The layers composing an economic paradigm
If you are reading this blog the chances are that you want to understand how our economic system works, and you want to do this because you believe that in many ways it will give you a very good insight on the mechanisms that drive our society and the world around us. Not an easy endeavour but, in a time of fast change, unsettling disruption, and utter confusion, an objective that for many people in all walks of life has become fairly important.
Unless you are a fan of the dismal science (and there are many such people…but they are by no means the majority) this is probably the reason why you want to understand economics, and possibly you want to do so without going through too many abstract models and complicated formulas. If this is the case, then you are in the right place. My approach is based on understanding economics via history (as opposed to via mathematics) and on highlighting its unavoidable interconnections with politics and geopolitics.
The central concept of this blog, that of ‘economic paradigm’, is the building block, I believe, to a correct understanding of how our economic system evolved over time: that is, through a succession of different economic paradigms. In turn, each paradigm is shaped to a large extent by the interconnections of economics with politics and geopolitics. This interrelation can appear daunting in its complexity but, if we look separately at the layers that form an economic paradigm, then it becomes easier to digest.
Before I get into explaining these layers, I need to emphasise that the method that I have used in this work to approach the complexity of the subject is not theoretical but practical: I have followed mainly a historical narrative. Therefore, you can just go along with the narrative and you will get a good insight into our economic system without worrying about the theory. However, for some people it may be useful to get an idea of the theoretical framework as well, and this I will explain in the next few paragraphs.
As stated above, I believe that the best way to understand economics (or, if you prefer, our capitalist economic system) is by looking at it as a succession of economic paradigms, and by further breaking down these paradigms into the layers that compose them.
An economic paradigm results from the interconnection of three major forces: world hegemonic arrangements, class conflict and cycles of technological innovation.
To be more specific, since the beginning of capitalism as a mode of accumulation in the 15th century, there have been four successive (and partly overlapping) hegemonic cycles. Here we are concerned with the last two cycles, those occurred since the beginning of the Industrial Revolution, which marked the transformation of capitalism into a mode of production. Basically we are concerned with the British and the American hegemonic cycles, and with the possible start of a new one as we speak, probably to be led by China. During the two latest hegemonic cycles we have seen three different economic paradigms: Liberal, Keynesian and Neo-liberal.
For what concerns the class struggle, I distinguish two types: a) the classical one, the one dear to Marxists and leftists of all denominations, which I call the ‘lower class struggle’. This struggle used to take place between workers and their bosses – mainly industrial capitalists – but has been fading in the last few decades; b) a much less known one that, on the contrary, is fast gaining attention, and which I call the ‘upper class struggle’. This struggle is waged by transnational financial capitalists (or the famous One Percent) against everybody else.
For what concerns the cycles of technological innovation (or Kondratieff cycles) which periodically change the physical landscape in which we live, scholars distinguish five such cycles since the beginning of the Industrial Revolution, each lasting around 50/55 years.
As time goes by our system (known to its enemies as capitalism and to its friends as ‘the modern economy’, or ‘the market economy’) tends to become increasingly complex and organised – despite claims that market forces are able to self regulate, via the mythical ‘invisible hand; thus as time goes by economic paradigms come to encompass ever more complex and expensive technologies, ever thicker layers of institutional and legal arrangements, both national and international (the so called ‘rule based system’), along with a host of more informal set-ups, of established ways of ‘doing things’ and of managing the ever present conflicts.
If this stratification can seem daunting, the good news is that you don’t need to go too deep into every single layer before you can start to understand how economic paradigms, and by extension our economic system, work. In the first chapter I will go through the succession of paradigms in the last two centuries (Liberal, Keynesian and Neoliberal) very briefly to give you an idea of what they are and how they relate to world hegemonic arrangements. In the same chapter there will be another section, 1b, in which the last two paradigms (Keynesian and Neoliberal) will be described more at length by summarising the book ‘The Global Minotaur’ written by Yanis Varoufakis. In Chapers 3 and 4 these latest two paradigms will be analysed more in depth for what concerns their economic aspects. Only later on will we start adding more layers (technology, class conflict) and go deeper into the past.
