Every day, I read another economist, journalist, or government official opining on how best to achieve economic recovery in this country or that. Needless to say, the remedies all contradict each other. But almost all of these pundits seem to me to live in fantasyland. They actually seem to believe their remedies will work in some relatively short period of time.

The fact is that the world is only at the beginning of a depression that will last for quite a while and will get far worse than it is now. The immediate issue for governments is not how to recover but how to survive the growing popular anger they are all, without exception, facing.

Let us start with the economic realities of the present. Just about everybody throughout the world - governments, enterprises, individuals - has been living above their income for the last 10-30 years, and doing it by borrowing. The world went giddy with inflated earnings and inflated consumption. Bubbles have to burst. This one has now burst (or actually several bubbles have burst). The impossibility of continuing on this path has sunk into consciousness, and suddenly everyone has gotten scared that they are running out of real money - governments, enterprises, individuals.

When that fear takes over, people stop spending, or lending. And when spending and lending declines significantly, enterprises stop producing or slow down. They may close down entirely, or at least fire workers. This is a vicious cycle, since closing down or firing workers leads to lower real demand and causes further reluctance to spend or to lend. It's called depression, and deflation.

For the moment, the United States government, which is still in a position to borrow money and print money, intends to throw some new money into circulation. This might work if the government threw an awful lot, and threw it wisely. But quite probably, it won't do it wisely. And quite probably throwing the amount that might work amounts to little more than creating another bubble. And the dollar might then really fall much faster than other currencies, pulling down the last important prop to the world-economy.

In the meantime, there is less and less money for daily consumption of all kinds for the bottom 90% of the world's population (and it's not so good for the top 10%). People are getting restless. Just in the last month, we have seen people in the streets protesting economic difficulties in a growing number of countries - Greece, Russia, Latvia, Great Britain, France, Iceland, China, South Korea, Guadeloupe, Reunion, Madagascar, Mexico - and probably a lot more that haven't been noticed by the world press. In fact, it's been relatively mild up to now, but the governments are all on edge.

What do governments do when their primary concern is dealing with internal unrest? They really have two choices - shoot the protestors, or appease them. Shooting works only up to a point. For one thing, the agents of force must themselves be well-enough paid to be willing to do it. And when there is a serious economic downturn, arranging this is not all that easy for the regimes.

So the regimes begin to appease their populations. How? First of all, by protectionism. Everyone has begun to complain about the protectionism of other countries. But the complainers are all practicing it themselves. And they will do a lot more of it. The free market economists all tell us that protectionism makes the overall economic situation still worse. That's probably true, but politically quite irrelevant, when there are people in the streets wanting jobs - now!

The second way governments appease when there is unrest is by social-democratic welfare measures. But to do that, governments need money. And governments get money from taxes. The free market economists all tell us that raising taxes (of any kind) during an economic downturn makes the overall economic situation still worse. That may be true, but in the short run that's also irrelevant. As it is, in a downturn, tax receipts fall. Governments can't keep up even with current expenditures, not to speak of paying for increased expenditures. So they will tax in one way or another. Or they will print money.

Finally, the third way they appease is by a healthy dose of populism. The real income gap between the top 1% and the bottom 20% both within countries and worldwide has grown enormously in the last thirty years. The gap will now be reduced to the more "normal" gap that existed in 1970, which is still very large, but somewhat less scandalously large. Hence, you have governments talking now of "income caps" for bankers, as in the United States and France. Or you can prosecute people for corruption, as in China.

It's a bit like being in the path of a tornado. The worst can come upon governments suddenly. When that happens, they have only minutes to take shelter in their cellars. The tornado then passes, and if one is still alive, one comes out to survey the damage. The damage will turn out to be very extensive. Yes, one can rebuild. But then the real argument begins - about how one rebuilds, and how fairly one shares the benefits of rebuilding.

How long will this gloomy picture prevail? No one knows or can be sure, but it will probably be a good number of years. In the meantime, governments will face elections, and voters will not be kind to the incumbents. Protectionism and social-democratic welfare serve governments the way the cellar does during a tornado. The quasi-nationalization of banks is another way of taking shelter in the cellars.

What we the people have to think about and prepare for is what we do when we emerge from the cellar, whenever that is. The fundamental question is how are we going to rebuild. That will be the real political battle. The landscape will be unfamiliar. And all our past rhetorics will be suspect. The key thing to realize is that rebuilding can take us into a far better world - but it can also take us into a far worse one. In either case, it will be a far different one.

by Immanuel Wallerstein

(Copyright by Immanuel Wallerstein, distributed by Agence Global).

 http://www.binghamton.edu/fbc/251en.htm

Immanuel Wallerstein
Commentary No. 243, Oct. 15, 2008

The Depression: A Long-Term View


The depression has started. Journalists are still coyly enquiring of economists whether or not we may be entering a mere recession. Don't believe it for a minute. We are already at the beginning of a full-blown worldwide depression with extensive unemployment almost everywhere. It may take the form of a classic nominal deflation, with all its negative consequences for ordinary people. Or it might take the form, a bit less likely, of a runaway inflation, which is simply another way in which values deflate, and which is even worse for ordinary people.

