism as a result of having to overcome the problem of the falling profit rate (itself caused by the fact that labour saving technologies over time had become very complex and expensive) – now we will briefly mention other important changes that came about to avert other potentially catastrophic crises, starting with the next big contender: the under-consumption crisis. (we are still using mainly Paul Mason’s narrative)
Averting underconsumption crises – capitalism creates new markets & business models – ‘In 1913 Rosa Luxemburg with her book ‘The Accumulation of Capital’ produced the first modern theory of under-consumption, making the case that capitalism is forever beset by the problem of too little spending power among the workers. So it is forced to open up colonies, not just as sources of raw materials, but as markets. (The military expenditures incurred in the process have the added benefit of soaking up excess capital). Capitalism, she concluded, is the first mode of economy which is unable to exist by itself, which needs other economic systems as a medium and soil. Although it strives to become universal, it must break down, because it is incapable of becoming a universal form of production. At the time activists felt that monopoly, finance and colonialism were storing up an almighty catastrophe. By the 1920s under-consumption [exacerbated by the austerity policies implemented after WWI to repay the war debts] became the Marxists’ main theory of crisis and provided its common ground for Keynesian economics for the next fifty years.’
‘Luxemburg remains relevant because she identified something critical: the importance of an outside world for systems that successfully adapt. If we ignore the rest [the fact that she overestimated the probability of an under-consumption crisis spinning out of control] and concentrate on the fact that capitalism is an open system then we are nearer to understanding its adaptive nature (Marx had modelled it as a closed one). Throughout its entire history and as part of its essence, capitalism must interact with an outside world that is not capitalist.
- Once the immediate outside world is transformed [enclosure of the commons], indigenous societies annihilated, peasants cleared from the land
- it has to find new places to repeat the process. But Luxemburg was wrong to limit this to the race for the possession of colonies.
- New markets can also be created at home, not just by boosting the workers’ spending power (Fordism), [= introduction of the assembly line, mass production leading to mass consumption]
- but by transforming non-market activities into market ones.
It is curious that Luxemburg missed this, for just such a transformation was going on all around her. Even as she was working on her book, leisure, the ultimate non-market activity in the nineteenth century, was becoming commercialised. The spectacular upswing of the third long wave (1896-1945) was unfolding, above all, as the expansion of a new consumer market among the lower-middle class and skilled workers. Luxemburg had ignored the fact that new markets are formed in a complex way, interactively, and that they can be created not only in colonies but within national economies, local sectors, people’s homes and indeed inside their brains. The real question is not ‘what happens when the whole world is industrialised?’ but ‘what happens if capitalism runs out of ways to interact with an outside world?’ ‘what happens if it cannot create new markets within the existing economy?’’
The answer is that, while in the longer term capitalism constantly endeavours to create new markets, in the shorter term instability can and does occur. The only remedy against this inherent instability is the institution of permanent stabilisers: the welfare state and counter-cyclical demand management (also known as Keynesian economics); that is, monetary and fiscal policy to stabilise aggregate demand, indispensable to avoid potentially dangerous crises. But this happened a little later, although some of these measures had been pioneered already at the end of the nineteenth century:
Ha-Joon Chang: ‘With increasing socialist agitation and reformist pressures, a raft of welfare and labour legislations were implemented from the 1870s: industrial accident insurance, health insurance, old age pensions and unemployment insurance. Many countries also banned the employment of younger children and restricted the working hours of older children and women. [‘Economics: the User’s guide’]
Summing up what we have learned about crises – So far we have seen: a) how the mutation (the advent of monopoly capitalism) takes care of the falling-rate of profit crisis; b) we can assume that this mutation, resulting in considerable vertical integration, is also a remedy for the inefficient flow of capital between sectors, that is, the imbalances between the production and consumption-oriented sectors of the economy; c) we have also seen how the creation of new markets and, later on, the advent of Keynesian economics, take care of the under-consumption crisis; d) therefore, the other major crisis left is the financial crisis. In reality this crisis comes in two versions. One, more prevalent in the nineteenth century, is the ‘genuine’ type, resulting from miscalculation and also abuse, but not intentionally caused; while the other, very frequent at the beginning of the twentieth century (and frequent again more recently under neoliberalism) is the – in all likelihood – ‘intentional’ one, planned and provoked by the financial elite to achieve its ever-present objective of concentrating economic power (of course we don’t have the proof that these crises are orchestrated but there is ample circumstantial evidence). The typical nineteenth century crisis was the result of having a monetary system that was still ‘primitive’. The Gold Standard was a straight-jacket for the expansion of capitalism, because it did not allow the creation of money in sufficient amounts to expand production in step with the expanded possibilities that ever improved technologies started to enable. Throughout the nineteenth century banks had been doing the recycling of accumulated capital into the economy as new investments, but additional money was needed to finance expansion, and this money was created by the banks as credit. This was a disorderly activity, as banks were not regulated, and it caused frequent crises and bankruptcies of banks – hence the reform was introduced in England in 1844 to use the central bank as banker of last resort (and thus bail out the system if necessary). After the mutation of capitalism in the late nineteenth century, ‘with larger companies came larger banks, and the risk was then heightened that the failure of one bank could destabilise the whole financial system [especially considering the great instability of the first part of the twentieth century, culminating with the 1929 crash], so central banks were set up to deal with such problems by acting as the lenders of last resort, following the model of the Bank of England in 1844.’ [Economics: the User’s Guide]. (Later on the Glass Steagal Act – separating commercial banks from investment banks – along with a raft of other ‘regulatory’ measures was also introduced to eliminate the problem of financial instability at the root).
The above changes are partial remedies to the four types of crises listed before – more of these remedies will be developed later on, as we will see.
