Climate Change Adaptation, Coffee, and Corporate Social Responsbility : Challenges and Opportunities

Climate change is making a profound impact on agricultural production across the globe. Coffee (especially the Arabica variety) is one of the most severely affected crops. Adaptive measures are therefore needed to ensure the industry’s survival. Although large coffee companies have a long history of environmental action, less is known about their strategies and attitudes related to climate adaptation. This paper attempts understand how global coffee companies are addressing climate change adaptation as part of corporate social responsibility (CSR) strategies and what barriers may exist to prevent future scale-up. To answer this question, I analyzed overall global adaptation needs and the specific needs of the coffee industry, which revealed serious financial, capacity-related, and principle-based challenges. To better understand how the industry may view climate adaptation, I reviewed CSR theoretical literature and the history of CSR within the coffee industry. Through this analysis, I determined the promotion of climate adaptation in the coffee industry can best be explained by the “Creating shared value” (CSV) framework. Using the CSV framework and an understanding of global adaptation challenges, I reviewed the CSR strategies of five major coffee companies as well as supporting literature and industry information. I find that all five companies have expansive CSR programs, yet none seriously undertake climate adaptation efforts and/or make them public. I suggest several reasons for this absence, including competing CSR priorities, lack of awareness, competition, lack of leadership, the controversial nature of climate change, and the overemphasis of certification. I end the paper with a call for more collaboration and research around the adaptation issue for the coffee industry.

Climate change poses an existential threat to the global coffee industry. Increasing average temperatures, more frequent droughts and heat waves, and inclement weather patterns threaten to upend a large portion suitable coffee producing areas over the next 50 years (Davis, Gole, Baena, & Moat, 2012; Rahn et al., 2018). This implies that large multinational coffee companies could lose substantial profits and even disappear entirely if climate trends continue unabated. Even if ambitious global emission reduction targets are met, the coffee industry could still face substantial losses. Given the severity of this threat, one would expect climate adaptation efforts to be at the forefront of corporate social responsibility (CSR) strategies of major coffee companies. Yet, from a superficial level, terms such as “climate change adaptation” appear mostly absent from these companies’ public-facing data. Why would an industry with such a long track record of CSR engagement ignore an opportunity to ensure its survival and benefit the communities who supply its coffee?

This article attempts to answer this question through a holistic analysis of the industry, its relationship with CSR, and with climate change mitigation and adaptation. This article contributes to the broader literature of climate change in CSR by adding a climate adaptation perspective, which is less discussed than climate mitigation and broader environmental activities. This research also contributes to discussions of CSR activities in developing country contexts.

The Global Coffee Industry

Coffee is one of the most widely traded and consumed commodities in the world. The demand for coffee is also growing (FAO, 2015A; Panhuysen & Pierrot, 2018), perhaps due to increased demand from emerging economies. Despite its wide consumption in developed countries, coffee is overwhelmingly grown in less developed economies. In addition, it is estimated that 70% of the approximately 25 million coffee producers are smallholders who manage less than 10 ha of land (Panhuysen & Pierrot, 2018; Rahn et al., 2018). This means that coffee production is potentially a source of economic development (FAO, 2015a; Rahn et al., 2018). Even though smallholders and developing economies produce most of the world’s coffee, they reap few of the benefits. Global trade and sale of coffee is increasingly concentrated in a few “mega” companies housed mostly in the developed world (Panhuysen & Pierrot, 2018).

Coffee production can be split into two types: Arabica (Coffea arabica) and Robusta (Coffea robusta). Robusta accounts for roughly 40% of global production and is generally grown in hotter climates, lower elevations, under less shade, and using more mechanized means of production, (FAO, 2015a). Robusta is also considered to be of poorer quality. Arabica accounts for the remaining 60% of global production and is the preferred coffee of choice for consumers in the United States and Europe (FAO, 2015a). Arabica is not as hardy as Robusta, requiring more shade, higher elevations, and cooler temperatures to thrive (FAO, 2015a; Rahn et al., 2018). Because of the nature of Arabica coffee, production cannot easily be mechanized and is much more labor intensive (Rahn et al., 2018). This may be why Arabica production has remained the domain of the smallholder for so long. This paper will focus mostly on Arabica production, since it is the variety of most concern to Western companies and consumers, most threatened by climate change, and the most tied to rural development.

Global Climate Change: the Adaptation Challenge

Global climate change is already affecting both natural and human systems across the globe. The Food and Agriculture Organization of the United Nations (FAO) estimates that between 2003 and 2015, climate related events caused $1.5 trillion in economic damages (FAO, 2015b). While some effects of global climate change will be positive (such as through prolonged growing seasons and warmer climates in Europe and North America), changes for economies near the tropics will mostly be negative, including longer and more frequent droughts, extreme weather events, and more severe heat waves (IPCC, 2014). Climate-related disruptions tend to exacerbate existing challenges for poor and marginalized populations (ibid.).

Recently, world governments have committed to keeping global climate change in check, pursuing efforts to mitigate greenhouse gas (GHG) emissions to keep warming to under 2̊ degrees Celsius pre-industrial levels (The Paris Agreement, 2016). Even if these ambitious efforts are successful, climate impacts will continue to occur, and will disproportionately effect populations with the fewest resources and capabilities to deal with them (IPCC, 2014). Recognizing this reality, the 2016 Paris Agreement also supports climate adaptation efforts by developing country national governments, developed country (“donor”) governments, and international organizations.

The Intergovernmental Panel on Climate Change (IPCC) defines adaptation as “The process of adjustment to actual or expected climate and its effects. In human systems, adaptation seeks to moderate or avoid harm or exploit beneficial opportunities.” (2014). Put another way, while climate mitigation is about halting future warming by reducing emissions and building carbon sinks, climate adaptation is about adjusting to the effects of warming that can and will take place, regardless of the success of mitigation efforts. A related yet distinct concept is climate “resilience”, which can be thought of as the strength of a system to recover from shocks. In the context of climate change, adaptation can be thought of as the process of increasing or maintaining reliance of systems in response to or in anticipation of shocks (Nelson, 2011) (Table 1).

A useful way to understand the climate adaptation process and the options available to actors is through an analysis of climate-related risks. Climate risks are the combination of “exposure” (i.e., location, infrastructure, assets, ecosystems, etc.), “vulnerability” (i.e. the capacity to cope with changes) and “hazards” (the potential for climate related events) (IPCC, 2014). Actors interested in reducing climate-related risks thus have several options. For instance, they could use explicit adaptation measures to reduce vulnerability by introducing more climate resilient crop varieties or building flood resistant infrastructure. Another option is to reduce vulnerability by improving overall socio-economic development, increasing the population’s resilience. Actors could also reduce exposure by promoting livelihood transitions from an industry that is more impacted by climate change to one that is less impacted. A more extreme example of reducing exposure might be the promotion of migration from a more to less climate-impacted area. Hazards are more difficult to address in the short-term since they depend on geography and exogenous factors such as global climate change caused by total emissions and possibly reduced through global mitigation efforts (IPCC, 2014). Actors thus have many options to reduce climate risks, though most of them require substantial investments beyond what is possible for many economies. Because of this, many economies and industries are turning to external sources of finance (Fig. 1).

Figure 1

Climate Finance for Adaptation

Despite the financial needs of developing countries and their higher vulnerability to climate change, donors and investors are reluctant to pay for adaptation efforts. Of all climate finance from public and private sources, only 7% is currently labelled as adaptation funding, with the rest supporting mitigation (Buchner et al., 2017). This is discouraging considering that total climate finance is reaching all-time highs, and because developing country representatives pushed for equal financing for adaptation and mitigation during the Paris Climate negotiations. Adaptation funding is dominated by national financial institutions and multilateral organizations (Micale, Tonkonogy, & Mazza, 2018) which are currently struggling to raise and disburse funds. Bilateral aid from donor governments and climate funds contributes to adaptation finance but makes up only a small percentage of their total climate portfolios (Lyster, 2017). In addition to the dearth of adaptation finance, roughly 80% of all climate finance remains in the country of origin (Buchner et al., 2017), suggesting that poorer countries are neglected. The reasons behind donors’ and investors’ reluctance to support adaptation can be split into two broad categories: principle-related and logistical and capacity-related:

Principle-Related Barriers

The benefits of climate mitigation are global; each ton of GHG avoided or sequestered benefits the global economy and humanity by reducing the potential warming of the entire planet (Klein, Schipper, & Dessai, 2005; Lecocq et al. 2011). Adaptation on the other hand is mostly a local good. Each country, province, state, municipality, and city—and the different economies and businesses within them—have different adaptation needs. For instance, an adaptation investment in one city will not directly benefit stakeholders in another city. This means that an investment in adaptation is harder to justify from the perspective of a developed “donor” country, since the investment does not benefit the donor in a direct way. A related difference is that mitigation benefits are mostly “public goods”, while adaptation benefits are mostly “private goods”. Mitigation is also much easier to quantify than adaptation (Klein et al., 2005; Lecocq et al. 2011). For example, many economists and scientists have developed models for determining the “social cost of carbon” to the global economy. However, the quantifiable benefits of adaptation are much more elusive (Stanton, 2011). For government donors, adaptation may be a more difficult sell to taxpayers because it is seen as “giving up” on trying to reduce climate impacts (mitigation) by accepting the need to adapt (see for example Wood, 2019 or Ostrander, 2013).

Logistical and Capacity-Related Barriers

Logistical and capacity-related barriers to adaptation finance are probably more concerning for private investors. Since adaptation benefits are harder to quantify (Klein et al., 2005), they are also harder to track progress on. This makes performance monitoring challenging for investors. Furthermore, there is lack of consensus on what counts as adaptation finance, how to differentiate it from other types of development finance, and how to measure it. Other barriers include nascent development of adaptation-related products and services, lack of scalability of these products and services, and factors specific to the local market context (Micale et al., 2018).

As a result of both principle and logistical and capacity constraints, adaptation is often neglected by international donors and investors and even by governments most affected by climate damages (OECD, 2012). Given the strain on international governments because of the financial crisis, global health crisis, security concerns such as international migration and terrorism, and the commitments to climate mitigation, new strategies and actors must be identified to meet the adaptation gap (Ostrom, 2008 OECD, 2012).

Coffee Production: Adaptation Needs and Challenges

The need for climate adaptation is particularly relevant to the coffee industry. As the natural climate system is disrupted, production of coffee is becoming increasing difficult, especially for the less hardy Arabica variety. Arabica crops, which thrive at higher altitudes and mild temperatures, are extremely sensitive to changes in average temperatures, as well as changes in rainfall patterns, soil quality, and unseasonal frosts (Davis et al., 2012; Rahn et al., 2018). Even in a world without significant global climate change, Arabica coffee can only be grown in specific agro-ecological zones. Unfortunately, increasing global concentrations of CO2 are disrupting these zones by raising average temperatures, disrupting rainfall patters, more common and severe extreme weather events, and broadening the vectors for diseases and pests (IPCC, 2014.) A recent biophysical projection of climate impacts on Arabica coffee in Ethiopia suggest that if current climate trends continue, by 2080 somewhere between 65% and almost 100% of current coffee-growing areas will be unsuitable for production (Davis et al., 2012). Another analysis of coffee-growing areas in Nicaragua finds that by 2050 more than 90% of the current growing areas will be unsuitable for production (Laderach et al., 2017).

These are disturbing statistics for coffee drinkers and the global coffee industry; they are even more frightening to coffee farmers whose livelihoods and local economies depend on its production. Since most coffee producers are smallholders, they often have less capacity to address climatic changes and shocks (Laderach et al., 2017; Panhuysen & Pierrot, 2018). Even in a scenario where the international community manages to meet the Paris Climate Agreement targets, the global production of coffee and the millions of smallholders who depend on it will face serious adaptation challenges. At the same time, global demand for coffee is increasing. Since 2010, global demand increased by 20%, and is not slowing down (Panhuysen & Pierrot, 2018). Thus, the global coffee industry and coffee producers have a shared interest in large-scale adaptation to climate change if either one is to survive through the twenty-first century.

There are several tools which could be deployed to reduce the climate risks for smallholder coffee farmers. For instance, specific adaptive measures could be scaled up to reduce climate vulnerability. These include increased shade cover, introducing climate resistant coffee varieties, restoration and rehabilitation of degraded areas, improved soil and water management, integrated pest management, and insurance and other risk sharing schemes (Cohn et al., 2017; Davis et al., 2012; Laderach et al., 2017). Another strategy is to reduce exposure to climate risks by helping farmers transition from coffee to the production of other crops which thrive in warmer climates, such as cocoa (Laderach et al., 2017). While these types of transitions reduce climate risks for farmers, they do nothing to help coffee companies meet increasing demand. Another strategy is to increase the overall socio-economic development of smallholders, thereby reducing their exposure and vulnerability (IPCC, 2014). This final strategy is perhaps the most commonly used by individual coffee companies through CSR activities, though usually not explicitly for the purpose of adaptation. This strategy is also problematic because it assumes coffee farmers will recognize and make the needed climate adaptations given enough resources, ignoring possible technical and educational gaps. The following section will explore these CSR efforts to date in more detail to understand the reasoning and strategy behind them.

Corporate Social Responsibly (CSR) in the Coffee Industry

CSR campaigns from large multinationals are deep-rooted in the coffee industry, dating back to at least the 1990s. Some coffee scholars point to the collapse of the International Coffee Organization regime in 1989 as the start of the increased CSR interest in coffee. The end of the International Coffee Organization signified a transfer of power in the coffee industry from the developing exporting countries, to the large multinational coffee companies (Daviron & Ponte, 2005; Kolk, 2005; Talbot, 2004). At around the same time, oversupply of coffee in global markets led to falling prices for producers and eventually to worsening social and environmental conditions for farmers (Hamann, Luschnat, Niemuth, Smolarz, & Golombek, 2014). This led to increased interest from consumers, and philanthropic and development organizations to improve the lives of farmers in the value chain, and increased pressure on global coffee companies (Millard, 2017).

While some NGO efforts were successful in increasing consumer awareness about the plight of coffee farmers and the environment, they lacked coordination and the impact was generally small (Millard, 2017). If transformational change were to happen, it would need to come from the new de facto leaders of the industry: the multinational corporations (Kolk, 2005). The 1990s and early 2000s saw a rapid expansion of independent certification schemes for coffee producers, which were quickly adopted by large coffee companies to protect their brand image and respond to consumer pressure (Daviron & Ponte, 2005; Millard, 2017). These certification standards included FairTrade, Organic, 4C, Utz, and Rainforest Alliance, and focused on issues such as decent pay, pesticide application, child labor, protective gear use, deforestation, biodiversity management, waste disposal and water management, among others (Samper & Quiñones-Ruiz, 2017). These certification systems for responsibly produced coffee expanded so quickly that all major international coffee firms had adopted sustainability initiatives by the 2000s. Today, 40% of all coffee produced globally now meets one or more standards (Levy, Reinecke, & Manning, 2016). In addition, some firms such as Starbucks developed their own in-house certification standard, based on the best practices from key third-party schemes (Millard, 2017).