Of course everyone is asking what has triggered this depression. Is it the derivatives, which Warren Buffett called "financial weapons of mass destruction"? Or is it the subprime mortgages? Or is it oil speculators? This is a blame game, and of no real importance. This is to concentrate on the dust, as Fernand Braudel called it, of short-term events. If we want to understand what is going on, we need to look at two other temporalities, which are far more revealing. One is that of medium-term cyclical swings. And one is that of the long-term structural trends.

The capitalist world-economy has had, for several hundred years at least, two major forms of cyclical swings. One is the so-called Kondratieff cycles that historically were 50-60 years in length. And the other is the hegemonic cycles which are much longer.

In terms of the hegemonic cycles, the United States was a rising contender for hegemony as of 1873, achieved full hegemonic dominance in 1945, and has been slowly declining since the 1970s. George W. Bush's follies have transformed a slow decline into a precipitate one. And as of now, we are past any semblance of U.S. hegemony. We have entered, as normally happens, a multipolar world. The United States remains a strong power, perhaps still the strongest, but it will continue to decline relative to other powers in the decades to come. There is not much that anyone can do to change this.

The Kondratieff cycles have a different timing. The world came out of the last Kondratieff B-phase in 1945, and then had the strongest A-phase upturn in the history of the modern world-system. It reached its height circa 1967-73, and started on its downturn. This B-phase has gone on much longer than previous B-phases and we are still in it.

The characteristics of a Kondratieff B-phase are well-known and match what the world-economy has been experiencing since the 1970s. Profit rates from productive activities go down, especially in those types of production that have been most profitable. Consequently, capitalists who wish to make really high levels of profit turn to the financial arena, engaging in what is basically speculation. Productive activities, in order not to become too unprofitable, tend to move from core zones to other parts of the world-system, trading lower transactions costs for lower personnel costs. This is why jobs have been disappearing from Detroit, Essen, and Nagoya and factories have been expanding in China, India, and Brazil.

As for the speculative bubbles, some people always make a lot of money in them. But speculative bubbles always burst, sooner or later. If one asks why this Kondratieff B-phase has lasted so long, it is because the powers that be - the U.S. Treasury and Federal Reserve Bank, the International Monetary Fund, and their collaborators in western Europe and Japan - have intervened in the market regularly and importantly - 1987 (stock market plunge), 1989 (savings-and-loan collapse), 1997 (East Asian financial fall), 1998 (Long Term Capital Management mismanagement), 2001-2002 (Enron) - to shore up the world-economy. They learned the lessons of previous Kondratieff B-phases, and the powers that be thought they could beat the system. But there are intrinsic limits to doing this. And we have now reached them, as Henry Paulson and Ben Bernanke are learning to their chagrin and probably amazement. This time, it will not be so easy, probably impossible, to avert the worst.

In the past, once a depression wreaked its havoc, the world-economy picked up again, on the basis of innovations that could be quasi-monopolized for a while. So, when people say that the stock market will rise again, this is what they are thinking will happen, this time as in the past, after all the damage has been done to the world's populations. And maybe it will, in a few years or so.

There is however something new that may interfere with this nice cyclical pattern that has sustained the capitalist system for some 500 years. The structural trends may interfere with the cyclical patterns. The basic structural features of capitalism as a world-system operate by certain rules that can be drawn on a chart as a moving upward equilibrium. The problem, as with all structural equilibria of all systems, is that over time the curves tend to move far from equilibrium and it becomes impossible to bring them back to equilibrium.

What has made the system move so far from equilibrium? In very brief, it is because over 500 years the three basic costs of capitalist production - personnel, inputs, and taxation - have steadily risen as a percentage of possible sales price, such that today they make it impossible to obtain the large profits from quasi-monopolized production that have always been the basis of significant capital accumulation. It is not because capitalism is failing at what it does best. It is precisely because it has been doing it so well that it has finally undermined the basis of future accumulation.

What happens when we reach such a point is that the system bifurcates (in the language of complexity studies). The immediate consequence is high chaotic turbulence, which our world-system is experiencing at the moment and will continue to experience for perhaps another 20-50 years. As everyone pushes in whatever direction they think immediately best for each of them, a new order will emerge out of the chaos along one of two alternate and very different paths.

We can assert with confidence that the present system cannot survive. What we cannot predict is which new order will be chosen to replace it, because it will be the result of an infinity of individual pressures. But sooner or later, a new system will be installed. This will not be a capitalist system but it may be far worse (even more polarizing and hierarchical) or much better (relatively democratic and relatively egalitarian) than such a system. The choice of a new system is the major worldwide political struggle of our times.