Summing up the changes occurred during the third cycle (1890-1945)
Therefore we can say that the third Kondratieff cycle saw capitalism mutate in many aspects: a) technology – a raft of radical innovations (called the Second Industrial Revolution) comes to fruition, as a result of the emergence of a new technological innovation paradigm: no longer the lone entrepreneur tinkering in his workshop but the big corporation using applied science, supported by state spending on basic research and infrastructure; b) suppression of market competition both within the national borders with the creation of state monopoly capitalism and outside the national borders with protectionism; c) creation of new markets ‘inside’ the national economy, by adopting mass production and the Fordist business model; d) Keynesian economics – theorised in the 30’s, introduced with the New Deal, and fully institutionalised after 1945: adopting ‘counter cyclical demand management’ and state management of the economy as a permanent feature of capitalism. This Keynesian paradigm will be fully implemented only in the next cycle (after WWII), but we already have the first welfare measures pioneered mainly in Germany at the turn of the century and more of them will be introduced in the 1930’s, in the USA, as part of what became known as the ‘New Deal’ but also similar legislation was introduced in other countries, including by authoritarian regimes.
Having looked at the third Kondratieff cycle in detail and having gained a good insight on how capitalism underwent a dramatic change in that span of time (1890-1945) – now we can go back to the whole theory of these techno-economic cycles to answer the question of what causes them.
Causation of the Kondratieff cycles – the concept of mutation
Paul Mason: ‘The fundamental problem remains: to understand the fate of capitalism and its major mutations, Marxian crisis theory is not enough. There is, as Marx suggested, a process whereby labour is expelled by machinery; the result is a tendency for the profit-rate to fall. There is an equal tendency for falling profits to be offset by adaptation (the counteracting tendencies) and a cyclical crisis is what happens when these adaptations break down. But Kondratieff shows us how at a certain point – when crises become frequent, deep and chaotic – a more structural adaptation is triggered. The moment of mutation is fundamentally economic [not just technological]. It is the exhaustion of an entire structure – of business models, skill-sets, markets, currencies, technologies – and its rapid replacement by a new one. These mutations need to be understood as likely and regular events. Crisis theory cannot contain the whole phenomenon of structural mutation, but it can describe what causes it in each specific case’.
‘Therefore, [in order to understand the evolution of capitalism], modern crisis theory cannot be abstract, it needs to take into account the state as an economic force, organized labour, monopolies, currencies or central banks. The determination to trace crises in general to one abstract cause, ignoring the structural mutation that was actually going on, was the original source of confusion in Marxist theory. This time around we must avoid it and our account must be concrete, it must include the real structures of capitalism: states, corporations, welfare systems, financial markets’.
This concept of the ‘entire structure’ mentioned above (business models, skill sets, markets, currencies, technologies etc.) is roughly similar to the concept of economic paradigm developed so far in this blog (the main difference being the emphasis on technological innovation): in these cycles described by PM we see a roll out of new technologies which changes the physical environment, and along with it business models, skill-sets, markets, currencies, and also, progressively, more complex legal/institutional arrangements take shape – all these aspects taken together make up a techno/economic paradigm, or Kondratieff cycle. Back in the nineteenth century these paradigms were much less organised and formalised, much less institutionalised. And they had more loopholes – no man’s lands, un-regulated, unorganised activities left pretty much to the initiative and improvisation of the operators (and prone to break down and crisis). Over time the system has become more complex and the paradigms as well have become more refined, all-encompassing and recognisable as a coherent whole. Having said this, I would like to emphasise the fact that not all cycles are alike: if it is true that each cycle represents a small mutation (and that the system avoids snowballing crises and collapse via incremental mutations) the changes that took place during the third cycle were a lot more fundamental, giving rise to a full blown mutation, in which the system underwent radical transformation, indispensable for its very survival. This happened over a period of time marked by extensive economic, financial, political and geopolitical turmoil and ending with hegemonic transition. Therefore we need to understand that the system mutates over time by shifting from one paradigm to the other, and that at a given point in time (during the third cycle) the mutation that took place was much more fundamental, giving capitalism its modern form, but this doesn’t undermine the general pattern. At this stage we are concerned with the general pattern of the Kondratieff cycles, in order to understand what causes what.
Having highlighted that the whole paradigm must be considered, and not just the technological aspect, Paul Mason now draws an outline of how these cycles actually take place and what could be their causal factors. First of all he outlines the hypotheses of other analysts, starting with Kondratieff himself, who thought that excess capital accumulation that needs somehow to be invested was the trigger for all the other adaptations, then Schumpeter who thought that the creativity of entrepreneurs inventing new technologies was the trigger, and then Carlota Perez, a Schumpeterian economist who has refined Schumpeter’s theory and highlighted the role of the state as the organiser of each new paradigm with the creation of new laws and institutions. Paul Mason further refines this model by drawing attention to the role of class struggle (to be more precise the lower class struggle, the one between workers and their industrial bosses). For Paul Mason the main trigger is class struggle, that forces technological innovation and with it a series of changes on how to do business; then change brings about instability, until state intervention systematises the new ways and makes them mutually compatible, thus creating a new paradigm. This is the full explanation according to Paul Mason: when an existing paradigm exhausts its possibilities to produce profits, investment in production slows down, resulting is an over-accumulation of capital that needs to find profitable investment but cannot do so, as profit rates are too low; we thus enter the downswing of the cycle, with a tendency for the capitalists to adapt ‘on the cheap’ by cutting down on wages (race to the bottom), and a tendency from the part of the workers to resist this attempt; the resistance of the workers constitutes the main turning point according to Paul Mason, as it forces the capitalists to adapt by improving technologies (race to the top). New technologies are thus deployed and with them new business models, new skill sets, new ways of doing things take hold, creating disruption; then eventually state intervention re-adjusts the system by adopting new laws and creating more suitable institutions, and a new paradigm takes shape. This sequence of events, according to PM, is at the root of the generation of a new cycle. This is the abstract model of a normal wave, according to Paul Mason:
- the start of a wave is usually preceded by the build-up of capital in the finance system, which stimulates the search for new markets and triggers the rollout of clusters of new technologies. There is political turmoil and then the world market stabilises around a new set of rules and arrangements.