While these were positive trends, several authors have challenged the apparent “paradox” of the coffee industry (Daviron & Ponte, 2005; Levy, Reinecke, & Manning, 2016; Samper & Quiñones-Ruiz, 2017). If so much of the global coffee supply chain is produced in an environmentally and socially responsible way, why are smallholder farmers still struggling? One possible answer to the paradox is that large coffee companies are not responding to the root causes of smallholder poverty (see for example Escobar Botero, Arboleda Diaz, Marín Cadavid, & Muhss, 2011; Glasbergen, 2018). They may be responding to consumer demands and peer pressure from firms in the same industry, but this does not always address key environmental and livelihood challenges that smallholders face (ibid.). The issue of climate change is a prime example. Given the current and future changes to growing conditions for coffee farmers, one would expect climate adaptation to be a more explicit concern to coffee companies interested in their image and the long-term viability of their supply chains. On a superficial level, this appears not to be the case.

The broad concept of climate change itself is a relatively new addition to the CSR messaging of global coffee companies, with the first large initiative launched only in 2010 (Millard, 2017). Additional multi-stakeholder programs have since emerged to address climate adaptation in the coffee value chain. However, these include few of the large industry players, and are driven typically by NGOs and governmental organizations. Climate adaptation still appears rather low on the list of the CSR objectives for companies themselves. For example, although “climate change” is one of the most reported indicators used by British coffee companies in 2018 (Bradley & Botchway, 2018), they still predominantly emphasize mitigation. The following sections will explore how large companies talk about and implement climate adaptation strategies as part of larger CSR initiatives in an attempt to understand if an “adaptation gap” really exists, how serious it is, and why it persists.

Literature Review and Theoretical Framework

Before examining the presence or absence of adaptation actions within coffee CSR initiatives, it is important to ground the findings in theories behind the pursuit of CSR. CSR is broadly defined as “A company’s sense of responsibility towards the community and environment (both ecological and social) in which it operates.” (Business Dictionary, 2019). The European Commission provides a shorter definition as “the impact of business on society”. (The European Commission Corporate Social Responsibility & Responsible Business Conduct, 2019). A.B. Carroll explains that the idea of CSR is a relatively new one. Although prominent business thinkers did hint at the idea of CSR as early as the 1950s, it was not until the 1980s and 1990s that the term really became part of mainstream thought in the industry (Carroll, 2001). Interestingly, the emergence of CSR as a concept roughly maps to the rise of the environmental movement in the developed world. Given how new CSR is as a concept, it is not surprising that climate change is just entering its lexicon in the past decade. Climate change itself is also a relatively recent development in the public consciousness. The need for large-scale climate change adaptation is even more recent, which may further explain the delay.

A company theoretically would employ a CSR strategy for various reasons. Campbell links the health of economy and of the corporation itself as strong predictors of CSR behavior (Campbell, 2007). This theory is also supported by a qualitative and quantitative analysis conducted by the Economist Business Unit (2008). Therefore, it is not surprising that the largest and most profitable coffee companies were behind the sustainable coffee movement during the late 1980s and 1990s when the global economy was strong. Campbell also finds that corporations are more likely to pursue CSR strategies as they meet “NGOs and other independent organizations that monitor them” among other factors (ibid.). In this sense, the pressure from environmental watchdogs and certification groups no doubt contributed to the development of CSR policies of coffee companies during the late 1980s and 1990s.

As I have explained, the CSR policies of coffee companies are not always environmental in nature. In fact, many corporations focused on workers’ pay and child labor as the primary issues of concern (Kolk, 2011; Talbot, 2004). Environmental CSR, or “Corporate Ecological Responsibility” focuses on “mitigating a firm’s impact on the natural environment” (Bansal & Roth, 2000). According to Bansal and Roth, a corporation will “go-green” for three primary reasons: competitiveness, legitimization, and social/ecological responsibility. According to these authors, firms who are motivated by competitiveness are more likely to engage in developing and marketing “green products”. Companies that are motivated by legitimization are likely to be concerned with regulatory compliance, and engagement with environmental interest groups. Finally, companies motivated by social/environmental responsibility are likely to engage in donations to environmental causes, life-cycle analyses (LCAs) and unpublished initiatives. Using this lens, it appears that large coffee companies are mostly motivated by competitiveness (“green” marketing) and legitimation (in the form of certification requirements and collaboration with environmental groups). This framework helps us understand why a company would pursue strategies in favor of climate change mitigation (Bansal and Roth even use the word “mitigation” in their definition), but it does not explain the inclusion or exclusion of adaptation. For large coffee companies, the motivation for pursuing adaptation initiatives would be more existential.

The concept of climate adaptation as an existential need for companies and farmers alike is perhaps best encompassed by Porter and Kramer, in their seminal paper “Creating Shared Value” (CSV) (Porter & Kramer, 2011). According to the authors, “shared value” is, “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. Shared value creation focuses on identifying and expanding the connections between societal and economic progress”. The authors further explain the concept as “expanding the total pool of economic and social value”. Porter and Kramer use the relevant example of FairTrade, which they claim is merely a redistribution of resources and does not increase the total pool of resources available to the company, the farmer, and society.

The CSV frame so far seems the most relevant to describing the tendency of companies to support climate adaptation initiatives, since adaptation does not fit neatly into the boxes of competitiveness, legitimization, and social/ecological responsibility proposed by Bansal and Roth. Adaptation also goes beyond theories proposed by Campbell regarding the economic relationship between CSR and overall performance. The CSV lens is not perfect, however (see for example, Crane, Palazzo, Spence, & Matten, 2014), but it does provide a workable framework to assess CSR in the coffee industry.

As coffee is mostly grown in developing countries, another relevant subsection of the literature is related to CSR practices in these countries by multinational corporations. Carroll, in an update to his influential 1999 paper, noted that CSR is growing in developing regions, owing to more companies viewing CSR as an important business strategy (2016). Latapi Agudelo, Johannsdottir, and Davidsdottir (2019) suggest the growth of CSR in developing countries can be attributed to new international frameworks and agreements, such as the Sustainable Development Goals (SDGs) and the Paris Climate Agreement. Visser (2009) suggests that CSR initiatives in developing countries are often distinct from those of developed countries and can present trade-offs between the concerns of shareholder and consumers and stakeholders in the countries where they operate. Several studies reinforce this disconnect between CSR priorities (Barkemeyer, 2011; Brown & Knudsen, 2012), with some calling for more serious alignment with poverty alleviation targets (Idemudia, 2014; Ragodoo, 2009). Visser makes a related point, that only large countries with “very serious public images” are involved in CSR within developing countries (2008). This may suggest that if any coffee companies are engaging in CSR around climate adaptation, they would likely be large multinationals.

The following section will explore how several coffee companies are specifically tackling the issue climate adaptation, and how well it is explained by the CSV framework. In addition, it will attempt to frame these strategies within the context of CSR in developing countries.

Research Methods

Armed with an understanding of CSR practices of coffee companies (especially through the CSV lens), the next step was to understand how the coffee industry is or is not strategically addressing climate adaptation at the producer level. To understand this question, I first created a list of the largest companies involved in the coffee supply chain based on volume of coffee sold (from Panhuysen & Pierrot, 2018). I focused on large companies because of the observation of Campbell that the health of a company is a strong predictor of CSR (2007) and because they were more likely to have CSR information publicly available. This list of large companies included both roasters and retailers, and companies that are involved in both activities. I selected from this list a total of five companies, seeking a balance between roasters, retailers, and hybrids, as well as a balance between European and North American companies to control for possible corporate culture differences. Based on Visser’s conclusion that only companies with exceptionally large public images would engage in CSR activities in developing countries (2008), I excluded large coffee companies such as JDE with less recognizable public images. I also excluded large traders such as Ecom for the same reason. Although traders are important industry actors, they operate more outside of the public view.

Once the companies were selected, I analyzed their public reports and communications, especially CSR related reports over the past 5 years. To supplement this research, I searched an academic database for peer-reviewed and grey literature published in the past 10 years related to the company in question. The search terms included “[company name]” + “CSR” or “climate change”, or “adaptation”. Finally, I searched for broader industry-wide analyses related to adaptation and CSR published over the past 10 years using search terms “coffee”, “CSR”, “adaptation”, and “climate change”.

Industry Trends

Coffee companies appear to include a wide range of issues within their individual CSR strategies. One analysis of British coffee companies identified a total of 94 distinct sustainability indicators. Of these, 44 were environmental, 30 were social and 20 were economic in nature (Bradley & Botchway, 2018). The authors found that the most reported indicators were related to climate change, though companies generally preferred to report on specific environmental issues affecting the farmers in their value chain, as opposed to global issues. Even though coffee companies appear concerned with several sustainability issues, there is clear skepticism about the effectiveness of this approach in generating true shared value. A 2018 Hivos commissioned report concluded that continued demand for coffee has not translated into the livelihood gains for farmers, who “remain largely voiceless in the discussions about a sustainable coffee sector” (Panhuysen & Pierrot, 2018). Other reports are critical of the metrics used by companies to report on sustainability, which to date remain rooted in a set of certification standards which do not always encompass the whole picture or measure livelihoods of farmers properly (Levy et al., 2016; Millard, 2017). Yet another report suggests that CSR process could be improved through more equitable consensus between farmers and coffee companies to define metrics (Samper & Quiñones-Ruiz, 2017). These analyses seem to suggest a shift is needed away from traditional CSR measures, toward one which better incorporates the needs and voices of producers. Implicitly this suggests a need to shift toward CSV.

Tim Horton’s

A Canadian company in operation since 1964, Tim Horton’s serves coffee and fast food in over 4000 locations worldwide. Tim Horton’s CSR initiatives focus on community-building in areas where stores and offices are located, as well as “Coffee Partnerships” with communities which the company sources from in Central and South America (Tim Horton’s, 2015). The Coffee Partnerships focus on social, environmental, and economic pillars, with each pillar consisting of technical assistance and training. The environmental pillar of these projects is holistic but does not directly address climate adaptation as a strategy, instead focusing on reducing biodiversity loss and limiting pollution to water and soil resources. Furthermore, the key performance measurements used by Tim Horton’s in its recent GRI report center almost exclusively on climate mitigation targets, such as GHG emissions and energy usage. The phrase “climate change” is not used once in the report. Nevertheless, the idea of community partnerships it establishes in the coffee-sourcing regions is evidence of an attempt at CSV, rather than redistribution strategies.

Dunkin’ donuts

Like Tim Horton’s, Dunkin’ Donuts specializes in coffee and fast food. The US-based company is much larger however, with over 10,000 stores, mostly in the United States. Dunkin’ sources coffee that is both Rainforest Alliance and FairTrade Certified, though this appears to be a relatively small fraction of total coffee sold. One of the key metric categories in its CSR report is “Responsible Sourcing”. However, it focuses on pulp and paper, palm oil and eggs, not coffee. The “Climate and Energy” section is mostly concerned with energy usage and reducing GHGs. Interestingly, coffee sourcing is not part of Dunkin’s CSR metrics at all (Dunkin’ Donuts, 2017). The company did however report a grant to Rainforest Alliance to provide technical assistance to farmers in Peru. It appears that climate adaptation is even less of a priority to Dunkin’ than to Tim Horton’s, yet the partnership with Rainforest Alliance indirectly addresses the issue. This finding may suggest that some companies see third-party certification as a means to “check the box” of environmental and climate-related CSR.

Tchibo

Tchibo is German coffee company of comparable size to Tom Horton’s and Dunkin’ Donuts. Tchibo’s goal since 2006 has been to become a 100% sustainable business. The company’s 2018 sustainability report claims that Tchibo believes in sustainability “Because we believe that our future business success depends on a sustainable business policy”, (Tchibo, 2018), which is the closest I have encountered to a “survival” type CSR message from a coffee company. Like the previous two companies, Tchibo is also concerned with its carbon footprint, highlighting it as one of its key performance metrics. The company is also concerned with sustainable sourcing, dedicating a key performance metric to it as well. Unlike the previous two companies, support to coffee farmers is more front and center. In addition, Tchibo explicitly mentions climate change as a threat to the future of the industry and outlines specific actions to help farmers adapt. Tchibo seems at least on paper to embrace the concept of CSV as it relates to climate adaptation.

Starbucks

An American coffee company with over 28,000 locations around the world, Starbucks is a leader in the retail and coffeehouse industry. Starbucks was one of the first companies to popularize high-quality coffee consumption and “café culture” (Daviron & Ponte, 2005). Perhaps as a result of this, Starbucks was one of the first coffee companies to embrace sustainability concerns, dating back at least as early as their engagement with the Environmental Defense Fund (EDF) and Conservation International (CI) in the late 1990s (Austin & Reavis, 2004). Starbucks is committed to 100% ethical coffee sourcing, achieving 99% as of 2018 (Starbucks, 2018). Unlike other coffee companies mentioned, Starbucks does not rely on third party certification, instead using its own in-house “C.A.F.E” standards. Starbucks also has several community-related CSR targets, such as education support for its workers. Although Starbucks does not explicitly mention adaptation or resilience in its annual CSR report, it does point to two programs which indirectly address the issue. The first is the Farmer Loan Program, which provided low-interest finance to farmers in their supply chain to make changes. The other is a tree donation program, which aims to donate 100 million “resilient” trees to farmers by 2025 (Starbucks, 2019). It is also relevant to note that Starbucks is part of CERES’ Business for Innovative Climate and Energy Policy (BICEP) network, as well as a signee of the 2015 “Pledge” by major US companies to address climate change (White House Office of the Press Secretary, 2015). Clearly, Starbucks at least recognizes the importance of addressing climate change. These programs demonstrate a commitment to sustainability on the part of Starbucks, and even tangentially address the adaptation challenges, but do not explicitly address CSV as related to adaptation.

Nestlé

Nestlé is a Swiss company which includes coffee-related products Nespresso and Nescafé. Nestlé is the largest food and beverage company in the world and by far the oldest company I analyzed by close to a century. More than the other four companies mentioned, Nestlé embraces the concept of CSV, even going so far as to name their CSR report “Creating Shared Value” (Nestlé, 2018). Interestingly, climate adaptation and resilience are also more front and center than for the other companies I analyzed. Nestlé also specifically ties its targets to the SDGs. Nestle’s two largest coffee-related CSR programs are the Nescafé Plan and the Nespresso AAA Sustainable Quality Program. The former is a research and extension program for farmers intended to expand the supply of quality coffee. The latter is the company’s in-house certification standard, similar to Starbucks’ C.A.F.E. program. Unlike, Starbucks, Nestlé also uses third-party certification such as FairTrade and Rainforest Alliance. Although Nestlé explicitly mentions climate adaptation in its messaging, it appears mostly limited to extensive tree planting to increase shade. This is an important adaptation strategy, but it just scratches the surface of what needs to be accomplished to promote adaptive capacity for small holder farmers.

Emerging Collaboration Around Adaptation

Collaboration around climate adaptation in the coffee sector is piecemeal. Although the Paris Climate Agreement and the SDGs provide important frameworks and some general targets, the industry is lacking a true leader to drive adaptation research, strategy, and evaluation. However, there are some intriguing trends. First, the emergence of climate adaptation-based organizations within the past decade, such as the Global Alliance for Climate Smart Agriculture (GACSA) and FAO’s EPIC Programme, highlight the growing awareness around agricultural adaptation (Newell & Taylor, 2018). Another recent example is the Inter-American Development Bank’s SAFE platform. Second, the growth of the Adaptation Fund as a legitimate source of multilateral financing over the past decade helped fill a void in climate financing specifically for adaptation, even if it pales in comparison to mitigation-based funding mechanisms. Third, the emergence and growth of the Science-Based Targets initiative could push coffee companies to base their CSR strategies on proven climate-related metrics, as opposed to more one-off programs. However, to date the initiative focuses more on mitigation targets.