However, for those who want to gain a better understanding of the first layer, world hegemonic arrangements, I can recommend this very good book: ‘The Long Twentieth Century’ by Giovanni Arrighi (1994). It is rather long (although not difficult and certainly well worth the effort) but if you want to take a short cut you can read this article by the same author: ‘Capitalism and world (dis)order by G Arrighi and B Silver’ – Review of International Studies(2001) (link:http://eclectic.ss.uci.edu/~drwhite/pw/2001(Dis)Order.pdf)
From Arrighi’s work you will gain a basic understanding of the four hegemonic cycles so far occurred since the beginning of capitalism as a mode of accumulation (later evolved into a mode of production with the start of the Industrial Revolution).
The four cycles are:
Spanish/Genoese (15th & 16th centuries)
Dutch (17th & part of the 18th century)
British (end of 18th century & 19th century)
American (20th century)
Each cycle presents a clear recurring pattern and is composed of two phases: the initial rising phase featuring a major expansion of the real economy, and the later declining phase witnessing an expansion of the financial economy. From this reading you will also be able to understand an important underlying trend: that of geographical as well as functional expansion of the world capitalist economy from one cycle to the next, accompanied by an increase in its complexity; hence, the country able to expand and re-organise the system each time that it enters a major crisis, is the one that will become hegemonic in the next cycle (this has important implications for understanding our current phase of hegemonic transition).
Another interesting and useful aspect that you will understand from this book – and here we are dealing with the second layer composing an economic paradigm, and more precisely with the ‘upper class struggle’ – is the genesis of our current transnational financial elite, tracing its origins all the way back to the merchants of Medieval times and the transnational financial networks that they started building back in those times and have been expanding and refining ever since. Another basic concept that you will learn is the dialectical interconnection between these merchant capitalists, with their ‘profit based’ logic, and the states hosting them, with their ‘territorial’ logic, a dynamic that overshadows our current opposition between the financial economy and the real economy.
The subject of the financial elite and its financial networks leads us into another major aspect of our economic system: the international monetary system, possibly the most important institutional arrangement out of the many that compose an economic paradigm. A very real arrangement, that is never emphasised in the current economic discourse, and that doesn’t tend to be assessed for what it really is: a major – only in part ‘official’- institution emanating from the hegemonic country as well as the transnational financial elite and that both embodies and perpetuates the hegemonic arrangements existing at any given time in history. A book that has the merit of dealing explicitly with the international monetary system and its recent history (albeit without explaining its genesis or its power implications) is ‘The New Case for Gold’ by James Rickards (2016).
The above two books take care of developing a deeper historical understanding of the first layer of an economic paradigm and in part the second layer: world hegemony as exercised by specific countries at any given time, the financial elites acting as major influencers of state power and the international monetary system embodying this hegemony. There will be more information on the international monetary system, and also on its historical evolution in the last chapter, dedicated to Money and Currencies. This chapter is still under construction and only the first part has been completed. However, if you don’t fancy going too deep into history, these aspects will be dealt with at length, for what concerns their development since the end of WWII, in the next few chapters (2, 3 and 4). For what concerns the other two forces shaping economic paradigms, the lower class struggle as well will be dealt with in the next few chapters, while a proper analysis of the technological innovation cycles will take place in Chapter 7, dedicated to industry and technology.
Having said all this, I have to reiterate that this work is not based on a theoretical approach. It is based on a historical approach instead, and therefore the various concepts and layers will be seen in action (rather than explained in theory) as I develop a narrative of how the system evolved.
Now that we have a rough idea of the layers composing economic paradigms, we can go to Chapter 1, in which you will be able to understand what an economic paradigm is about, by seeing it in action with a brief economic history of how three different paradigms evolved in the course of the last 200 years; then there will be an assessment of future developments. In keeping with this practical/historical approach, the second chapter will be dedicated to the challenges coming to the current economic paradigm, and the possible implications for future developments.
Not unlike many fictional narratives, having started from a place that can attract interest (and not from the beginning) then the reader will slowly learn everything else by going back and forth into more recent and more distant events as the narrative unwinds.
Continue to Chapter 1 – Economic Paradigms