- Once everything (technologies, business models and market structures) begins to work in synergy forming a new technological paradigm capital rushes into the productive sector, fuelling a golden age of above-average growth with few recessions. Since profit is everywhere it can be redistributed downwards, it feels like an era of ‘collaborative competition’
- The tendency to replace labour with machines operates, but in the upswing any fall in the profit rate is counterbalanced by the expanded scale of production, so the overall profits rise. The economy has no trouble absorbing new workers into the workforce even as productivity increases.
- When the golden age stalls (maybe because of over investment, inflation or war) there is a break point with uncertainty over future business models, currency arrangements and global stability
- Now the first adaptation begins with an attack on wages and an attempt to de-skill the workforce. (Redistribution projects such as the welfare state come under pressure. Business models evolve rapidly and the state is urged to organise more rapid change.) Recessions become more frequent.
- If the initial attempt to adapt fails, as it did in the 1830s, 1870s and 1920s capital retreats from production and into finance. Prices fall, panic, depression – a search begins for more radical technologies, business models and new supplies of money. Global power structures become unstable.
At this point, Paul Mason suggests, we need to factor in the concept of ‘agents’: social groups pursuing their own interests. Each ‘failed adaptation’ phase happens because of working-class resistance; each successful one is organised by the state. This is his description of the actual cycles, taking into account the actions of the agents (state and working class) as they actually occurred in history.
1st wave (1790-1848 – Britain – factory system & canals)
downswing —> adaptation on the cheap —> workers’ resistance —>
‘During the first long wave in Britain you have an industrial economy trapped within an aristocratic state. A prolonged crisis begins in the late 1820’s and factory owners are determined to survive by de-skilling the workforce and cutting wages. There is also chaos in the banking system. Working class resistance (the Chartist movement, the General Strike of 1842 ) forces the state to intervene to stabilise the economy:
—-> state-led adaptation—->
In the 1840s a successful adaptation takes place: the Bank of England gains monopoly over the issue of banknotes; factory legislation forbids replacing skilled male workers with women and children. The Corn laws are abolished. [this allows the import of cheaper food, helping to keep wages low and British industry competitive] Income tax is levied and the British state finally begins as a machine for the ruling industrial capitalists (and no longer a battleground between them and the aristocracy).
—-> roll out of new technologies and new wave follows.
2nd wave (1848-1890-Britain, Western Europe, North America, later also Russia and Japan – railways, telegraph, steam ships)
downswing —> adaptation on the cheap —> workers’ resistance (but also rival countries’ resistance)—>
The downswing begins in 1873. The system tries to adapt through the creation of monopolies, with agrarian reform, an attack on skilled wages, and by pulling in new migrant workers where possible as cheap labour. Countries move on to the Gold standard , [but the stronger ones] form currency blocks and impose trade tariff measures [to protect their infant industries from British competition]. But sporadic instability still plagues growth. The 1880s see the first mass workers movements. Though the movements themselves are often defeated, skilled workers succeed spectacularly in resisting automation, while unskilled workers benefit from the beginnings of a social welfare system.
—-> state-led adaptation (taking place at the beginning of the next cycle)
Only in the 1890s when monopolies become fused with banks or backed by a liquid financial market does a strategic change take place. A cluster of radically new technologies is deployed and – as in the 1840s – there is a step change in the economic role of the state. The state – (whether in Berlin, Tokyo or Washington) becomes indispensable to maintaining optimum conditions for big monopoly companies through tariffs, empire expansion and infrastructure building. (once more, it is workers resistance that prevents the system from adapting on the cheap, without technological innovation)
3rd wave (1890-1945 –Second Industrial ‘Revolution, heavy industry, paved roads etc)
downswing —> adaptation on the cheap —> workers’ resistance —>
1917-21 is the start of the downswing – the system adapts by tightening state control of industry, and by trying to revive the Gold Standard. In most countries there is an attack on wages during the 1920’s but they do not fall fast enough to solve the crisis.
—> state-led adaptation
Then, once the Great Depression begins, fear of social unrest pushes each major country to pursue a competitive exit route: destroying the Gold Standard, creating closed trading blocks, using state spending to boost growth and reduce unemployment. [WWII follows, and then only when the war is over a raft of new technologies is introduced, giving rise to the fourth cycle]
Paul Mason continues: ‘In each long cycle, the attack on wages and working conditions at the start of the downswing is one of the clearest features of the pattern. It sparks the class warfare of the 1830s, the unionization drives of the 1880s and 90s, the social strife of the 1920s. The outcome is critical: if the working class resists the attack, the system is forced into a more fundamental mutation, allowing a new paradigm to emerge. The role of the sate in creating the new paradigm is equally clear’. Here Paul Mason outlines a crescendo in the intensity of state intervention:
- In the 1840s the Currency School imposes sound money on British capitalism by insisting that the Bank of England has a monopoly on issuing the notes.
- In the 1880s and 90s there is the rise of state intervention.
- In the 1930s it is outright state capitalism and fascism’.
Only when capital fails to drive down wages and new business models are swamped by poor conditions is the state forced to act: to formalize new systems, reward new technologies, provide capital and protection for innovators. If the working class is able to resist wage cuts and attacks on the welfare system, the innovators are forced to search for new technologies and business models that can restore dynamism on the basis of higher wages, through innovation and higher productivity, not exploitation. In the first three cycles working class resistance was successful in forcing capitalism to reinvent itself on the basis of existing or higher consumption levels (although the flip side was more brutal exploitation in the periphery). Once you factor in class, wages and welfare states, working class resistance can be technologically progressive; it forces the new paradigm to emerge on a higher plane of productivity and consumption. It forces the new men and women of the next era to promise and find ways of delivering a form of capitalism that is more productive and which can raise real wages’.