Discussion

Through an analysis of the coffee industry trends and a small sampling of company profiles, I found that adaptation is mostly ignored or overshadowed by other CSR concerns. It could be argued that these companies intend to tackle adaptation concerns through improving the socio-economic status of farmers (see the “socio-economic processes” on Fig. 2). However, this seems unlikely given the rhetoric of these initiatives and the stated reasons for implementing them. Even Nestlé, which bases its CSR strategy on CSV principles, only discusses adaptation in a broad sense. What is worse is that there appears to be little sector collaboration around adaptation aside from isolated efforts. The following section explores possible explanations.

Figure 2

Why Are Large Coffee Companies Neglecting Adaptation?

Other CSR priorities

All five of the companies analyzed have prominent public images. This means that they face public pressure for a range of issues beyond climate change concerns. These include, community relations, employee development and education, and reducing energy usage throughout their operations. These CSR initiatives are presumably important for the companies’ stakeholders, customers, and its reputation, and may contribute to the companies’ vision for CSV. It is possible that these companies understand the adaptation gap but have limited bandwidth to address them given other CSR concerns.

Certification

Coffee companies may see certification as sufficient to address climate-based concerns. All five of the companies I analyzed emphasize these standards to some extent. While in theory certification could promote climate adaptation through “socio-economic pathways”, it rests on the contested assumption that certification will directly improve farmer wellbeing (see for example, Glasbergen, 2018), and that if livelihoods are improved, farmers would necessarily know which adaptation actions are needed. As problematic as this explanation is, it would corroborate some of the industry-wide criticism that too much emphasis is placed on meeting third-party certification standards and industry guidelines. The industry may be slow to accept climate-related initiatives outside of the certification standards and the responsible sourcing commitments they worked so long to achieve.

Controversial Nature of Adaptation

Another explanation is that climate adaptation may be too controversial for individual coffee companies to address. As outlined earlier, the concept of climate adaptation implies that there is no answer for climate change and that humanity must accept the impacts (“principle-based” objections). Talking about the possible extinction of coffee may be something that coffee companies want to avoid to not scare customers. For instance, Starbucks’ tree donation and farmer loan programs in theory would promote adaptation, but the word “adaptation” is absent from public communications (Starbucks, 2019). Furthermore, climate change in the United States is still a highly politized topic, so US coffee companies may be reluctant to address adaptation specifically. The same way that mitigation efforts can be disguised generally as “environmental sustainability”, so to can adaptation be rebranded and diluted as “livelihood development” or “poverty alleviation”.

Lack of awareness

A possible but somewhat unlikely explanation is that coffee companies are not aware of the extent that the Arabica crop is threatened by climate change. While the scientific consensus is that coffee is extremely vulnerable, it may require more time and effort to disseminate this information among industry stakeholders. There is likely some lag time between new scientific evidence and implementation of related best management practices of companies because they must respond to their boards and shareholders. Still, given the technical sophistication and scientific literacy of the coffee industry, this explanation is rather weak.

Lack of leadership

It is also possible that the industry lacks clear leadership on adaptation. The original sustainable coffee movement required years and strong leadership from companies and NGOs to develop common goals, standards, and indicators. It is possible that the industry is aware of the adaptation challenge, but each company is waiting for a leader to emerge. A related concern is a lack of standardization of adaptation-based targets for the industry, a role that an industry leader could fulfill.

Competition

Related to lack of leadership is strong competition among coffee companies that deters cooperation. Companies may be reluctant to invest in adaptation since producers they invest in could easily switch buyers. There may also be hesitance to share information on techniques and best management practices to facilitate adaptation. The clean energy sector (an example of climate mitigation) faces a similar challenge with technology transfer. However, unlike the energy sector, no one owns patents on climate-smart agricultural practices, which are often promoted by NGOs and shared openly. There are some emerging trends which could potentially reduce these barriers, including the founding of the Global Coffee Platform (GGP) and the Sustainable Coffee Challenge (SCC). Both of these initiatives are non-competitive and could potentially include more adaptation specific actions if scaled-up (Panhuysen & Pierrot, 2018).

Conclusions

Future climate impacts—even if global emission goals are met—will have deep impacts on the coffee industry. According to some estimates, the majority of current coffee growing areas will be unsuitable for its production by the end of the century (Davis et al., 2012; Laderach et al., 2017). It is clear that if the coffee industry wants to survive the next 50–100 years, it needs to take climate adaptation more seriously. With world governments and donors reluctant to fund adaptation efforts due to principle and capacity/logistical reasons, one would expect major coffee companies to fill this gap. The coffee industry has a long history of CSR, making it theoretically better equipped than most industries to tackle “triple bottom line” issues. Given its CSR track record, power, and the existential threat it faces, one would expect to see major coffee companies seriously investing in adaptive practices which reduce the vulnerability of farmers. Through this approach, coffee companies could “create shared value” by simultaneously securing a steady supply of coffee and ensuring the livelihoods of farmers, their communities, and local economies.

Unfortunately, my analysis of five of the largest coffee companies did not support this assumption. These companies have expansive CSR programs, most of which include environmental or climate changed-related initiatives. Still, specific actions to reduce climate vulnerability are largely absent. Among the reasons for exclusion of adaptation activities may be competing CSR interests, limited awareness of adaptation needs, lack of leadership on adaptation, controversy around climate change as a concept, industry competition, and reliance on certification standards. This final reason deserves a more thorough analysis.

Certification programs are featured prominently by all five companies, which may serve as a stand-in for adaptation and other climate-related issues. Certification can be a powerful tool to reduce environmental impacts and create incentives for farmers. It can even reduce vulnerability to climate change by improving overall socio-economic well-being, for example through price premiums and access to premium markets (“socio-economic pathway” to adaptation). This reasoning is problematic for two reasons. First, it assumes that farmers will necessarily improve their livelihoods significantly through meeting certification criteria. Second, it assumes that if farmers have more resources and improved livelihoods, they will automatically know what kinds of adaptive practices will reduce their future vulnerability. Certification is thus a rather roundabout way to reduce vulnerability. A more direct strategy which invests in specific adaptation actions such as introducing climate resilient varieties, increasing shade cover, improving water collection and management, and controlling climate-related pest and disease outbreaks, would more effectively reduce the vulnerability of the farmers. This strategy would be more hands-on and costly than certification, but would most directly create shared value by securing farmer livelihoods and ensuring the supply of coffee for the companies which fund it.

Climate adaptation is both a challenge and an opportunity for the coffee sector. The constraints placed on governments and private donors to meet mitigation targets, promote international development, and deal with health and security threats, make climate adaptation low on the priority list. If it wants to survive past the twenty-first century, the coffee industry cannot wait for external actors to come to the rescue. The investment needed to adapt global coffee production to a changing climate is massive and will likely surpass all previous CSR initiatives. However, it is an opportunity to reshape the industry to be more equitable and sustainable, securing profits for coffee companies and livelihoods for producers. It is also an opportunity for the industry—regarded as one of the most enlightened with regards to CSR—to position itself as a leader in adaptation and as a model for other industries struggling with the effects of climate change.

More research is needed before specific strategy recommendations can be made for the industry. Future studies will need to incorporate research from a larger number of companies and include a more rigorous analysis of individual company policies through employee and board member interviews. This primary research will be useful in understanding not only the actions of individual companies, but also perceptions of adaptation within these companies. Future research should also seek to understand the role of coffee traders in climate adaptation. Because they are less public-facing, traders were excluded from the study. However, their relative insulation from the public view may actually increase the likelihood of engaging in climate adaptation activities. Finally, additional research should also examine the appetite for more sector-wide alliances to specifically address and finance large-scale climate adaptation actions.

Although this article focused on large coffee companies, it is important to not downplay the importance of coffee farmers in the adaptation process. Adaptation is inherently a local process, and any top-down strategy which does not include those at the bottom of the pyramid is likely to be maladaptive (Sovacool, 2013). Smallholders can benefit from the dissemination of best practices and increased farmer finance. However, the global coffee industry has much to learn from smallholders, who possess generations of knowledge which allows them to make the most of limited resources in changing contexts. Creating shared value is a meaningless term without their involvement.

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Kopi Dalam Gempuran Perubahan Iklim

Indonesia saat ini merupakan eksportir kopi nomor empat di dunia setelah Brazil, Vietnam dan Kolombia.  Ini menunjukkan bahwa kopi sudah memberikan devisa berharga bagi negeri ini. Produksi kopi dalam 12 tahun cendrung menurun dengan laju 0.7% per tahun.  Pada tahun tertentu penurunan bisa lebih besar akibat penyimpangan iklim yang cukup ekstrim. Perubahan iklim diperkirakan akan meningkatkan frekuensi dan intensitas iklim ekstrim yang dapat menurunkan panen kopi secara signifikan.  Hal yang lebih mengkhawatirkan, kenaikan suhu yang terus terjadi dapat menyebabkan kopi tidak lagi dapat berproduksi dan pada saatnya nanti kita tidak lagi dapat menikmati lezatnya secangkir kopi.

Kopi Indonesia sudah lama terkenal di dunia dengan citarasa yang khas dari setiap daerah penghasil kopi.  Kopi  Gayo – Aceh, Sidikalang – Sumatera Utara, Pangalengan – Jawa Barat, Kintamani – Bali, Toraja – Sulawesi Selatan, Wamena – Papua, dan kopi dari daerah lainnya di Indonesia memiliki rasa yang berbeda. Keanekaragaman rasa kopi di Indonesia menjadi salah satu daya tarik sehingga penikmat kopi tidak pernah bosan dan selalu mencoba berbagai rasa.   Beragamnya rasa kopi dari setiap daerah disebabkan oleh sifat biofisik yang berbeda seperti jenis tanaman dan satwa yang mendiami daerah tersebut.

Kopi yang hidup pada dataran tinggi akan berbeda rasanya dengan kopi dataran rendah. Kopi yang bersimbiosis dengan tanaman hutan akan berbeda rasanya dengan kopi yang berdampingan dengan pohon mangga, durian atau pohon buah-buahan lainnya. Begitu pula interaksi dengan fauna lainnya yang turut berpengaruh. Selain itu tentu saja kondisi iklim juga memberikan dampak terhadap rasa kopi dan produktivitasnya.  Kopi tertentu tidak bisa berproduksi atau produksi sangat rendah karena berubahnya kondisi iklim.

Pengamatan di Afrika selama 49 tahun terakhir menunjukkan adanya kenaikan suhu yang cukup konsisten dan menyebabkan penurunan produktivitas kopi yang cukup signifikan yaitu sebesar 46%.  Wilayah pertanaman yang sesuai untuk tanaman kopi juga semakin terbatas.  Di Indonesia, wilayah pertanaman kopi utama untuk jenis arabika umumnya pada wilayah dengan ketinggian di atas 1000 m d.p.l. sedangkan robusta antara 400-800 m d.p.l.

Upaya adaptasi yang dilakukan petani dengan naiknya suhu udara dan berubahnya pola hujan akibat perubahan iklim ialah mengembangkan wilayah pertanaman kopi baru ke wilayah yang lebih tinggi.  Wilayah dengan ketinggian di atas 1000 m d.p.l. umumnya di Indonesia umumnya masih berupa hutan dan berada pada kawasan lindung.  Penelitian yangh dilaksanakan oleh Tim peneliti IPB di wilayah Toba, Sumatera Utara, menemukan bahwa sudah banyak petani yang mengembangkan kebun kopinya ke wilayah yang lebih tinggi dan masuk ke wilayah hutan lindung, karena suhu lebih rendah dan masalah hama relatif lebih rendah.

Pada saat ini, sekitar 62% kebun kopi petani di Kabupaten Samosir berada di kawasan lindung.  Hasil prediksi yang dilakukan oleh Tim Peneliti IPB, apabila tidak ada upaya pencarian varietas yang lebih adaptif terhadap suhu tinggi, wilayah yang sangat sesuai (‘very suitable’) untuk pertanaman kopi yang sesuai di wilayah Toba akan bergeser ke ketinggian di atas 1500 m d.p.l.  Wilayah yang saat ini sangat sesuai untuk tanaman kopi akan menjadi tidak sesuai (unsuitable).   Hal ini berarti akan mengancam keberadaan hutan lindung.

Tantangan lain, terjadinya kenaikan suhu akibat perubahan iklim juga akan meningkatkan serangan hama penggerek buah kopi.  Pengamatan selama 10 tahun terakhir di wilayah Toba menunjukkan adanya tren kenaikan tingkat serangan hama ini.  Hasil proyeksi tim peneliti IPB menunjukkan bahwa tingkat serangan hama penggerek buah kopi akan semakin besar ke depan. Terjadinya kenaikan suhu akan menurunkan lama waktu yang diperlukan untuk menggandakan diri.

Pada saat ini di wilayah pertanaman kopi arabika (ketinggian 700-1500 m d.p,l), waktu yang diperlukan hama penggerek buah kopi untuk menggandakan diri antara 10 sampai 12 hari (hijau), di masa yang akan datang akan lebih singkat, yaitu hanya sekitar 4-5 hari (merah).  Dapat dibayangkan semakin cepatnya pertumbuhan populasi hama penggerek buah kopi, maka tingkat serangan hama akan semakin tinggi, dua sampai tiga kali lebih parah dari saat ini dan dapat membuat petani kopi tidak dapat lagi memanen kopinya.  Lebih lanjut hasil prediksi tim IPB, penurunan produktivitas kopi akibat perubahan iklim dapat mencapai lebih dari 50%.  Tanpa upaya adaptasi, produktivitas kopi pada wilayah pertanaman kopi saat ini tidak akan melebihi 0.5 t/ha.

Prasyarat Internasional

Dunia internasional saat ini semakin menyukai kopi Indonesia. Namum demikian, dunia internasional memiliki prasyarat-prasyarat dalam mengkonsumsi berbagai komoditi termasuk kopi. Perhatian negara-negara Eropa dan Amerika terhadap isu lingkungan akhir-akhir ini semakin besar. Untuk itu kopi Indonesia harus mulai membenahi produksi kopi khususnya pada tahap budidaya dan pasca panen.  Negara-negara maju semakin peduli dengan isu deforestasi dan degradasi lahan.  Terjadinya perubahan iklim diprediksi akan membatasi wilayah pengembangan kopi ke wilayah yang lebih tinggi yang umumnya berada pada kawasan lindung dan berhutan.

Perilaku budidaya kopi pada daerah lindung dan konservasi dengan karbon tinggi akan berpengaruh terhadap perubahan iklim (PI). Negara-begara Uni Eropah pengimpor komoditas pertanian mensyaratkan bahwa dalam pengembangan kebun atau lahan pertanian tidak menyebabkan terjadinya konversi atau pemanfaatan lahan-lahan yang memiliki cadangan karbon tinggi seperti hutan.  Apabila pola pengembangan kebun kopi dengan pemanfaatan atau pembukaan lahan berhutan terus berlanjut maka akan berdampak pada citra kopi Indonesia di mata internasional. Untuk itu dibutuhkan strategi dalam pengembangan dan kajian teknologi sehingga kopi Indonesia lebih adaptif terhadap perubahan iklim dan produksinya meningkat dengan citarasa terjaga, sehingga tetap laku di dunia.