As for our immediate short-run ad interim prospects, it is clear what is happening everywhere. We have been moving into a protectionist world (forget about so-called globalization). We have been moving into a much larger direct role of government in production. Even the United States and Great Britain are partially nationalizing the banks and the dying big industries. We are moving into populist government-led redistribution, which can take left-of-center social-democratic forms or far right authoritarian forms. And we are moving into acute social conflict within states, as everyone competes over the smaller pie. In the short-run, it is not, by and large, a pretty picture.

by Immanuel Wallerstein


(by Immanuel Wallerstein, distributed by Agence Global).
Fernand Braudel Center, Binghamton University
 http://www.binghamton.edu/fbc/243en.htm


Oct. 15, 2008: Die Weltwirtschaftskrise: Eine Langzeitbetrachtung der aktuellen Finanz- und Wirtschaftskrise (Nr. 4 / Lunapark21):
 http://www.binghamton.edu/fbc/243gr.htm (aus:  http://www.blaetter.de)

Oct. 2008: Interview in Le Monde:

Immanuel Wallerstein, who’s been predicting the end of capitalism for the past thirty years, gave an interview to Le Monde on the current financial crisis, especially in the context of Braudel’s concept of "longue duree" and the history of the world-system.

In Braudel’s conception of the longue duree, the history of humans, systems which regulate relationships between humans and their material environment. Within these phases, there are long cycles described by Nicolas Kondratieff or Joseph Schumpeter. For Wallerstein, we are now in the B-phase of the Kondratieff cycle which started roughly 35 years ago. The A-phase (1945-1975) has been the longest in the history of the capitalist system.

In phase A, profits are generated through material or industrial production. In phase B, in order to keep on generating profits, the capitalist system needs to increase the use of financial and speculative tools. In the past thirty years, states, businesses and households have gone into massive debt. For Wallerstein, we are now in the last part of a B-phase of the Kondratieff cycle. Virtual decline becomes real and bubbles burst one after another In these conditions, we see more bankruptcies, greater concentration of capital, increased unemployment and recessionary conditions.

What makes things worse is not simply this cyclical moment but its combination with the transition between two systems over the longue duree (one being capitalism). The system is no longer capable of returning to equilibrium. This is where things become chaotic and uncontrollable. The struggle becomes then between competing views of what will replace that system. This is really a crisis. And the end of capitalism.

But is it not a new mutation of capitalism? After all, capitalism has undergone dramatic transformation ever since the rise merchant capitalism to global financial capitalism.

No, for Wallerstein, because the system has reached its limitations. There are no more opportunities of real accumulation and profits at this point (biotechnologies and information technologies were the last sources of growing profits as emerging sectors). What is left is the capacity of capitalism to feed off global inequalities but how low can we go in the periphery?

At the same time, the economic emergence of the Asian tigers as well as India and South America presents a challenge to the world-economy created by the West where costs (both labor and resources) become harder to control. By the end of the 1990s, these costs were lower than in the 70s but still higher than right after WWII. Actually, the last period of actual accumulation was only possible because of Keynesian policies of massive government intervention. And here too, limits have been reached, as the current crisis demonstrates.

Wallerstein sees similarities between the current crisis and the collapse of the feudal system in Europe in the middle of the 15th and 16th centuries, with the replacement with the capitalist system. With religious wars, come the collapse of monarchical and aristocratic authority over wealthy farmers and urban dwellers.

So, how long are we going to be in this mess? For Wallerstein, this destructive period which closes the b-phase of the cycle usually lasts between two and five years before the conditions of a phase A are met (possibilities of real accumulation through material production). But the fact that the current phase is also a systemic crisis means that we can expect political chaos where dominant political and economic actors will try everything to regain equilibrium. But according to Wallerstein, they will fail.

In this period of transition, it is impossible to predict what the new system will look like, and there is definitely no certainty that we’ll end up with a less violent and more just system. It could be the opposite.

And of course, this is also the end of a political cycle, that of American hegemony, which started in the 1970s. The US will always be an important political actor but not in a dominant position in the context of the multiplication of centers of power in Western Europe, China, Brazil and Idia, for instance.

In the meantime, the political and economic consequences will be painful. The dominant actors in this system will look for scapegoats (the government, the banks, the Black, the CRA…).

Wallerstein predicts that conflicts internal to the US will be exacerbated by the situation and this country might become one of the most politically unstable. As he concludes

"And don’t forget, in the United States, we’re all armed…"

Le capitalisme touche a sa fin:  http://www.lemonde.fr/la-crise-financiere/article/2008/10/11/le-capitalisme-touche-a-sa-fin_1105714_1101386.html
L'economie en crise (Le Monde):  http://www.lemonde.fr/web/sequence/0,2-1101386,1-0,0.html
 http://globalsociology.edublogs.org/2008/10/11/wallerstein-on-the-financial-crisis/

Sophie Wahnich: Apres 1789, 2009?:  http://www.lemonde.fr/societe/article/2009/04/04/apres-1789-2009_1176699_3224.html