‘Marx’s theory effectively describes where the energy that creates the fifty-year wave comes from. The falling rate of profit and its counteracting tendencies can be assumed to operate throughout the fifty-year cycle. Breakdowns happen when the counter-tendencies become exhausted. In the immature capitalism of the nineteenth century they were frequent – but always more frequent in the decline phase. However, the falling profit rate now operates beneath layer upon layer of social practice designed to counteract it. The ‘counteracting factors’ have been made into a permanent feature of capitalism, in many cases they have been institutionalised. Kondratieff’s account, which said that the cycles were driven by the need to renew major infrastructure was far too simplistic. Better to say that each wave generates a specific and concrete solution to falling profit rates during the upswing, a set of business models, skills and technologies – and that the downswing starts when this solution becomes exhausted or disrupted. The tendency of the rate of profit to fall, interacting constantly with the counter-tendencies, is a much better explanation of what drives the fifty-year cycle than the one Kondratieff gave. Put simply: fifty-year cycles are the long-term rhythm of the profit system. An arrangement that allows for the rapid replacement of labour by machinery works for a while, generating expanded profits, and then breaks down. Also we need to emphasise the importance of the need for capitalism to interact with a world outside to search for new markets for goods and a new labour supply. During the nineteenth century there was a ready internal market waiting to be developed within capitalist countries, provided that the agrarian economy could survive the shock of disruption. Likewise, an ample labour supply was on hand. But after 1848 adaptation also involved the search for external markets. By the start of the twentieth century, the internal supply of labour was constrained – in part by the working class resistance to child and female labour, in part by the birth rate. As for new markets, by the 1930s virtually the whole world was cordoned off into closed trading blocs’.
Then Paul Mason introduces his explanation of why the fourth wave ended up generating a dysfunctional situation (the one we have inherited):
‘With the fourth wave, (1945-2008) a substantial part of the world outside is initially closed off. Once the Cold War begins, about 20 per cent of the world’s GDP is being produced outside the market. After 1989 the sudden availability of new markets and a new labour force plays and important part in prolonging the wave; so does the West’s new freedom of action to shape markets in neutral countries that were formerly off-limits: new labour, new markets, entrepreneurial freedom, and new economies of scale – this is part of the reason of the disruption of the fourth wave. Its cycle was prolonged, distorted and ultimately broken by the defeat and moral surrender of organized labour, the rise of information technology and the discovery that an unchallenged superpower can create money out of nothing for a long time. ‘
However, this is not relevant yet, as we need to further examine the first three waves before we can get to the two most recent ones. We need to expand and clarify the information provided by Paul Mason. First of all I would start by introducing the hegemonic race into the picture, and instead of talking generically about the adaptations, I would distinguish between the adaptations produced by the hegemonic power and those produced by its rivals. The first two cycles are under British hegemony with Britain ahead of other countries for what concerns capitalist development, so the adaptations concern mainly Britain.
1st wave – (1790-1848 – Britain – factory system & canals)
‘During the first long wave in Britain you have an industrial economy trapped within an aristocratic state. A prolonged crisis begins in the late 1820’s and factory owners are determined to survive by de-skilling the workforce and cutting wages. There is also chaos in the banking system. Working class resistance (the Chartist movement, the General Strike of 1842 ) forces the state to intervene to stabilise the economy:
Now we need to add a bit more background to this brief description. We are in the ‘infancy’ of industrial capitalism, the ‘anarchic’ phase studied by Karl Marx. Or, as the supporters of ‘laissez faire’ capitalism call it, the ‘liberal’ phase (=free trade/free market) of capitalism. This mythical and idealised form of capitalism is perennially evoked by the supporters of free enterprise, but in reality it was never quite as it is depicted, nor could this ever have been so. At this time Britain has a huge empire, and is not particularly liberal for what concerns international trade – it will only switch to free trade in 1860. Britain has protectionist laws (i.e. the Corn Laws), forbids its colonies to grow an industry, and even goes as far as destroying their existing ones, as it did with the Indian textile industry – in addition, it can count on the colonies to absorb many of the costs and to act as buffers for the disruptions and crises generated by its nascent capitalist system. Another factor to consider is that at this stage there is still ample margin to reinvest the profits and grow the capitalist economy in the mainland, so even if the system is rather anarchic and there is no state intervention to stabilise the economy, it can still work out, it has shock absorbers both inside and outside the national economy. The ‘laissez faire’ or free market policies are mainly applied for what concerns the domestic economy and they consist of: allowing maximum freedom for business, pursuit of the balanced budget (that is, the government is allowed to spend only as much as it collects in taxes – there is no countercyclical spending) and the adoption of the Gold Standard – these were the key ingredients. The pursuit of balanced budgets and the adoption of the Gold Standard mean that the modern concept of fiscal, monetary and exchange rate policy does not exist yet. However, as there is an empire and ample room for growth this arrangement more or less works out, just about, as there were indeed quite a lot of crises in the 19th century. One of the main problems had to do with money creation. The money supply is constrained by the Gold Standard, but banks are free to create money in the form of bank notes, and also to extend credit, this helps economic growth but also results in frequent crises and bankruptcies. Hence the necessity to establish a monopoly for the Bank of England, to avoid monetary chaos. Even with all of these factors (empire, room for expansion etc.) allowing ample room for a free market system to expand and avoid breakdown, the government needs to intervene to smooth out the capitalist machine (factory legislation, repeal of the Corn Laws, income taxes).
—> state-led adaptation
In the 1840s a successful adaptation takes place: the Bank of England gains monopoly over the issue of banknotes; factory legislation forbids replacing skilled male workers with women and children. The Corn laws are abolished. [this allows the import of cheaper food, helping to keep wages low and British industry competitive] Income tax is levied and the British state finally begins as a machine for the ruling industrial capitalists (no longer a battleground between them and the artistocracy).