Teknologi Adaptif Iklim untuk Petani Kopi

Beragamnya pengaruh perubahan iklim terhadap tanaman kopi, menimbulkan kekhawatiran banyak Negara penghasil kopi dan sudah barang tentu bagi para pencandu kopi.  Hilangnya kopi dengan cita rasa tertentu karena tidak lagi bisa dikembangkan akibat perubahan iklim, sudah menjadi perbincangan dunia.  Berbagai media melaporkan bahwa perubahan iklim sudah mengancam kopi.  Tanpa ada upaya adaptasi, bukan tidak mungkin dalam 30 tahun ke depan, banyak negara penghasil kopi saat ini tidak lagi bisa berproduksi, bahkan diprediksi 50 tahun ke depan, kita tidak lagi bisa menikmati secangkir kopi karena kopi tidak lagi bisa ditanam karena dengan terjadinya perubahan iklim, tidak ada lagi lokasi yang bisa ditanami kopi.

Oleh karena itu, diperlukan adanya varietas atau jenis kopi yang lebih tahan suhu tinggi, teknologi yang adaptif, tahan terhadap serangan hama dan memiliki produksi yang tinggi. Petani menunggu bimbingan dari parapihak, pemerintah dan ahli kopi.   Dari pengamatan lapangan, sebagian besar  petani kopi di wilayah Toba masih banyak yang belum menerapkan praktek-praktek budidaya pertanian dan manajemen yang baik.  Kegiatan pemangkasan misalnya jarang dilakukan petani, kalaupun ada tidak dilakukan secara kontinu atau bagian-bagian tanaman yang dipangkas tidak menentu, sehingga tanaman menjadi tinggi yang menyulitkan pada saat panen, cabang-cabang meranggas sehingga komposisi antara cabang-cabang bawah, tengah dan atas tidak seimbang dan proporsional lagi.

Kondisi ini menyebabkan umur ekonomisnya menjadi lebih singkat.  Penggunaan naungan juga banyak yang belum melakukannya, sementara tanaman kopi sangat memerlukan kondisi ini.  Pengendalian hama penggerek buah juga relatif tidak dilakukan dengan baik.  Buah yang rusak dan diserang penggerek buah banyak ditinggalkan dibiarkan jatuh di tanah sehingga menjadi sumber makanan bagi hama untuk terus berkembang.  Pengelolaan yang baik, ialah dengan memutus siklus hama dengan cara mengambil semua buah yang ada pada tanaman maupun yang jatuh di tanah dan dimusnahkan.  Cara pengendalian ini akan efektif apabila dilakukan oleh semua petani dalam suatu hamparan yang sama, kalau tidak hama PBKo hanya akan pindah dari satu kebun ke kebun lainnya.  Kurang diterapkannya praktek-prekter pertanian yang baik membuat tanaman kopi semakin rentan terhadap dampak perubahan iklim.

Momentum tingginya permintaan kopi dalam negeri, luar negeri dan persepsi positif masyarakat terhadap kopi yang ditandai dengan maraknya berbagai café-café kopi perlu disikapi dengan melakukan edukasi pada petani kopi. Petani yang terlanjur melakukan budidaya kopi pada areal konservasi dan lokasi yang memiliki stok karbon tinggi diharapkan tidak mengembangkan lagi pada daerah lain dengan kondisi sama. Perlu dicarikan lokasi budidaya kopi berupa daerah terdeforestasi atau stok karbon rendah dan dalam pengembangannya menggunakan tanaman naungan multiguna yang dapat menciptakan kondisi iklim mikro yang sesuai bagi kopi.  Namun demikian, pengembangan kebun kopi ke dalam wilayah berhutan tanpa merusak hutannya melalui program perhutanan sosial juga dapat dilakukan.

Prof. Dr. Rizaldi Boer, Direktur Eksekutif CCROM SEAP IPB

Sumber:

Capital, Science, Technology

Understanding the way in which contemporary capitalism—which Samir Amin insightfully characterized as the era of generalized monopolies—organizes productive forces is crucial to grasping both the forms of domination defining imperialism today and the profound metamorphoses that monopoly capital has undergone during the last three decades.¹

The concept of general intellect, put forward by Karl Marx, is a useful starting point for the exploration of the organization of productive forces. Let us take the example of one of the most “advanced” innovation systems today: Silicon Valley’s Imperial System. Our analysis seeks not only to reveal the profound contradictions of capitalist modernity, but also to highlight the significant transmutation that today’s monopoly capital is undergoing. Far from acting as a driving force for the development of social productive forces, it has become a parasitic entity with an essentially rentier and speculative function. Underlying this is an institutional framework that favors the private appropriation and the concentration of the products of general intellect.

Capital, General Intellect, and the Development of Productive Forces

Capitalism is characterized by the separation of the direct producers from their means of production and subsistence. This separation broke violently into the embryonic phase of capitalist development with the process that Marx referred to as “so-called primitive accumulation” (more correctly translated as “so-called primary accumulation”). It is not just a foundational process, external or alien to the dynamics of capitalism, but one that reproduces itself over time and is accentuated through new and increasingly sophisticated mechanisms with the advent of neoliberal policies, so much so that David Harvey proposed the category “accumulation by dispossession” in his book The New Imperialism to refer to this incessant phenomenon.²

Importantly, the primal separation of the direct producer that Marx describes in chapters 14 and 15 of the first volume of Capital is only formal. In the early stages of industrial capitalism, even if the direct producers did not own the means of production—which they considered foreign property and an external force of domination—they maintained some control over their working tools in the production process. Thus, the separation was not wholly complete until the appearance of large-scale industry in the second half of the twentieth century, which radically changed the situation. The production of machines by machines—that is, the use of an integrated machinery system, as a totality of mechanical processes distributed in different phases moved by a common motor—gave way to a complete separation between workers and their tools. This brought the optimal conditions for a second and deeper dispossession, relegating labor to a subordinated role in the production process and converting the worker into an appendage of a machine. It is worth mentioning, however, that the use of this metaphor by Marx does not mean that the direct producer is unable to eventually contribute to the attainment of an improvement or a technological innovation. There are several historical examples that account for this possibility.

Nevertheless, in terms of the theory of value, there is a general movement toward the predominance of dead labor, objectified in the machine, over living labor—in other words, the prevalence of relative surplus value in the dynamics of capitalist accumulation. The emergence of machinery and large-scale industry meant that capital managed to create its own technical mode of production as the foundation of what Marx conceives in the unpublished sixth chapter of Capital, volume 1, as the real subsumption of labor under capital; in other words, the “specific capitalist mode of production.” As Marx wrote, “the historical significance of capitalist production first emerges here in striking fashion (and specifically), precisely through the transformation of the direct production process itself, and the development of the social productive powers of labour.”³

This process originated during the second half of the First Industrial Revolution and deepened during the Second Industrial Revolution (1870–1914), where science and technology appear as engines of production, forcing development as the so-called first globalization was occurring. Since then, the growth of capital has been directly associated with the development of production forces and the consequent expansion of surplus value, mainly in the form of relative surplus value. At the same time, this is marked by the continuous increase in the organic composition of capital (the relation between capital invested in the means of production and that invested in the labor force), where “the scale of production is not determined according to given needs but rather the reverse: the number of products is determined by the constantly increasing scale of production, which is prescribed by the mode of production itself.”⁴ This inherent contradiction in the specifically capitalist mode of production is related, in turn, to (1) the trend of concentration and centralization of capital that accompanies accumulation dynamics and (2) the concomitant tendency toward absolute impoverishment of the working class, in what Marx conceives as the general law of capitalist accumulation:

The greater the social wealth, the functioning capital, the extent and energy of its growth, and, therefore, also the absolute mass of the proletariat and the productiveness of its labor, the greater is the industrial reserve army. The same causes which develop the expansive power of capital also develop the labor power at its disposal. The relative mass of the industrial reserve army increases, therefore, with the potential energy of wealth. But the greater this reserve army in proportion to the active labor army, the greater is the mass of a consolidated surplus population, whose misery is in inverse proportion to its torment of labor. Finally, the greater the growth of the misery within the working class and the industrial reserve army, the greater the official pauperism.⁵

The trend toward the complete separation of the worker from the means of production is consolidated into what Victor Figueroa described as follows:

The factory offers us the image of a production center that does not demand workers’ awareness or knowledge of the production process.… As if the factory, being itself the result of the productive application of knowledge, demanded for the knowledge to be developed outside and, therefore, independently to the workers it houses, where immediate labor is presumably a mere executor of the progress forged separately by science.⁶

In Labor and Monopoly Capital, Harry Braverman described this fissure as an essential part of the scientific and technological revolution that detached the subjective and objective content of the labor process.

The unity of thought and action, conception and execution, hand and mind, which capitalism threatened from its beginning, is now attacked by a systemic dissolution employing all the resources of science and various engineering disciplines based upon it. The subjective factor of the labor process is removed to a place among its inanimate objective factors. To the materials and instruments of production are added a “labor force,” another “factor of production,” and the process is henceforth carried on by management as the sole subjective element.… This displacement of labor as the subjective element of the process, and its subordination as an objective element in a productive process now conducted by management, is an ideal realized by capital.⁷

In the face of these circumstances, derived from the technical and social division of labor inherent to the specifically capitalist mode of production, it is worth asking ourselves: In what way does capital, beyond the immediate work that is deployed in the factory, organize the development of the productive forces? What kinds of workers, universities, and research centers participate in this process? What is the role of the state and other institutions? What role do accumulated social knowledge, basic and applied science play? What types of intangible and tangible products are generated? What are the mechanisms and mediations involved in the transformation of scientific and technological work to productive forces? What kind of profit enters the scene and how does it affect the dynamics of social surplus value distribution, concentration, and centralization of capital?

Although Marx does not explicitly address this issue in Capital except in marginal footnotes, in the Grundrisse’s “Fragment on Machines,” he coined the category of general intellect and made some considerations, in the form of notes, that provide important clues to help us understand the subject.

Nature builds no machines, no locomotives, railways, electric telegraphs, self-acting mules etc. These are products of human industry; natural material transformed into organs of the human will over nature, or of human participation in nature. They are organs of the human brain, created by the human hand; the power of knowledge, objectified. The development of fixed capital indicates to what degree general social knowledge has become a direct force of production, and to what degree, hence, the conditions of the process of social life itself have come under the control of the general intellect and have been transformed in accordance with it. To what degree the powers of social production have been produced, not only in the form of knowledge, but also as immediate organs of social practice, of the real-life process.⁸

From this, we can infer that fixed capital, or constant capital, is condensed into past material and immaterial labor (dead labor). Consequently, accumulated social knowledge is objectified in the means of production and becomes an immediate force of production. In other words,

general intellect is a collective and social intelligence created by accumulated knowledge and techniques. This radical transformation of the workforce and the incorporation of science, communication and language within the productive forces has redefined the entire phenomenology of labor and the entire global horizon of production. General intellect means that the general form of human intelligence becomes a productive force in the sphere of global social labor and capitalist valorization. The power of science and technology are put to work.… With the concept of general intellect, Marx refers to science and consciousness in general, that is, the knowledge on which social productivity depends.⁹

With the advent of the capitalist mode of production, a new and particularly significant division was created between what could be called immediate labor and scientific-technological labor. While the former unfolds in the factory, the latter is carried out separately and under different, although complementary, forms of organization, with both converging in the critical function for capitalist development: the increase of surplus value. If immediate labor is actually subsumed by capital, scientific and technological labor can only be, at best, formally subsumed, becoming what Figueroa calls a workshop of technological progress to distinguish it from the way immediate labor in the factory is organized.¹⁰ However, the way general intellect is structured, in its quest to accelerate the development of productive forces, acquires increasingly sophisticated and complex modalities, as in the paradigmatic case of the Silicon Valley Imperial Innovation System.

The growing importance of immaterial work in the production process does not imply a “crisis” of the law of value, as suggested by Antonio Negri.¹¹ Rather, it implies that an increasing proportion of the social surplus value and the social surplus fund captured by capital and the state is redistributed toward activities aimed at promoting the development of productive forces. In other words, immediate labor and scientific-technological labor interweave dialectically to broaden the scope of capital valorization through the deepening of exploitation. In this sense, under the prism of the theory of value, the general intellect contributes to increasing the organic composition of capital with a powerful leitmotif: the appropriation of extraordinary profits, that is, profits greater than the average profit, commonly conceived as technological rents. In this aspect, the Ecuadorian-Mexican philosopher Bolívar Echeverría specifies that there are

two poles of monopoly property to which the group of capitalist owners must acknowledge rights in the process of determining the average profit. Based on the most productive resources and provisions of nature, land ownership defends its traditional right to convert the global fund of extraordinary profit into payment for that domain, in other words, into ground rent. The only property that is capable of challenging this right throughout modern history and has indefinitely imposed its own, is the more or less lasting domain over a technical innovation of means of production. This property forces the conversion of an increasing part of extraordinary profit into a payment for its dominion, in other words, into a “technological rent.”¹²

It is worth noting that Echeverría brackets the notion of technological rent, associating it with ground rent—or surplus associated with the ownership of a monopolizable good that does not derive from incorporated labor during the production process. Under the new forms of general intellect organization, monopoly capital appropriates profit through the acquisition of patents, without implying investments in the promotion and development of the productive forces, behaving in this sense as a rentier agent.

Unlike immediate labor, the subordination of scientific and technological labor to capital is extremely complex, especially because the value that the scientific and technological labor force incorporates into the production process is not immediately objectified; it is the product and result of social knowledge expressed in the market once new commodities, new production processes, and new ways of organizing and increasing labor productivity are concretized. Pablo Míguez refers to this phenomenon not as “a simple subordination to capital, but an independent relation to labor time imposed by capital, making it increasingly difficult to distinguish working time from production time or leisure time.”¹³

From the theory of value perspective, the process of valorization of scientific and technological labor is materialized in the production and circulation sphere, but in the distribution sphere of valorized capital, that social surplus value, mediated by intellectual property, is issued in the form of a rent. In this sense, it is important to emphasize the fundamental role held by states in the distribution of social surplus to promote basic and applied science, supporting public and private universities, as well as research centers. The state also contributes to creating institutions and policies that allow for the private appropriation of rent to come out of the general intellect. These institutions become crucial to the dynamics of accumulation and uneven development characterizing contemporary capitalism and imperialism.

The transformation of the general intellect into an immediate productive force, materialized in new commodities and new ways of organizing the labor process, requires the mediation of patents and a patenting system. In the capitalist mode of production, the creation of intellectual property through patents or patenting systems acquires a strategic importance in relation to the control and orientation of productive forces. This becomes a key element both for the private appropriation of products that emanate from the general intellect, and for the organization of innovation systems. In this sense, national and international patent legislations constitute a mechanism that enables the privatization and commodification of common goods, hindering potentially beneficial innovations for society.¹⁴ For example,

The legal mechanisms for the private appropriation of scientific-technological labor, with the patent as a nodal part in the restructuring of innovation systems, becomes a basic piece for the withholding of extraordinary profits made possible through global corporate regulation in tune with the imperial State policies.… Hence, international law functions as a core piece of private control of scientific-technological labor through a series of intellectual property and international trade regulatory agreements.¹⁵

Following this idea, Míguez argues that, in the context of contemporary capitalism, “intellectual property is reinforced as it is the only mechanism that allows for the private appropriation of increasingly social knowledge in its incessant quest to valorize capital.”¹⁶

The development of the productive forces in contemporary capitalism—and the course followed by the general intellect—cannot be understood separately from the contemporary domination of monopoly capital. This hegemonic fraction of capital—ubiquitous in contemporary capitalism—finds its raison d’être in the appropriation of extraordinary profits and technological rents through monopoly prices, among other processes. According to Marx, monopoly appropriation of profit through prices refers to prices that rise above the cost of production and the average profit together, enabling monopoly capital to appropriate a relatively greater portion of social surplus value than the one that would correspond to conditions of free competition.

Another fundamental feature of monopoly capital, as a sine qua non condition for obtaining profits, is its need to maintain lasting advantages over other possible participants in a particular branch or branches where it operates. Such advantages can be natural or artificial, depending on the combination of forms of surplus profit, which, in turn, configure particular monopolistic practices. One of these forms is related to capitalism’s revolutionary development of productive forces, as envisioned by Marx: technological change. In this regard, Joseph A. Schumpeter—far from intending to identify his vision of technological change with that proposed by Marx in Capital—sets forth the existence of a positive relationship between innovation and monopoly power, arguing that competition through innovation or “creative destruction” is the most effective means of acquiring advantages over potential competitors. Furthermore, Schumpeter argues that innovation is both a means of achieving monopoly profit and a method of maintaining it.

It should be noted, however, that in the Marxist conception, there is no mechanical or direct identification of technological change with a positive vision of progress. On the contrary, being governed by the law of value and the necessity of capital to broaden accumulation, technological change does not escape the contradictions of capitalist modernity, which, as Echeverría emphasizes, “leads itself, structurally, by the way in which the process of reproduction of social wealth is organized…to the destruction of the social subject and the destruction of nature where this social subject affirms itself.”¹⁷

The appropriation of extraordinary monopoly profits produced by means of intellectual property is accompanied in contemporary capitalism by a profound restructuring of this hegemonic fraction of capital, through a process of hyper-monopolization, where three additional forms of profit appropriation stand out:¹⁸

1. The formation of monopoly capital global networks, commonly known as global value chains, through the geographic expansion of corporate power by transferring parts of production, commercial, and financial service to peripheral countries in search of cheap labor.¹⁹ Basically, it is a new nomadism in the global production system based on the enormous wage differentials that persist between the Global North and the Global South (the global labor arbitrage). This restructuring strategy has deeply modified the global geography of production to the degree that just over 70 percent of industrial employment is currently located in peripheral or emerging economies.²⁰
2. The predominance of financial capital over other factions of capital.²¹ In the absence of profitable investments in the productive sphere due to the overaccumulation crisis triggered in the late 1970s, capital began moving toward financial speculation, creating strong distortions in the sphere of social surplus value distribution through the financialization of the capitalist class, which has led to an explosion of fictitious capital—financial assets without a counterpart in material production.²²
3. The proliferation of extractivism by monopolizing and controlling land and subsoil by monopoly capital.²³ In addition to accentuating the dynamics of accumulation by dispossession, the growing global demand for natural resources and energy has led to an unprecedented privatization of biodiversity, natural resources, and communal goods benefiting mega-mining and agribusiness. This implies the appropriation of huge extraordinary profits in the form of ground rent (unproduced surplus value) that translates into greater ecosystem depredation, pollution, famine, and disease with severe environmental implications, including global warming and worsening extreme climatic events that jeopardize the symbiosis between human society and nature.²⁴

The predominance and metamorphosis of monopoly capital under the neoliberal aegis has brought about far-reaching transformations in the organization of production and the labor process. These transformations are integral to the global capitalist system’s geography, leading to a fall of the welfare state, an increase in social inequalities, and the emergence of a new international division of labor, where the labor force becomes the main export commodity. This, in turn, gives way to new and extreme forms of unequal exchange and transfer of surplus from the periphery to the core economies of the system. In this context, the irruption of the technoscience revolution has generated new ways of promoting scientific and technological creativity, of organizing the general intellect on a global scale and of appropriating its products.

Untangling Silicon Valley’s Imperial Innovation System

A strategic dimension of capitalist development in the era of generalized monopolies corresponds to the extraordinary dynamism that the development of productive forces achieves through a rampant rate of patenting. Hence, it is vital to understand the characteristics of the most advanced innovation system today, hegemonized by the United States and georeferenced in Silicon Valley, which operates as a powerful patenting machine and has tentacles in various peripheral and emerging countries. The organizational architecture of the general intellect in this complex economic terrain enables corporate control over scientific and technological labor of an impressive mass of intellectual workers trained in different countries around the world, both in core and periphery economies. In this system, a wide range of agents and institutions interact to speed up the dynamics of innovation, reducing the costs and risks associated with inventors and independent entrepreneurs—organized through innovative embryonic companies known as startups—to be capitalized by large corporations through the acquisition or appropriation of patents.²⁵

Some of the most outstanding features of what we conceive as the Silicon Valley Imperial Innovation System are:

1. The internationalization and fragmentation of research and development activities under “collective” methods of organizing and promoting innovation processes: peer to peer, share economy, commons economy, and crowdsourcing economy, through what is known as Open Innovation. These are forms of scientific and technological inventions produced outside the boundaries of multinational corporations, which involve the opening and spatial redistribution of knowledge-intensive activities, with the increasing participation of partners or external agents to large corporations, such as startups that operate as privileged cells of the new innovative architecture, venture capital, clients, subcontractors, head hunters, law firms, universities, and research centers.²⁶ This new form of organizing the general intellect has given way to the permanent configuration and reconfiguration of innovation networks that interact under a complex interinstitutional fabric commanded together by large multinational corporations and the imperial state (see Chart 1). This networked architecture has deeply transformed previous ways of driving technological change. ‌It is worth noting that, in this context, scientific and technological labor carried out by startups is not formally subsumed to capital as inventors are not direct employees of large corporations. Hence, subsumption is subtle and indirect, backed by an institutional framework established by the Patent Cooperation Treaty of the World Intellectual Property Organization (WIPO) and a sophisticated ecosystem network that fosters the collective development of products emerging as part of the general intellect on a planetary scale and its private appropriation through patents and other proprietary mechanisms mediated by law firms responding to large multinational corporation interests. As a result, accumulated social knowledge—a collective drive accelerated by networks of scientists and technologists—ends up in corporate hands through juridical mechanisms.²⁷
2. The creation of scientific cities such as Silicon Valley in the United States and new “Silicon Valleys” recently established in peripheral areas or emerging regions, mainly in Asia, where collective synergies are created to accelerate innovation processes. As Annalee Saxenian highlights, it is a new georeferenced paradigm that moves away from the old research and development models and opens the way for a new culture of innovation based on flexibility, decentralization, and the incorporation, under different modalities, of new and increasingly numerous players that interact simultaneously in local and transnational spaces.²⁸ Silicon Valley became the pivot point of a new global innovation architecture, around which multiple peripheral links are woven to operate as a sort of scientific maquiladora located in regions, cities, and universities around the world. This gives rise to a new and perverse modality of unequal exchange, through which the costs of forming and reproducing a highly skilled workforce involved in the dynamics of scientific innovation are transferred from core economies to peripheral and emerging countries, generating extraordinary profits via monopolistic technological rents.
3. New forms of control and appropriation of scientific labor products by large multinational corporations, through various forms of subcontracting, associations, and management and diversification of venture capital. This control is established through a two-way channel. On the one hand, it is established through specialized teams of lawyers thoroughly familiar with the institutional framework and operating rules for patents imposed by the Patent Cooperation Treaty and WIPO, serving the interests of large corporations. Under this complex and intricate regulatory framework (see Chart 2), it is practically impossible for independent inventors to register and patent products on their own. On the other hand, this is done through teams of lawyers who operate as headhunters, contractors, and subcontractors working though “strategic investment” to appropriate and gain control over general intellect products.²⁹
   ‌The way in which large multinational corporations participate in the dynamics of innovation incubated and deployed through the Silicon Valley matrix reveals that, more than development driven to facilitate social productive forces, monopolistic capital operates as a rentier agent that appropriates the products of the general intellect without participating in the production process of its development. In other words, the extraordinary profits that constitute the leitmotif of monopoly capital become technological rents in accordance with the meaning that Marx attributes to ground rent: the possibility of demanding a significant portion of social surplus value by virtue of owning a product, in this case the patent, though not acquiring it through a production process that incorporates value through labor. Hence, in the era of generalized monopolies, monopoly capital ceases to be a progressive agent in the development of the productive forces and becomes a parasitic entity that even decides, as owner of intellectual property, which products are potentially significant in the market and which will remain petrified in the freezer of social history.³⁰
4. A North-South horizon expansion of the workforce in areas of science, technology, innovation, and mathematics, and increasing recruitment of a highly skilled workforce from the peripheries through outsourcing and offshoring mechanisms. In this sense, highly skilled migration from peripheral countries plays an increasingly relevant role in global innovation processes, generating a paradoxical and contradictory dependence of the South on the North, where patent inventors more often reside in peripheral and emerging countries. In fact, this trend can be seen as part of a higher stage in the development of global value chains—what we prefer to call global monopoly capital networks—as the new international division of labor moves up the value-added chain to the scientific and technological sphere, and while monopoly capital moves to capture profit derived from productivity and knowledge contributed by a highly qualified workforce from the Global South.³¹ This trend can be found in different sectors of the global economy, including agricultural biotechnology and biohegemony in transgenic crops, as well as the appropriation of Indigenous knowledge related to seed technology.³²

Chart 1. Graphic Representation of the Silicon Valley Innovation System

Source: Produced based on information gathered from Strategic Business Insights.

Chart 2. World Intellectual Property Organization Patent Cooperation Treaty

Source: Image adapted from the World Intellectual Property Organization Patent Cooperation Treaty, 2015, http://www.wipo.int.

A key piece that supports the new geopolitics of innovation is the creation of an ad hoc institutional framework aimed at the concentration and appropriation of general intellect products through patents under the tutelage and supervision of the WIPO in agreement with the World Trade Organization (WTO).³³ Since the late 1980s, there has been a trend toward generating legislation in the United States, in tune with the strategic interests of large multinational corporations in the field of intellectual property rights.³⁴ Through rules and regulations promoted by the WTO, the scope of this legislation has been significantly expanded. The Office of the U.S. Trade Representative has taken on the role of promoting the signing and implementation of free trade agreements, since intellectual property disputes within the WIPO/WTO tend to be enormously complex due to their multilateral nature. The U.S. strategy also includes bilateral free trade agreement negotiations as a complementary measure to control markets and increase corporate profits. The regulations established by the Patent Cooperation Treaty, amended in 1984 and 2001 within the framework of the WIPO and WTO, have contributed significantly to the strengthening of this trend.

In addition, according to the nature and characteristics of the Imperial Innovation System, the United States appears as the leading capitalist power in innovation worldwide, absorbing 23.9 percent of the total patent applications registered in the WIPO from 1996 to 2018. However, in the same period, China surpassed the United States in patent applications, with 23.1 percent compared to the U.S. 21.7 percent (Table 1).

Table 1. Requested and Granted Patents: Total and 10 Main Countries, 1996–2018

Patents: Granted	Requested	Distribution (%)	Granted	Distribution (%)	Percent Granted	Rank
Total	45,361,224	100.0	19,447,764	100.0	42.9
Subtotal	37,412,593	82.5	15,696,151	80.7	42.0
China	10,497,318	23.1	3,138,160	16.1	29.9	3
U.S.A.	9,862,774	21.7	4,646,826	23.9	47.1	1
Japan	8,627,834	19.0	4,093,992	21.1	47.5	2
Korea	3,534,255	7.8	1,811,789	9.3	51.3	4
Germany	1,406,340	3.1	357,246	1.8	25.4	7
Canada	842,421	1.9	388,204	2.0	46.1	6
Russian Federation	831,702	1.8	622,539	3.2	74.9	5
India	652,043	1.4	130,933	0.7	20.1	13
United Kingdom	601,246	1.3	165,056	0.8	27.5	12
Australia	556,660	1.2	341,406	1.8	61.3	8

Source: SIMDE-UAZ. Estimations using data by WIPO, 1996–2018.

In the era of generalized monopolies, the development of productive forces has entered a point of no return in which the contradictions between progress and barbarism embodied in capitalist modernity have become more evident than ever before. The historical mission of progress attributed to capitalism in the development of the productive forces of society has turned into its opposite: a regressive path that threatens nature and humanity. In this context, the current dispute between the United States and China is uncertain. While there are signs that the United States still maintains leadership in strategic fields of innovation, China has been gaining ground and contesting the U.S. scientific-technological preeminence and global hegemony. Under the conditions of this disputed scenario, the COVID-19 pandemic opens a great question, where the only certainty is uncertainty.