This adaptation is successful and ushers in the second wave (1848-1890), with a cluster of new technologies, railways, steam ships, the telegraph.
Second wave (1848-1890)
The downswing begins in 1873. The system tries to adapt [on the cheap] through the creation of monopolies, with agrarian reform, an attack on skilled wages, and by pulling in new migrant workers where possible as cheap labour. Countries move on to the Gold standard , [but the stronger ones form currency blocks and impose trade tariff measures to protect their infant industries from British competition – this is an adaptation by the rivals]. But sporadic instability still plagues growth. The 1880s see the first mass workers movements. Though the movements themselves are often defeated, skilled workers succeed spectacularly in resisting automation, while unskilled workers benefit from the beginnings of a social welfare system.
It is only during this second wave that Britain adopts free trade (1860), as it has nothing to fear and everything to gain, having by far the most competitive industry in the world. Free trade combined with the Gold Standard constitutes a problem as, by not allowing currency devaluation, it forces deficit countries/enterprises into deflation, bankruptcy and sale of assets. It also keeps wages down even in the exporting nation, in order to keep its industry competitive and because, once deflation takes hold, it can spiral out of control. So we can see that this ‘liberal’ economic set up by its very nature triggers adaptations ‘on the cheap’ (monopolies, attack on skilled wages etc.), as well as the reaction of the workers, and also the reaction of other Western countries that protect their infant industries with currency blocks and tariff measures. So I would say that it is not just the reaction of the workers that eventually leads to technological innovation but also the reaction of the competitor countries intent on bridging the technological gap by means of protectionism, investment in infrastructure and in growing their own industrial base. It seems to me clear that it is international competition (and not just class struggle) at the heart of the new technologies and of the new paradigm. Another aspect to highlight, which seems to support this hypothesis, is that the technological adaptation following the downswing of the second wave happens within the major rivals of Britain.
Third wave (1890-1945)
—> state-led adaptation (mainly Germany, Japan and the USA)
Only in the 1890s when monopolies become fused with banks or backed by a liquid financial market does a strategic change take place. A cluster of radically new technologies is deployed and – as in the 1840s – there is a step change in the economic role of the state. The state -(whether in Berlin, Tokyo or Washington) becomes indispensable to maintaining optimum conditions for big monopoly companies through tariffs, empire expansion and infrastructure building. (once more, it is workers resistance that prevents the system from adapting on the cheap, without technological innovation).
In the 1880s and 90s we witness the rise of state intervention. Paraphrasing PM we can say that at this point we have an advanced industrial economy trapped within a liberal state. Liberalism (gold standard, free trade, free markets, balanced government budget, free cross border capital movements etc.) is a straightjacket that impedes the system from functioning smoothly and makes it prone to crisis. From the point of view of Britain (except for the workers, obviously) this is fine, as it prevents potential competitors from protecting and developing their economies, but not from the point of view of its rivals of course. Therefore state intervention on the part of the rivals proceeds to dismantle the straightjacket of liberalism, and set up a system of rules that would allow capitalism to develop in a progressive way and avoid self-destruction: we see the creation of monopolies and the beginning of a few welfare measures, due to the necessity to keep the social peace and to recycle some wealth in order to prevent the economy from stalling. State intervention also refers to protectionism and the expenditures in R&D and infrastructure in order to build heavy industry and produce upgrades in military technology. The adaptation is successful and coincides with the radical innovations (known as the Second Industrial Revolution) that produce the upswing of the third wave (heavy industry, combustion engine, paved roads etc.)
Third wave (1890-1945) – downswing
1917-21 is the start of the downswing – the system adapts by tightening state control of industry, and by trying to revive the Gold Standard which had been suspended at the beginning of WWI. In most countries there is an attack on wages during the 1920’s but they do not fall fast enough to solve the crisis.
—> state-led adaptation
Then, once the Great Depression begins, fear of social unrest pushes each major country to pursue a competitive exit route: destroying the Gold Standard, creating closed trading blocks, using state spending to boost growth and reduce unemployment.
Paul Mason then notes that this exit route involves a drastic form of state intervention ‘outright state capitalism and fascism’/Nazism’. I would say that it includes also Communism in Russia which, very loosely speaking, can be considered another variant of state capitalism. Therefore we must highlight that there is a crescendo here. From the ad hoc reforms made by Britain in the 1840s to overcome the frequent crises occurring as the new system was starting to get into gear, to a much more extended and systematic ‘rise of state intervention’ in the 1890s, which led to a major mutation of capitalism, to finish off eventually, in the 1930’s with nothing less than a complete take over on the part of the state: state capitalism, fascism, Nazism. Not only this, let’s not forget that the third long wave sees the outbreak of the two most devastating wars the world has ever known: WWI and WWII and in between the Russian Revolution, the 1929 Financial Collapse and the Great Depression! This can by no means be considered an ordinary wave.
I think it was already a bit of a stretch to treat the rising phase of the third cycle, with its radical innovations, as any other adaptive phase, without considering the context of strong competition between countries for world hegemony and the fact that the technological advances were also due to the arms race in the run up to WWI. Obviously Paul Mason here is trying to stick to his model (mainly concerned with competition between businesses, workers’ struggles and state intervention in the economy) and not to introduce too many ‘exogenous’ factors otherwise it becomes impossible to highlight the patterns that he thinks are important. In my opinion, he also seems to have a bit of a bias towards over-estimating the importance of class struggle (workers’ resistance). Be that as it may, although it was a bit of a stretch to overlook international competition for what concerns the start of the third cycle, once we get to WWI and the ensuing events it’s impossible to understand anything without introducing both hegemonic struggle and also what I would call the ‘upper class struggle’, the one conducted by the transnational financial elite against everybody else – as opposed to the ‘lower’ class struggle, the one taking place between labour and industrial capital, the one Paul Mason (and all the Marxists) are concerned with. With these additional struggles the pattern will become messier, but if we keep in mind all three aspects – (a) the factors affecting the Kondratieff cycles as described so far – business competition, workers’ resistance and state intervention b) the hegemonic struggle to replace Britain, and c) the actions conducted by the transnational financial elite against the states and civil society – and try to keep them separate for the purpose of our analysis, while also understanding that they are inextricably interconnected, then we can make better sense of what took place in those turbulent years that completely changed the face of capitalism.