Notes

1. ↩ David Harvey, A Brief History of Neoliberalism (Oxford: Oxford University Press, 2005).
2. ↩ Karl Marx, chap. 6 in El capital (1867; repr. Mexico: Siglo XXI, 1981), 60.
3. ↩ Marx, chap. 6 in El capital, 76.
4. ↩ Karl Marx, El capital, tomo 1, vol. 3 (1867; repr. Mexico: Siglo XXI, 2005), 804.
5. ↩ Victor Figueroa, Reinterpretando el subdesarrollo: Trabajo general, clase y fuerza productiva en América Latina (Mexico: Siglo XXI, 1986), 40.
6. ↩ Karl Marx, Elementos fundamentales para la crítica de la economía política 1857–1858 (Grundrisse), tomo 2 (1858; repr. Mexico: Siglo XXI, 1980), 229–30.
7. ↩ Antonio Gómez Villar, “Paolo Virno, lector de Marx: General Intellect, biopolítica y éxodo,” SEGORÍA: Revista de Filosofía Moral y Política 50 (2014): 306.
8. ↩ Figueroa, Reinterpretando el subdesarrollo: trabajo general, clase y fuerza productiva en América Latina, 41.
9. ↩ Antonio Negri, Marx más allá de Marx (Madrid: Akal, 2001).
10. ↩ Bolívar Echeverría, Antología: Crítica de la modernidad capitalista (La Paz: Oxfam, Vicepresidencia del Estado Plurinacional de Bolivia, 2011): 78–79.
11. ↩ Pablo Míguez, “Del General Intellect a las tesis del Capitalismo Cognitivo: Aportes para el estudio del capitalismo del siglo XXI,” Bajo el Volcán 13, no. 21 (2013): 31.
12. ↩ Guillermo Foladori, “Ciencia Ficticia,” Estudios Críticos del Desarrollo 4, no. 7 (2014): 41–66.
13. ↩ Julián Pinazo Dallenbach and Raúl Delgado Wise, “El marco regulatorio de las patentes en la reestructuración de los sistemas de innovación y la nueva migración calificada,” Migración y Desarrollo 27, no. 32 (2019): 52.
14. ↩ Míguez, “Del General Intellect a las tesis del Capitalismo Cognitivo,” 39.
15. ↩ Echeverría, Antología, 173.
16. ↩ Francisco Javier Caballero, “Replanteando el desarrollo en la era de la monopolización generalizada: Dialéctica del conocimiento social y la innovación” (PhD dissertation, Universidad Autónoma de Zacatecas, Mexico, 2020).
17. ↩ Raúl Delgado Wise and David Martin, “The Political Economy of Global Labor Arbitrage,” in The International Political Economy of Production, ed. Kees van der Pijl (Cheltenham: Edward Elgar, 2015), 59–75.
18. ↩ John Bellamy Foster, Robert W. McChesney, and R. Jamil Jonna, “The Global Reserve Army of Labor and the New Imperialism,” Monthly Review 63, no. 6 (November 2011): 1–15.
19. ↩ Walden Bello, “The Crisis of Globalist Project and the New Economics of George W. Bush,” in Critical Globalization Studies, ed. Richard P. Appelbaum and William I. Robinson (New York: Routledge, 2005),101–9.
20. ↩ Robert Brenner, The Boom and the Bubble: The U.S. in the World Economy (New York: Verso, 2002); John Bellamy Foster and Hannah Holleman, “The Financialization of the Capitalist Class: Monopoly-Finance Capital and the New Contradictory Relations of Ruling Class Power,” in Imperialism, Crisis and Class Struggle: The Enduring Verities and Contemporary Face of Capitalism, ed. Henry Veltmeyer (Leiden: Brill, 2010).
21. ↩ James Petras and Henry Veltmeyer, Extractive Imperialism in the Americas (Leiden: Brill, 2013).
22. ↩ Guillermo Foladori and Naina Pierri, ¿Sustentabilidad? Desacuerdos sobre el desarrollo sustentable (Mexico: Miguel Ángel Porrúa, 2005).
23. ↩ Raúl Delgado Wise, “Unraveling Mexican Highly-Skilled Migration in the Context of Neoliberal Globalization,” in Social Transformation and Migration: National and Local Experiences in South Korea, Turkey, México and Australia, ed. Stephen Castles, Derya Ozkul, and Magdalena Arias Cubas (Basingstoke: Palgrave MacMillan, 2015): 201–18; Raúl Delgado Wise and Mónica Guadalupe Chávez, “¡Patentad, patentad!: Apuntes sobre la apropiación del trabajo científico por las grandes corporaciones multinacionales,” Observatorio del Desarrollo 4, no. 15 (2016): 22–30; Míguez, “Del General Intellect a las tesis del Capitalismo Cognitivo.”
24. ↩ Henry Chesbrough, “Open Innovation: A New Paradigm for Understanding Industrial Innovation,” in Open Innovation: Researching a New Paradigm, ed. Henry Chesbrough, Wim Vanhaverbeke, and Joel West (Oxford: Oxford University Press, 2008), 1–14.
25. ↩ Guillermo Foladori, “Teoría del valor y ciencia en el capitalismo contemporáneo,” Observatorio del Desarrollo 6, no. 18 (2017): 42–47.
26. ↩ AnnaLee Saxenian, The New Argonauts: Regional Advantage in a Global Economy (Boston: Harvard University Press, 2006).
27. ↩ Titus Galama and James Hosek, S. Competitiveness in Science and Technology (Santa Monica, CA: RAND, 2008).
28. ↩ Foladori, “Teoría del valor y ciencia en el capitalismo contemporáneo.”
29. ↩ Raúl Delgado Wise, “El capital en la era de los monopolios generalizados: Apuntes sobre el capital monopolista,” Observatorio del Desarrollo 6, no.18 (2017): 48–58; Rodrigo Arocena and Judith Sutz, “Innovation Systems and Developing Countries” (DRUID Working Paper 02–05, Danish Research Unit for Industrial Dynamics, Aalborg, 2002).
30. ↩ Laura Gutiérrez Escobar and Elizabeth Fitting, “Red de semillas libres: Crítica a la biohegemonía en Colombia,” Estudios Críticos del Desarrollo 7, no. 11 (2016): 85–106; Pablo Lapegna and Gerardo Otero, “Cultivos transgénicos en América Latina: Expropiación, valor negativo y Estado,” Estudios Críticos del Desarrollo 6, no. 11 (2016): 19–44; Renata Motta, “Capitalismo global y Estado nacional en las luchas de los cultivos transgénicos en Brasil,” Estudios Críticos del Desarrollo 6, no. 11 (2016): 65–84.
31. ↩ Wise and Chávez, “¡Patentad, patentad!”
32. ↩ Peter Messitte, “Desarrollo del derecho de patentes estadounidense en el siglo XXI. Implicaciones para la industria farmacéutica,” in Los retos de la industria farmacéutica en el Siglo XXI: Una visión comparada sobre su régimen de propiedad intelectual, ed. Arturo Oropeza and Víctor Manuel Guízar López (Mexico: UNAM–Cofep, 2012),179–200.

The Impact of Covid-19 on the Global Economy

The Covid-19 pandemic has triggered the sharpest and deepest contraction of GDP (Gross Domestic Product) in the history of capitalism as globalisation has gone into reverse. International supply chains, which were once the exemplars of organised production and the backbone of trade, have collapsed; an emphasis on the national economy is back. Overseas travel and tourism have almost stopped entirely. Within the last few weeks, tens of millions of workers have become unemployed and millions of small businesses and their suppliers have closed down. In Europe, the banks, railways, airlines, airports, hotels, restaurants, and pubs are on the verge of bankruptcy. The global financial markets have been plunged into turmoil, share prices have collapsed, and foreign capital investment has halted. Oil prices have crashed on international markets as demand for crude evaporates. This fall has been exacerbated by an inopportune price war between Saudi Arabia and Russia.

Although some countries are now beginning to move slowly towards easing lockdown restrictions the effects of the pandemic have already destroyed the livelihoods of many and have damaged the prospects for future growth. Key components of globalisation have either ceased to function properly or have disappeared completely.

The world’s highest official coronavirus death tolls have been seen in two countries, namely the United States and the United Kingdom. This was unexpected because both of these countries had time to prepare after warnings from scientists and cautionary examples from China and Italy. Moreover both countries have a strong research base, access to vast resources, and millions of scientists, engineers, and medical professionals, yet were still unable to deal with the pandemic effectively.

Global Economic Crisis

The question is how bad will the downturn become? And how soon will the economic recovery begin? Will the recession be double dip, also known as W-shaped downturn, i.e., drop twice before it recovers to its previous growth rate, or more like an L-shaped scenario, otherwise known as a ‘depression’ i.e., a deep recession with no recovery for several years, just as Japan witnessed since the early 1990s (Siddiqui, 2015a). All indicators tell us so far that the crisis is going to deepen and will most likely resemble the L-shaped scenario. We should not expect a return to business as usual.

Last week the IMF (International Monetary Fund) warned that the world economy is facing its worst recession since the ‘Great Depression’ of the 1930s with output likely to fall sharply by as much as 6.5% in 2020. Gita Gopinath, the IMF’s chief economist, said the crisis could knock US$ 9 trillion (£7.2 trillion) off global output within the next two years. (See Figure 1 and Figure 3) For all of us who lived through the Asian Financial Crisis of 1997, these warnings will bring back stark memories of currency crashes, property prices tumbling and millions out of work and the wealth that was built up in decades disappearing in a matter of months. The covid-19 pandemic economic crisis will be even worse – our generation’s Great Depression.

The IMF says governments must help these households and firms survive because the impact of the coronavirus will be “severe, across the board and unprecedented”. The IMF also predicts that the annual growth of the emerging economies will fall sharply. (see Figure 3) The Fund said this scenario could trigger a downward spiral in heavily-indebted economies. It said investors might be unwilling to lend to some of these nations, which would push up borrowing costs. In fact, only a few countries in the world have that sort of financial power to deal with this. Many are grappling with huge populations, limited financial resources, and the very real possibility of political instability as their people get sick, hungry or both.

The US economy is expected to contract around 6% by the end of this year (Siddiqui, 2019a), which is its biggest decline since 1929 and an evaporation of 30% of aggregate demand over the next three months is anticipated. However, a quick return to work could lead to an increase of number of deaths in the US, with little or no reversal in these projected economic outcomes.

To understand the adverse impact of the corona pandemic on the economy, we need to analyse its effect on different industries. Consumption makes up 70% of the US GDP, but consumption has dropped as businesses close and as households postpone about major purchases as they worry about their finances and their employments. In the US, investment makes up 20% of GDP, but businesses are postponing future investment as they wait for full picture of the corona. Tourism music, sports, entertainment, and restaurants constitute 4.2% of GDP. With restaurants and film theatres are closed and the manufacturing sector constitute nearly 11% of the GDP, but most of this is now disrupted, because global supply chains industries and companies have shut down in anticipation of reduced demand.

According to the IMF forecast, the US economy will shrink by almost 6% this year, compared with a contraction of about 7% in the EU countries and 5% in Japan, while the other experts estimated an annualised second-quarter decline in the US could be as much as 40%. However, if the government were not spending several trillion US dollars to keep businesses afloat, wages to unemployed and benefits to poor sections of the society, the damage would be worse. Over six weeks has passed since national lockdown was declared in UK to limit the spread of Covid-19, during which time it has become clear that the country is also heading for its deepest recession since the ‘Great Depression’.

The US and UK governments have pumped trillions of dollars into their economies and have reduced interest rates to combat recession. For instance, the UK government has launched a job retention scheme to pay up to 80% of the workers’ wages. Nearly 400,000 companies have applied to pay nearly 3 million people through furlough payments, which have cost the UK government £2 billion until now. There is also a similar scheme to compensate five million self-employed workers. Unfortunately, many millions will not be covered under such plans. For businesses, the government has provided up to £300 billion of loans although few of these have so far been awarded by the banks responsible for processing them.

The Office of Budget Responsibility (OBR) has predicted that the pandemic crisis could cause a 35% fall in GDP. In fact the economic loss depends on the length of lockdown measures. If lockdown lasts for three months, then GDP will shrink by 13% for 2020. The OBR also predicted more than 2 million people could lose their jobs. David Blanchflower, a former Bank of England rate-setter, has predicted 6 million job losses (i.e. 21% of the workforce). The budget deficit will rise to an unprecedented level and could reach £273 billion by the end of 2020, which is nearly 14% GDP.

The impact of the virus and lockdown has been very different across industries and parts of the UK. Tourism, hotels, restaurants, entertainment, and transport are among the long list of sectors which have been hardest hit by this pandemic. Furloughing is also relatively higher in the North East of England and in London, and South-East England. These current economic variations highlight the need for recovery policy which takes account of local socio-economic needs. Corona pandemic has highlighted the importance of skills. Over decades, in the UK the neoliberal policies, including austerity and over-reliance on the market have proved to be ineffective. But currently millions are facing unemployment, the government need to find ways of help people to find jobs.

The South European countries namely Greece, Italy and Spain, could see their economies contract by as much to 9-10 percent by next spring, while unemployment rates could reach as high as to 19-20% (See Figure 2). The Chinese economy is expected to expand only 1.2% by the end of 2020, which is China’s slowest growth since it embarked economic reforms in 1978 (See Figure 3).

Due to the fall in the demand, the factories are stopping to produce and they do not carry out production. As a result, investments decline, there would be another round of reduction in incomes and consumption levels. So, if jobs and incomes collapse, so do consumptions and savings. But, some consumption has to continue, so people withdraw their savings and past deposits from the banks and financial institutions. A vast majority of the workers in the developing countries are working in the unorganised sector and the poor have low incomes and as their incomes stop, their consumption drastically falls. For example, in India at present, the workers who are now migrating from the big cities to their villages where they feel that their families will at least get food. This model of uneven development, which forces people to migrate to big cities to find employment, has to be re-examined after the pandemic.

In India, the world’s second largest population faces coronavirus with too little money and too few resources for the needs of its people and economy (Siddiqui, 2019b). A large number of people are facing hunger, unemployed, and complete loss of income (Siddiqui, 2019e). The government money offered to support businesses and workers is insufficient to the task and nearly half of the package of measures consists of things already included in an existing scheme. The Indian government does have 77 million tons of grain in buffer stocks, which means there is plenty available for distribution without risking inflation, but the government is reluctant to distribute food among the poor households.

Once lockdown is slowly lifted in India, the government must put more money into village-based employment programmes so that immigrant workers who have returned to their villages from mega-cities like Mumbai, Delhi, Bangalore and Chennai can find some means of livelihood. Subsidies should also be extended to SMEs, especially those supplying essential goods and services. There is a need to reorient India’s economic growth strategy on the basis of its strong internal market in agriculture, which provides jobs to nearly half the country’s workforce. Agricultural growth has the potential to boost demand and thus employment in other sectors too (Siddiqui, 2018a; also see 2017). A great deal of attention paid to economic growth rates in India in recent years, while the on-going agrarian crisis is being ignored (Siddiqui, 2015b).

During the last two decades the agriculture sector in India has witnessed crisis in such as decline in rates of growth, rising numbers of farmers’ suicides, declining prices of several crops, and a widening gap between the agriculture and non-agriculture sectors. The agriculture sector is experiencing unprecedented crisis with stagnation or declining rural employment growth and as a result, food security and employment opportunities for the rural poor have been eroded. The agriculture sector plays an important role in the Indian economy and its better performance is crucial for inclusive growth. This sector at present contributes only 17% of the GDP, while it provides employment to 57% of the Indian work force (Siddiqui, 2019b).

For successful inclusive growth and development, agricultural growth is a pre-requisite. It is important to implement land reforms, improve institutional credits and increase investment in rural infrastructure, to assist small and marginal farmers and also to diversify the rural economy. Until a level playing field is created across the world, otherwise trade liberalisation in agriculture will simply prop-up developed countries farmers at the expense of farmers in the developing countries like India. The neglect of agriculture in India could and must be reversed through a policy of government remuneration procurement prices along with the use of tariffs to insulate domestic food grain prices from world price fluctuations. Furthermore, planting trees on unused lands could improve the quality of air and the overall environment whilst also providing additional employment opportunities in areas where they are now sorely needed.

At present in India, there is a large stock of foodgrains with the government and also bumper autumn crops are being harvested, which means there no danger of inflation. The levels of in­equality are very high in India, and the wealth taxes are non-existence. There is the current low level of India’s tax-to-GDP ratio, then when the recovery begins taxes on the rich has to be raised to mobilise the resources to repay the debts. However, if debt-financed expenditures are not undertaken, then recession will intensify and turns into a depression. Therefore, a large fiscal stimulus is an absolute necessity in the current context and without such a stimulus, the humanitarian crisis would intensify.

In India, as elsewhere, the lockdown has reduced social interaction, leading directly to a fall in output and employment. This measure mitigates the physical impact of disease but exacerbates the economic crisis. Hence, the government must intervene to flatten the recession curve to mitigate the adverse impact of the pandemic.

The coronavirus was detected last December in China and the world had time to prepare for the pandemic in the manner China had shown to be effective in confronting it. Other East Asian governments, such as Singapore, Taiwan, South Korea and Vietnam, adopted highly successful policies to fight the spread of Covid-19 without causing massive economic disruption. However, the West refused to learn from these examples and failed to take any strong measures to prepare for and to act against the spread of the coronavirus. The two countries supposedly best prepared for a pandemic, the US and the UK, ranked first and second in the Global Health Security Index, performed poorly and proved incapable of handling a rapidly-developing emergency situation. Eventually, the clear evidence of success in East Asia and also in Germany forced even the most reluctant governments to impose lockdowns and to increase the number of people tested for coronavirus. Even so, testing and personal protective equipment (PPE) remained restricted owing to the lack of strategic stockpiles and national manufacturing capability and therefore health staff were left to cope with excessive workloads without the health and safety provisions they had a right to expect.

Economic Policy Failure?

The bankruptcy of neoliberalism is clearly exposed by vastly different responses to the covid-19 pandemic of the world’s two most economically powerful countries. The US was reluctant to take immediate measures to tackle the pandemic and has seemed confused about the way forward ever since, while China from the beginning gave state institutions full responsibility to contain the virus and took decisive measures that led to a successful outcome, at least in the interim.

This pandemic has proved once again that the neoliberal attitude toward public policy deprives societies of the resilience they need to withstand large-scale disruption. At present the private sector in the advanced and in the developing economies has become supportive, and even desperately enthusiastic, for government spending. The proponents of the free market and opponents of government intervention in economic policy are now pleading for unlimited public spending to support asset prices and to save businesses and the economy.

When capitalism faced crisis and a falling rate of profit in the 1980s, it opted for globalisation and the transfer of production from North America, Europe and Japan to take advantage of low wage economies, low regulation, and much higher rates of exploitation available in developing countries (Siddiqui, 2016; also see 2019c). During periods of falling interest rates capitalists compete for financial assets leading to an increase in asset values, which are then used to support further borrowing, more investment in financial assets, which further inflates their value, all without generating any productive economic activity. Consequently, since 2008, productivity across the advanced economies has stagnated and GDP growth has been lower than any decade since 1950 (Siddiqui, 2020a; also see 2020b). At the same time debts have grown enormously, particularly in the developing economies. For example, according to IMF, the total debts of the 30 largest developing economies has reached US$ 72.5 trillion, an increase of 168% in the last ten years.

Around the globe desperate measures are being taken by national governments and international agencies to support the financial system with little provision for ordinary citizens in the developed world and often no provision at all in the developing world. At an emergency submit for the G20 – G7 and emerging economies including China, India, Russia, Brazil, Turkey and Indonesia – on 26^th March it was declared that “we are injecting over US$ 5 trillion into the global economy”. As the COVID-19 pandemic continues the rich countries now are planning to pump more money i.e. US$ 9 trillion to help businesses and people to get through the current economic crisis, which is US$ 1 trillion more than announced last month (see Figure 4).

The European Central Bank (ECB) will follow expansionary fiscal policy in the form of deficit spending. Economic expansion is to be backed by Eurobonds. This increased spending will keep business solvent and provide social security measures for workers. The IMF is considering emergency funds for developing countries which could amount to US$ 50 billon. However, these IMF loans are to help with “external financing gaps”, which means they are designed to bail out foreign creditors, not the people of the debtor countries. The harsh terms and conditions that invariably come with these loans will add to the crushing burden on the ordinary people of those countries unlucky enough to receive them.

In early 2020, the world economy was already slowing down, including even the best performing advanced economy, the US. The pandemic hit the economy after nearly four decades of excessive reliance on market forces to achieve greater efficiency. This neoliberalism fostered deindustrialisation and virtual collapse of the manufacturing base, while financial sectors grew to unsustainable proportions (Siddiqui, 2017; also see 2019d). Inevitably, this gross sectoral imbalance left the US and the UK unable to produce enough ventilators and personal safety equipment for their doctors, nurses and care workers.

The pandemic has revealed the pitfalls of capitalist globalization and has restored an understanding of the importance of sovereignty, national economy, and domestic markets. Even so, the potential for cross-border movements of finance has led to further pressure on countries in the developing world to restrict fiscal deficits even in the midst of global economic collapse. As a result the crisis will have a more adverse impact on the lives of the majority of people in Africa, South Asia and Latin America, who have no welfare benefits to protect them, and who rely on incomes drawn from unorganised sectors that have not enjoyed any government support. In addition the exodus of money from developing countries into US dollar dominated assets results in a depreciation of their currencies and thus increases the amount of their overseas debts, which are US-dollar denominated (Siddiqui, 2020a). At least 102 countries have approached the IMF for financial support to deal with the covid-19 pandemic.

Conclusion

Capitalism as an economic system is based on individualism, self-interest, greed and competition. It provides optimal conditions for the prosperity of elites on the assumption that the broader population will gain “trickle-down” benefits not otherwise available to them. In the midst of a pandemic in which governments have had to secure employment, incomes, supply chains, and the health system, whilst also supporting the financial system and the wider economy it has become painfully obvious that free trade and markets are incapable of supplying the resilience and core competencies that societies require and their populations demand.

Finally, it seems that Keynesian policies are back after four decades in the wilderness. Key services and utilities must be owned and managed by the government to ensure that basic needs are met and that essential services serve the people rather than profit. Public services must be expanded to create a society based on community, solidarity and respect for nature. Along with such policies, there is also need for progressive taxation so that the putative “wealth creators” who have benefitted from four decades of neoliberalism have the opportunity to contribute fully to the society that has supported them so generously.

Dr Kalim Siddiqui is an economist, specialising in International Political Economy, Development Economics, International Trade, and International Economics. His work, which combines elements of international political economy and development economics, economic policy, economic history and international trade, often challenges prevailing orthodoxy about which policies promote overall development in less developed countries. Kalim teaches international economics at the Department of Accounting, Finance and Economics, University of Huddersfield, U.K.. He has taught economics since 1989 at various universities in Norway and U.K.

References:

Siddiqui, K. 2020a. “The US Dollar and the World Economy: A critical review”, Athens Journal of Economics and Business. 6(1): 21-44. January, https:doi:10.30958/ajbe/v6i1.

Siddiqui, K. 2020b. “A Perspective on Productivity Growth and Challenges for the UK Economy”,Journal of Economic Policy Researches 7(1): 1-22.

Siddiqui, K. 2019a. “The US Economy, Global Imbalances under Capitalism: A Critical Review”, Istanbul Journal of Economics 69(2): 175-205, December. ISSN 2602-4151.

Siddiqui, K. 2019b. “The Economic Performance of Modi’s Government in India: The politics of Hindu right”, World Financial Review, July/August, pp. 12-26.

Siddiqui, K. 2019c. “Economic Transformation of China and India: A Comparative Political Economy Perspective”, Asian Profile, 47(3): 243-259.

Siddiqui, K. 2019d. “Government Debts and Fiscal Deficits in the UK: A Critical Review” World Review of Political Economy, 10(1): 40-68, Pluto Journals. DOI: 10.13169/worlrevipoliecon.10.1.0040.

Siddiqui, K. 2019e. “The Political Economy of Inequality and the issue of ‘Catching-up’” World Financial Review, July/August, pp. 83-94.

Siddiqui, K. 2018a. “Capitalism, Globalisation and Inequality”, World Financial Review, November/December, pp. 72-77. ISSN 1756-3763.

Siddiqui, K. 2018b. “U.S. – China Trade War: The Reasons Behind and its Impact on the Global Economy”, The World Financial Review, November/December, pp.62-68. ISSN 1756-3763. http://www.worldfinancialreview.com/?p=36411.

Siddiqui, K. 2017. “Financialization and Economic Policy: The Issues of Capital Control in the Developing Countries”, World Review of Political Economy 8 (4): 564-589, winter, Pluto Journals. DOI: 10.13169/worlrevipoliecon.8.4.0564.

Siddiqui, K. 2016. “Will the Growth of the BRICs Cause a Shift in the Global Balance of Economic Power in the 21st Century?” International Journal of Political Economy 45(4): 315-338, Routledge Taylor & Francis.

Siddiqui, K. “Political Economy of Japan’s Decades Long Economic Stagnation”, Equilibrium Quarterly Journal of Economics and Economic Policy 10(4): 9-39. DOI: http://dx.doi.org/10.12775/ EQUIL.2015.033.

Siddiqui, K. 2015b. “Agrarian Crisis and Transformation in India”, Journal of Economics and Political Economy 2 (1): 3-22. ISSN: 2148-8347.

Trade Liberalisation, Comparative Advantage, and Economic Development: A Historical Perspective

I. Introduction

This article critically analyses the theoretical and empirical basis of trade liberalisation and finds that the arguments of many mainstream economists concerning the static and dynamic gains from free trade are based on weak theoretical grounds. I will also discuss here the historical experience of trade liberalised regimes. It also discusses the impact of trade liberalisation on the industrial and agricultural sectors and shows how the performance of both sectors has a long-term impact on local industrialisation, food security, employment and the well-being of people in developing countries.

Global policies under the WTO (World Trade Organisation) are based on what are claimed as universal advantages of open economies and trade liberalisation (WTO, 2013). This paper shows this regime is in fact heavily biased towards the demands of rich and powerful countries and against the needs of developing countries (Reinert, 2007, Rodrik, 2004). Furthermore, this regime undermines elected legislatures and their democratic decision-making processes through constraints imposed by neoliberal treaties and associated mechanisms for the settlement of international disputes. The article further examines the theoretical and empirical basis of trade liberalisation and argues that the claimed benefits of free trade are based on weak grounds. An analysis of free trade in historical perspective highlights its negative implications for future development and suggests that the prosperity of the developing countries could be more dependent on their ability to act in concert to challenge the unbalanced rules-based system of the Western neoliberal order than on their willingness to submit to the strictures of the Bretton Woods institutions and the World Trade Organisation (Acemoglu and Robinson, 2012; Sen, 2005).

Free trade theory finds widespread support among the international financial institutions, namely the IMF (International Monetary Fund), World Bank, and WTO (Siddiqui, 2016a). This free trade approach deepens the process of uneven development and unequal exchange as seen, for instance, in the Trump Administration’s attempts to hinder China’s economic development by means of disadvantageous trade agreements. At present, Chinese developmental policies challenge US global corporations such as Boeing and Microsoft because they require some control over the nature of the US investment by granting China a degree of technology transfer. Existing WTO-enforced intellectual property rights, from which US corporations benefit, provide, among many other things, exorbitant patent rights for medicines and grant Microsoft Windows an effective monopoly on operating systems (Siddiqui, 2020a; also see 2018a). With genuine free trade consumers in the US and elsewhere could get cheaper medicines and have more choice in operating systems, but US corporations would not have the levels of profit guaranteed by current arrangements (Siddiqui, 2018a).

II. Late Developers and Free Trade

In the 19^th century, Friedrich List in Germany argued for building of the national economy to help the late-developers such as Germany and the US against British imperialism. According to him, due to the historical problems of the late industrialising countries, who were behind in industries and technology compared to Britain and Netherlands and according to him, this could be addressed through strategies of state-led industrialisation and tariff protection (Siddiqui, 2021a).

The List theory was not so much in favour of freedom for colonies and in fact he argued reproducing colonial relations so as a late industrialising country like Germany could become industrially advance and join industrial core of the world economy. The British economy by the second quarter of the 19^th century had become imperial economy i.e. industrial-financial centre and its colonies were forced to specialise in the production of agricultural commodities. As Gallagher and Robinson (1953:9) argued that “the British strategy was to transform the colonies into complementary satellite economies, which would provide raw materials and food for Great Britain, and also provide widening markets for its manufacturing.” List advocated that Germany must emulate the British path to industrialisation through protection and government intervention. For example, in the 17^th and 18^th century England had protected woollen industries by banning exports of raw wool to Netherlands and at the same time concluding treaties to open foreign markets for English products and supported shipping through its Navy.

However, once England secured superiority in industries and technologies, its rulers discovered the free trade doctrine was useful to maintain Britain’s domination. As Reinert (2005: 60) explains: “Britain not only made it politically clear that she saw it as a primary goal to prevent other nations from following the path of industrialization, but also ….possessed an economic theory [in the economics of Smith and Ricardo] that made this goal a legitimate one.” List argued that in order to escape Britain’s domination, Germany should ‘emulate the pragmatism and ruthlessness egoism of the English people’ and by extending support to state-led-industrialisation i.e. protecting infant industries through tariffs and duties on imports. Once competitive edge is acquired by domestic producers then slowly exposes them to foreign competition and resumption of free trade. The list was not in favour of Germany’s isolation but national equalisation and giving later-developers the opportunity to assume a dignified place in the world. However, List did not oppose European colonisation of non-European nations. He advocated that ‘civilised nations’ had to attain ‘balance of the productive powers in industry, commerce and agriculture’ (List, 1983: 51).

The colonizers denying any possibility of independent national development to the rest of the world led to the decolonisation struggles against European imperialism.

List deplored nations like Russia in the 19^th century as overwhelmingly agrarian, which according to him consisting of ‘primitive peasants who simply cultivate soil’ and lacked capital and technology and competitive spirit necessary to promote ‘division of labour’ and as a result did not create surplus to be invested in industries (List, 1983: 54). In the 18^th – 20^th century, the European discourse of so-called ‘civilising mission’ assumed that their colonies as economically stagnated and backward. And in the colonies, they imposed policies of forced specialisation in agricultural and mineral production for exports, especially in India, into de-industrialisation and repeated famines (Siddiqui, 2020b; also 2020c). Britain colonial rule of two hundred years led to the turning India into economic stagnation and mass poverty and a dramatic fall in life expectancy and per capita food consumption. The colonizers denying any possibility of independent national development to the rest of the world led to the decolonisation struggles against European imperialism. As Goswami (2004: 221) notes, “it was precisely the promise of formally replicable, self-engendered, and territorially delimited economic development, which underwrote Listian national developmentalism that helped propel its increasing popularity, while the success of Listian strategies in the USA, Germany and Japan certainly reinforced their appeal to anti-colonial and post-colonial developmental ambitions”.

The economies of the advanced countries were founded on state activitism and protectionism and once they became technologically advanced, rich and prosperous, then their leaders could afford to talk about the so-called benefits of ‘free trade’, but they perfectly ignore their real history of how their nations became rich.

Trade and investment liberalisation was initiated by the IMF and the World Bank during the debt crisis of the 1980s under the loan-conditions ‘Structural Adjustment Programmes’. This strengthened further after the signing of the WTO in 1994. The ideology of free trade began with Adam Smith and David Ricardo; both theorists were from Britain and wrote at a time their country was colonising other countries and grabbing resources of other nations (Siddiqui, 2018b). This was also the period when Britain was launching the world’s first industrial revolution and needed raw materials and resources to support it and thus forcing its colonies to only specialise on the production of agriculture and minerals for its industries. That was also the period when Britain created its own monopoly trade company ‘The East India Company’ to trade with the Indian subcontinent and China. Adam Smith in his book The Wealth of Nations strongly opposed the policy of developing industries in the USA and advised to rely on importing manufacturing from Britain. Adam Smith (1986: 466) notes: “It has been the principal cause of the rapid progress of our American colonies towards wealth and greatness that almost their whole capitals have been employed in agriculture. They have no manufactures…. the greater part both of exportation and the coasting trade of America is carried on by merchants who reside in Great Britain… to stop the importation of European manufactures, and by thus giving a monopoly to such of their own countrymen as could manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their products and would obstruct instead of promoting the progress of their country.”