Historical digression to understand the ‘inter-war’ period (1918-1939)
HISTORICAL DIGRESSION – We have to reiterate the fact that the events that took place during the third Kondratieff cycle are very peculiar, and crucial to understand the evolution of capitalism. The cycle starts with the arms race between countries that spurs technological innovation. There is a strong drive towards concentration of capital as we have seen, which leads to state based monopoly capitalism. This is a major turning point: from now on the structure of capitalism will be mainly national, and this depends on technical factors, on the fact that technology has become complex enough and expensive enough that big enterprises and state intervention are needed in order to be able to handle the scale of operations necessary. So we have monopoly state capitalism, as described by PM which is now structural (good bye ‘anarchic’ capitalism based on the factory system, although the official representation of capitalism – in textbooks, in the public discourse etc. – has not been properly updated to take this major mutation into account), then we have the struggle between countries to replace British hegemony, and then we need to introduce also the next factor: the transnational financial elite has by now acquired enough power and control (by using its control over money creation and central banks, and its ability to cause/manipulate financial crises in order to acquire assets) that is able to act as a major (if increasingly hidden) player both within the dynamics of each state, and also influencing (and financing) the major events about to take place: war, revolution and regime change. It would be too complicated to trace all this, the main thing to understand is that this financial elite is a distinct class from industrial capitalists, although the Marxists never quite understood this and tended to conflate the two, but their dynamics are completely different. The typical industrial capitalist of the nineteenth century is the entrepreneur tinkering in his workshop. Some of these people obviously eventually make enough money to be able to play not just the production game (in Marxian terms, M C M’: money converted into commodity production which is then sold at a profit, to end up with more money) but also the financial game (M M’: money being increased directly by financial ‘alchemy’, without having to produce commodities in the real economy) and become rentiers (the top ones joining the small elite that actually acts as a major strategic unit). And this is the main point: along with the industrial class engaged in a visible struggle against the workers, and along with the financial rentiers of various sizes, there is this very important, very strategically minded top rentier class, the transnational financial elite (what we now call the One Percent) who had been accumulating money and power already from the times of merchant capitalism. These people were intent on buying up existing enterprises (rather than building and growing new ones) and concentrating wealth and power, and they were mostly active in the Anglo-Saxon countries, and also in France and the Netherlands (the older imperial countries). Rather than giving risky loans to industrial capitalists in order to help them grow their enterprises, they preferred to play up in the stock market and also use (and in some cases provoke?) financial crises in order to build up an economic empire, buying up existing businesses as well as real estate. (This was the phenomenon of the ‘robber barons’, as they came to be known in the United States). Over time this elite acquired so much power that in 1913 they were able to finally win a subterranean war that had been going on for the whole nineteenth century over the control of the US monetary system. After two failed attempts in the previous century, the transnational elite was finally able to impose on the country its own private central bank, the Federal Reserve. Shortly afterwards the Federal Reserve, also known as the Fed, was at the centre of a major drive to finance the US government in view of WWI and the main representatives of this elite also played a major role in determining the entrance of the US in WWI, which flipped its final outcome (against Germany). This is an extremely concise account, just to show that this strategic elite does exist, that it has a strategic centre not unlike nation-states do, and that it has been playing a major role in world events, especially once it gained control of some major centres of power in the US, such as the central bank, and eventually what came to be known as the ‘military industrial complex’. From this vantage point it was able to play a major (but largely covert) role in the transition of hegemonic power from Britain to the US. But let’s not move ahead of too fast. We are now at the start of WWI. So now we have monopoly state capitalism ultimately controlled – in the older colonial empires and the US – by the top financial elite and in the rival countries of more recent industrialisation by a combination of state power and national capitalists. One of the major consequences of WWI was the Russian Revolution. There is no doubt that it wouldn’t have happened without the huge toll of death, devastation and popular anger caused by the war, but also by the opportunities provided by it (availability of weapons, the Kaiser helping Lenin to return to Russia from his exile in Switzerland and also money provided by the infamous financial elite). After this event, another country joins the state capitalist club, with its own peculiar version. Whatever the revolutionaries might have wished to implement in the wake of the revolution, it was the structure of things (technology + interstate competition) to dictate the shape that post-revolutionary Russia eventually took. As the country’s industrial structure was very backward, a major industrialisation drive was initiated by the new government. This was another form of capitalism from above, and it cost the country huge sacrifices and a huge toll of death, but it can be argued that there was no choice, as any country that did not want to fall prey to the appetites of its neighbours (especially if rich of natural resources) needed to become a top level industrial power and very quickly, as the subsequent events very conclusively proved. Another major consequence of WWI were the huge war debts in most of Europe, and the reparations imposed on Germany which completely crippled its economy. The management of the post-war debt binge in a restrictive manner (i.e. with austerity measures), the attempt to cling on to the Gold Standard on the part of Britain (but also the US) maintaining the same parity with gold as before WWI, the war reparations imposed on Germany, all of this caused severe poverty and unnecessary suffering, and the obvious reaction was the widespread labour strife and attempted revolutions of the 1920’s. In addition, the financial crises of 1921 and 1929 (probably caused, at least in part, by the usual elite in its attempts to escalate the acquisition of assets and power) as well as the post-1929 Great Depression – all of this constitute what PM calls ‘adaptation on the cheap’. But obviously there is a lot more to it, such as wars, revolutions, hegemonic transition, and the bid for total control on the part of the transnational financial elite. Be that as it may, all of these events seemed to bring capitalism to collapse. However, by now there was enough knowledge of how to keep capitalism working, by means of state management. Therefore the solution went in the direction of reinforcing state power and state intervention in the economy, snatching back control from the financial speculators and from foreign powers imposing austerity via unsustainable peace treaties and gold based monetary systems. What Stalin, Hitler and Mussolini had in common is that they took firm control of financial and industrial dynamics within their states, as well as providing various forms of welfare. Repression of labour strife, technological catch up, arms race and a much needed measure of welfare were the main features of these authoritarian models. And war of course, but this was not just driven by Germany, it was still the old conflict for hegemonic transition which had not been resolved by WWI (it was Winston Churchill who famously said that WWI and WWII were in reality one big war, interrupted by a 25 year long truce). As these regimes were proving to be far from unsuccessful in managing their economies, liberal capitalism had to mount its own ‘in-house’ alternative model, promoted by the ‘progressive’ side of the liberal establishment. The New Deal and later the full Keynesian economic reform package is the ‘insider’ answer to preserve a) the capitalist system, b) liberal democracy, c) Anglo-Saxon rule and d) the influence (although much reduced by the Great Depression disaster) of the transnational elite behind the scenes. This progressive side of the liberal Anglo-Saxon establishment will proceed to win the war, and from then on the Keynesian paradigm will prevail in the West. The Keynesian revolution is another ‘adaptation’ of the system in order to avert crisis which will become a well structured and permanent feature of capitalism after WWII.
Therefore we can say that, at least starting from the third cycle (but probably this is true of the previous cycles as well) there is a lot more than economic dynamics (enterprises competing for profits by replacing workers with machines) driving technological innovation. The rivalry between states is definitely a potent force. In addition, we can also conclude that the serious instability presented by capitalism after WWI was driven not just by its inherent economic contradictions (downward pressure on wages resulting in a perennial tendency to overproduction crises), but also by the perennial attempt on the part of the transnational elite to gain power by driving other entities bankrupt. The crises provoked by this ‘upper class struggle’ (and not just by the ‘adaptations on the cheap’ theorised by PM) ended up producing the opposite effect: the elaboration of a complete package of financial repression measures, as well as Keynesian demand management, as permanent stabilisers.
To sum up the major changes that took place during the third cycle, eventually formalised in the post-WWII paradigm. The constraints of liberalism (free trade, free markets, Gold Standard) are abandoned, now capitalism becomes ‘fully’ managed – the system, which had become a) national and monopolistic at the turn of the century, now that we have reached the middle of the century it is about to formalise the necessary economic tools and institutions that will allow it to deal with crises and imbalances in an ongoing manner, preventing them from reaching breaking point; b) With Keynesian economics the straightjacket of the balanced budget is abandoned and the necessity for countercyclical governance becomes established. This is something that capitalism has to have regardless of the paradigm chosen, therefore it is a permanent adaptation, which will be preserved, in a twisted manner (what Varoufakis calls ‘the global Minoraur’) also during the neoliberal era; c) the Bretton Woods agreement also ushers in a new, this time formal international governance system, – partially throwing off the straightjacket of the Gold Standard by introducing a much looser connection to gold – and by establishing clear written rules, and supra-national institutions to manage the international monetary system. Although the currency union, which was one of the main aspects of the Bretton Woods governance system, will break down in 1971, the necessity to establish a ‘rule based system’ with its supranational institutions has remained as a permanent feature.
Therefore we can say, looking at the whole third Kondratieff cycle, that first came the technological changes of the Second Industrial Revolution, which created the necessity for state capitalism; then eventually after much turmoil the need for managing this new version of capitalism at the state level with countercyclical policies (as well as a full package of financial repression measures and the central banks acting as lenders of last resort) is established and formalised. Then after WWII there is a new addition with the Bretton Woods agreement: the introduction of a basic framework for the governance of the system at the international level as well. This new monetary system replaces the Gold standard, which had been an informal arrangement. Therefore we have full state management of the economy, and a more formalised and articulated international governance as well. Not only this: both at the national and at the international level, the need to actively and consciously promote economic growth (a vital necessity to avoid crises) is informally – but no less seriously – taken on board both by the individual states and by the new hegemonic power for the whole capitalist block. The promotion of technological innovation via state-led industrial policy, along with the expansion of the money supply play a big role in this new, growth aware, and fully managed version of capitalism. We could say that if the original ‘anarchic’ capitalism was the version 1.0, the new ‘state capitalism’ version that followed was 2.0. This version started to emerge at the end of the nineteenth century, but it took 55 years of wars, labour strife and financial turmoil to mature into a fully accomplished paradigm. We can say that the type of capitalism which emerged after WWII is a fully matured and ‘mutated’ version of capitalism, or what we could call ‘capitalism 2.0’.
Therefore, to draw some conclusions regarding what drives the Kondratieff cycles: we can say that a clear 50/55 year pattern does exist but, especially for what concerns the third cycle, there is more to it than simply a pattern of innovation (technological and institutional) driven by business competition, labour resistance and government intervention. There are also the hegemonic struggle and the upper class struggle that play a big role, along with the fact that over time technology changes the scale of the game and the size of the players that count, affecting the dynamics of the future paradigms, that is, becoming a major factor in the formation of the next paradigm. Regarding causation, I would refine a bit Paul Mason’s argument, and say that all the factors he considers in its model (capital accumulation, class struggle and government intervention, as well as technological innovation itself) along with the upper class struggle and the hegemonic struggle, – all act in a circular process of co-causation and co-evolution. Or, if we really want to keep a linear trajectory of cause and effect, we could say, in very broad terms: natural instinct for aggression drives business competition, class struggle (both upper and lower) and the international struggle —> in the economic arena: desire for accumulation & competition tend to drive wages down (=race to the bottom) —> leading to workers’ resistance, as well as to instability and tendency to collapse —> remedy: external expansion via imperialism & war, but also internal expansion via technological advances accompanied by institutional adjustments (=race to the top) leading to higher and higher paradigms (= defusing conflict by increasing the size of the economic pie) —> technological innovation drives complexity and ever larger scales of production & international division of labour —> resulting in the necessity to refine the instruments of governance and cooperation
Another way to sum up the fundamental pattern of how industrial capitalism evolves, closer to Paul Mason’s analysis: the inherent instability of the system (propensity to the four crises indicated by Marx) combined with its inherent adaptability (the ‘counteracting tendencies’) drive technological shifts and along with them the necessary institutional adaptations – these two (technological + institutional innovation) cause the system to mutate by shifting from one paradigm to another, each paradigm being more complex, refined and all inclusive, enabling better standards of living, defusing conflict and averting crisis. But also making the system more complex, expensive, and in need of ever larger and complex structures of governance.
By the time we reach the end of WWII and the beginning of the fourth cycle, the system has become much more complex and has taken on many more stabilisers, it has refined, embedded and institutionalised the stabilisers indicated by Marx to such an extent that it becomes difficult to theorise the system in an abstract manner. This is something that PM recognises, when he says:….’Modern crisis theory cannot be abstract, it needs to take into account the state (as an economic force) organized labour, monopolies, currencies or central banks. The determination to trace crises in general to one abstract cause, ignoring the structural mutation that was actually going on, was the original source of confusion in Marxist theory. This time around we must avoid it and our account must be concrete, it must include the real structures of capitalism: states, corporations, welfare systems, financial markets’
Before we move on to the next phase (the fourth and fifth cycles) we can sum up what we learned about crisis theory and how the system evolved in order to avoid collapse. These are so far the remedies devised to avert the various types of crises to which capitalism is naturally subject:
- Under-consumption crisis – due to the fact that competition between capitalists tends to drive wages down and therefore dampen aggregate demand. The remedies are: a) market expansion – finding/creating new internal markets or investing the excess capital in new territories – mainly colonies in the past, or controlled countries nowadays; b) Once the possibilities for geographical expansion become tight, then some form of demand management involving redistribution towards the bottom layers of society is necessary, this is why at some point it becomes a permanent feature. It is a countercyclical stabiliser to avoid collapse. d) another remedy is to restrict market competition, create monopolies and cartels to fix prices and avoid the race to the bottom, this allows firms to become bigger and able to survive for a long time without profits. e) another possibility is to put the excess capital into financial expansion – when the financial expansion gets out of step with the economy it can lead to the second form of crisis, financial crisis. (A variant of this is accepting lower returns in the financial markets as a rentier, rather than wanting entrepreneurial profits – this is less destabilising).
- Financial crisis – this type of crisis can be ‘managed’ the hard way, by expropriating the debtors and creating further instability (as ancient societies that instituted debt-jubilee arrangements well understood) or it can be resolved by creating a modern institution: the central bank as the lender of last resort (it has to be noted that this will unfortunately become a major instruments in the hands of the financial elite under neoliberalism) – it can also be prevented with financial repression measures and with the separation of retail banking from investment banking (Glass-Steagall Act).
- Inefficient flow of capital between sectors – this type of crisis was resolved with vertical integration, achieved by promoting the creation of bigger firms by mergers and acquisitions and with the start of ‘monopoly capitalism’.
- Falling rate of profit crisis, potentially leading to investment freeze, layoffs, and a possible collapse. The solution for this type of crisis is to shift to a higher technological paradigm, this creates a whole new world and it needs investment in various types of infrastructure and networks. Technological innovation increases productivity, makes possible mass production, and creates new industries as well as new internal markets. The shift to higher and higher technological paradigms necessitates ever larger investments, too large for individual entrepreneurs, hence states and large corporations become the major players. Technological innovation is thus the major engine driving the evolution and mutation of the system and also, by allowing higher standards of living, the major factor in obtaining the consent of the masses necessary for its perpetuation.
To conclude this part, we can definitely say that the system has a ‘vicious’ tendency towards a race to the bottom (market competition driving down wages and leading to over consumption crises) exacerbated by rigid forms of management such as liberalism and the Gold Standard (and later repeated by neoliberalism). The system also tends to produce many automatic stabilisers and has developed, as a result of market competition, international competition, class struggle and government intervention a tendency to avoid self destruction by shifting to higher and higher (more complex) combinations of technological and institutional paradigms. By the time we reach the fourth cycle the basic patterns are still there, but the system is now much more complex and advanced that it may not be useful any longer to make analyses and predictions on the basis of the dynamics of the Kondratieff cycles as described so far. Or maybe yes. We will have to proceed further in order to find out. But one thing is sure: in order to proceed with our analysis, we will need a lot more historical context and understanding of the concrete historical forms that capitalism has taken since the end of WWII. We need to analyse the complete sets of adaptive measures present at any given time (i.e., the whole paradigm), in order to understand what is actually taking place below the surface and to decide if the basic dynamics of the Kondratieff cycles are still in action, however modified by all the layers of economic and social management devised over time.
Therefore what I will do in the next two sub-sections of this chapter is to look more in depth at the two most recent cycles, of which we have already analysed the economic structure in Chapters 4 and 5, dedicated to the Keynesian and the Neoliberal paradigms. Now the time has come to complete the concept of economic paradigm with all the layers mentioned in the introduction. In Chapter 4 and 5 I have explained the economic aspects of the latest two paradigms, integrated with references to the political (class struggle) and geopolitical (international struggle) layers. Now it is time to put the whole picture together, by adding the technological layer, and examining in more depth the political and geopolitical layers. Eventually, once the picture is complete, we will be able to draw more definite conclusions regarding the Kondratieff cycles and, in the last sub-section dedicated to the Chinese projects, to venture some indications as to possible future developments.