However, in 1776 after becoming independent the US leaders did quite opposite and ignored Adam Smith’s advice and erected protective barriers and increased tariffs to protect domestic manufacturing. As a result, the US in the early 20^th century emerged as a leading industrial nation. If the US leaders would have followed Adam Smith’s model of ‘free trade’ it would have been at most like Egypt (Siddiqui, 2020c).

The mainstream (also known as neoclassical) economists argue that free trade is a good thing for everyone participating in trade (Siddiqui, 1989a). Modern international trade theory is associated with David Ricardo model of ‘Comparative Advantage’. His theory focuses on specialisation in trade necessarily leads to mutual benefit to both trading nations as long as relative cost differences in producing goods exist, even if a country may produce all goods at lower costs than the other (Siddiqui, 2018b). David Ricardo in his book, Principles of Political Economy and Taxation (1817) wrote about his theory of ‘Comparative Advantage’. He presented the trade in wine and cloth between England and Portugal. He argued that even though Portugal to be more efficient than England in the production of both goods i.e. wine and cloth. However, he argued that it could still be mutually beneficial for both countries to specialise and trade if Portugal and England specialised where it was relatively most efficient compared to the other country. The problem with the Ricardian model is that it does not allow the possibility that after specialisation one country’s production may get caught in the spiral of diminishing returns and increasing production costs (e.g. in wine production) while another country might find the production costs falling as production increased due to increasing returns (e.g. cloth production) (Ricardo, 2004).

On the issue of ‘free trade’, Karl Marx argued that with increased competition, free trade will drive down workers’ wages. However, he questioned that the supporters who according to him failed to understand how “one country can grow rich at the expense of another.” Marx, emphasised that the related the differences in factor endowment to unequal economic development of the trading nations as his ideas of international trade was firmly based on the trade between unequal partners. He further elaborated, trade, whether home trade or foreign trade, produced exchange-value which was inseparable from the creation of surplus through exploitation of surplus labour. According to him, it was inherently unequal exchange. His theory explains the phenomena of colonial trade i.e. trade between Europe and their colonies. In the Communist Manifesto, he notes: “by the exploitation of the world market, the bourgeoisie has given a cosmopolitan character to production and consumption in every land. To the despair of the reactionaries, it has deprived industry of its national foundation. The old local and national self-sufficiency and isolation are replaced by a system of universal intercourse, of all-round interdependence of the nations…” Engels at Brussels Free Trade Congress said: “It was a strategic move in the Free Trade Campaign then carried on by the English manufacturers. Victorious at home, by the repeal of Corn Laws in 1846, they now invaded the continent in order to demand, in return for the free admission of continental corn into England; the free admission of English manufactured goods to the continental markets”. Engels further explained, “it was under the fostering wing of protection that the system of modern industry developed in England during the last third of the 18th century. England supplemented the protection she practised at home by the free trade she forced upon her possible customers abroad.”

The theory of ‘comparative advantage’ on which the classical theory of international trade is based on, it does not depend for its validity and on the inequality of status or economic strength of the trading partners or the degree of their economic development. The essence of this theory was the fact of reciprocal exchange of natural or acquired advantage in particular branches of production on the principle of international division of labour. Marx’s saw it as trade between unequal partners. Trade, whether home trade or foreign trade, was inseparable from the creation of surplus profit through exploitation of surplus labour. It was thus inherently unequal exchange. Marx noted on the colonial trade, i.e. trade between Europe and their colonies, as, “Commercial profit not only appears as out bargaining and cheating, but also largely originates from them.” Apart from the fact that the merchant abstracted the difference in prices over space, he appropriated the major part of the surplus-product emerging in a pre-capitalist society by mediating between societies and regions in which the marketed surpluses of commodities were of secondary importance and in which the trader could take advantage of the extravagant luxury consumption of landed proprietors and despotic rulers. Thus “merchant’s capital when it holds a position of dominance, stands everywhere for a system of robbery”. He referred to India’s vast home market that was “sufficient to support a great variety of manufactures”, and particularly to Bengal, “which commonly exports the greatest quantity of rice, but has always been more remarkable for the exportation of a great variety of manufactures than for that of grain”.

Marx indentified capitalism’s two inherent problems i.e. demand problem and tendency of the rate of profit to fall. He identified the source of surplus value by differentiating labour and labour power and presented how competition brings values down to their ‘socially necessary level’. Marx emphasised that capitalism was not eternal but a historically specific mode of production and due to its inner contradictions, it is inherently volatile and unstable David Ricardo claimed that free trade benefitted all countries; by this he justified colonisation and colonial pattern of trade, when the European powers sought to externalise their market crisis by exporting their excess production to colonies or unprotected markets, which destroyed any prospects of industrialisation there. Rosa Luxemburg in her book The Accumulation of Capital argued that ‘purely capitalist’ society consist of only workers and capitalists could not be self-contained and for its own survival requires non-capitalist societies to sell its excessive production and try to resolve demand deficits problems, which is a major contradiction of capitalism. She paid serious attention to the impact of occupation on the colonies. Later on Marxist economists analysed how surpluses drained from formally or informally from colonies or semi-colonies have critically aided industrialisation in Europe and how expanding markets for imperial products de-industrialised colonies. Moreover, how core countries monopolies on higher value production are secured and maintained in a wider system of unequal exchange and by various means formally or informally discouraging peripheries from improving their productive capacities (Chang, 2002).

David Ricardo’s theory has been claimed to be beneficial not only the trade between nations of equal economic strength e.g. intra-industry trade between rich countries, but also between economically unequal countries e.g. colonisers and their colonies, inter-industry trade. On this assumption, the Europeans imposed ‘free-trade’ on colonies to specialise in agriculture and minerals, while the European powers specialised in manufactures. Consequently, India being the world’s largest exporter of cotton textiles in the pre-colonial period, India turned into an importer of cotton textiles from Britain and an exporter of agricultural commodities such as raw cotton, opium, indigo, jute, tea etc. (Siddiqui, 2020d; also 2020e)

The mainstream economists ignore in their discussions that in the 19^th century if ‘free trade’ was beneficial then why European powers had to use military force to induce countries like India, China and Indonesia to accept it (Siddiqui, 2019a; also 2018b). Ricardo’s theory is based on incorrect premises. As Professor Utsa Patnaik (1999: 6) argues: “In the case of the comparative theory applied to the Northern trade with warmer lands, the premise itself is incorrect. The premise is that in the pre-trade situation (assuming the standard two-country two commodity model) both countries can produce both goods. Given this, then it can be shown that both the countries gain by specializing in that good which it can produce at a relatively lower cost compared to the other country, and trading that good for the other good: for compared to the pre-trade situation, for a given level of consumption of one good a higher level of consumption of the other good results in each country… The reality was that the tropical or sub-tropical regions with which Britain, Netherlands, France etc. initiated forced to trade using military power, where bio-diverse could, and did, produce a much larger range of goods than the Northern European countries could…”

Since 19^th century the ideology of free trade has been propagated via textbooks, print, and electronic media that any criticism or alternative opinions which examine the costs of ‘free trade’ is hardly ever heard. The free trade model is now modified and presented as – the labour-abundant country e.g. poor countries produce labour intensive goods (agricultural commodities) while capital abundant country e.g. rich countries produce capital intensive high value products (Siddiqui, 1989b). In fact, the crops such as raw cotton, jute, indigo, rubber, tea, coffee, cocoa, banana, sugarcane and rice cannot be produced in cold European climate hence the premise that both countries could produce both goods does not hold. Historically we could see that specialisation and enforced free trade led to very negative social and economic development in the colonies. For example, the nutrition levels and life expectancy fell sharply during the colonial period in India, Indonesia, the Philippines, and Kenya (Siddiqui, 2018c; also 2018d).

In the past, the cost of ‘free trade’ in the colonies had been de-industrialisation and the forcible trade liberalisation led to the destruction of traditional manufactures and increased dependence of the production of primary commodities (Siddiqui, 2015a). As Patnaik (1999: 12) further notes: “This resulted in one-way free trade, viz, a situation where the North protected its own industry by various means and opened up the subjugated markets of the Third World countries, …. Keynes had once used, describing a situation where a country insists on exporting another the good that second country also produces, thereby the North ‘exported its unemployment’ to other counties. That agenda too remains unchanged: market access is a price objective of the earlier and ongoing loan conditional liberalization and of the present WTO regime….” Moreover, the demands for tropical crops in rich countries have increased further in recent years and the WTO regime insists that tropical countries to increase the production and export of the primary commodities (Siddiqui, 2015b, also 2015c).

Free trade theory emphasises that if protections are removed resources should flow from high-cost to low-cost products resulting in an increase in productivity. David Ricardo’s theory of comparative advantage provides a foundation for understanding the nature of so-called mutually advantageous international free trade and forms the basis of arguments generally used to defend a laissez-faire approach (Siddiqui, 2018b). Protection is seen as interference in the free play of beneficent market forces (Kruger, 1996). Ricardo’s model assumes that all resources are fully employed, but in reality we find that in developing countries mass unemployment and mass poverty have often existed alongside vast but under-exploited resources. During the British colonial period, for example, the imposition of free trade policy on India made it possible for the Lancashire cotton industries to prosper while hand loom production in India was systematically destroyed by the active intervention of the British authorities (Bagchi, 2000). Another notable example could be cited here: in 1699 with the Wool Act, Britain banned the export of woollen cloth from the colonies to other countries. This proved to be a severe blow to the Irish wool industry.

Free trade theory emphasises that if protections are removed resources should flow from high-cost to low-cost products resulting in an increase in productivity.

Britain adopted “free trade” policies in the 19th century when it possessed relatively more advanced technologies and industries compared with those of other European countries. These policies were extended to the colonies to further Britain’s business and trade interests. From the mid-19th century, Africa and Latin American countries were also integrated into the world economy as suppliers of primary commodities, as envisaged by the “comparative advantage” model. (Siddiqui, 2019b and also 2019c)

At the same time that colonies were encouraged to specialize in the production and export of primary products rather than manufactured goods, Britain abolished import duties on raw materials produced in the North American colonies. Thus, Britain slowed, or completely prevented, modern industrial development in the colonies and in other territories in which it enjoyed pre-eminent influence. As Bagchi (2000: 403-4) observes: “In the victory of private enterprise, the construction of a state fostering its growth played a critical role, and free trade as a policy did not gain ascendancy until Britain had already emerged as the most powerful nation in the world economically, militarily and politically … it had begun preaching the doctrine of free trade to others, even enforcing it with gunboats and soldiers, as in the case of opium war”.

It is claimed that if all countries adopt free trade policies then it is claimed by the proponents that the world economy can achieve a more efficient allocation of resources and a higher level of material well-being than it can without trade. In contrast, Bieler and Morton (2014: 40) found: “Trade liberalisation has often implied deindustrialisation and import dependence. An analysis of the consequences of trade liberalisation in Africa and Latin America during the 1980s and1990s, for example, reveals widespread job losses, increasing unemployment and declining wages in both continents”.

In the late 1980s and 1990s, at the behest of the World Bank and the IMF and as a condition for their loans, most of the Latin American countries adopted Structural Adjustment Programmes or SAPs (Siddiqui, 1998; also 1994) (i.e. neoliberal reforms), while China, which was then not a member of the WTO, was able to maintain greater control over both trade and foreign capital investments (Girdner and Siddiqui, 2008). The Chinese government was able to encourage foreign investors to establish joint ventures with local companies that included agreements on technology transfer. In China rapid urbanisation and higher growth also resulted in a sharp increase in the scale of the domestic market. By 2010, China became a net importer of food, the largest importer of soya, and accounted for half of the world’s total food imports.

III. WTO and Trade Liberalisation

The WTO aims to liberalise trade in goods, capital and services, and more recently also in world’s agricultural markets. In the agriculture sector, the WTO wants to liberalise trade in agricultural commodities by eliminating subsidies to inefficient producers, tariffs, and the practice of holding food stocks by governments (WTO, 2013). This policy is supposed to increase agricultural commodity prices through a de-regulated market and benefit farmers. At the same time, increased competition is supposed to generate greater efficiency and thus bring down prices to the benefit of consumers. However, such assumptions ignore the fact that agricultural trade is in fact characterized by large economic, social, and political inequalities. Since 1991, with the collapse of the Soviet Union and East European regimes, many more countries have adopted trade liberalisation policy and thus global economy more integrated than ever in the past and global trade as a percentage of global GDP has risen sharply, as Figure 1 indicates. And the major trading countries in goods are largely developed economies apart from China (see Figures 2 and 3).

In agricultural commodities, due to climate limitations developed countries cannot produce coffee, rubber, sugarcane, cocoa, bananas or tea but want these commodities for their food processing industries and they want to acquire these from deregulated markets. In the cotton and sugar markets, however, distortions exist because of subsidies given to producers in both the United States and the European Union and therefore these products are protected from liberalisation. With the signing of the WTO’s international treaty Agreement on Agriculture (AoA) in 1995 developing countries were granted little access to new markets in the developed countries but were required to accept significantly more imports. This depressed local investment and production ultimately exacerbated food deficits and undermined food security in developing countries (Siddiqui, 2021b).

The agricultural sector plays an important role not only in maintaining a healthy rural environment and ecology but also in the economic development of a country. It makes a significant contribution to per capita income and employment, especially in developing countries. Neoliberal policy reforms in agriculture alter the situation in this sector and restructure the economic fabric of the society. Food security and self-sufficiency are important contributing factors to the stability and economic growth of regional and international economies (Siddiqui, 1990). Accordingly, we should examine the impact of trade liberalisation (i.e., free trade) on the agricultural sector and food security issues in developing countries.

The WTO wants to introduce the idea that agriculture and food production should be treated as any other form of production and be subjected to the rules of competition in deregulated and open markets similar to those in the industrial sector. The supporters of this approach claim that if such policies are followed in the developing countries they will increase output under competitive conditions and achieve levels of surplus and prosperity similar to those enjoyed by Europe and North America even though those regions do not, in fact, apply such policies in their domestic markets. The developing countries as a group would be wise therefore to defend their interests and seek reform of the WTO in order to protect their agriculture, manufacturing and service sectors and their interests in general.

IV. Conclusion

The proponents of ‘free trade’, which is based on David Ricardo’s ‘Comparative Advantage’ model, choose to forget that in the 18^th and 19^th centuries the transition of European and North American agriculture towards greater use of technology and capitalist large-scale production took place at the same time their industrial sectors were expanding and their surplus populations were migrating to the Americas, Australia, New Zealand, and South Africa. These developments resulted in the largest land-grabbing and resource-extraction exercises in human history, during which indigenous populations were eliminated or enslaved and their land and natural resources expropriated. Because developing countries have no such possibilities and hence, the adoption of the WTO’s agriculture neo-liberal reform policy inevitably leads to greater poverty and to ecological destruction exacerbated by climate change.

In fact the rich countries have advanced through a combination of tariff protection, government intervention, strategic investment and use of military force, however, when it comes to today’s poor countries, the benefits of so-called ‘comparative advantage’ is being insisted by the international financial institutions and the rich countries.

The WTO has become as an important international multilateral institution, not only by bringing liberalisation of trade in agriculture, manufacturing and services but also through its dispute settlement mechanism. In particular, the WTO’s negotiations at Doha in 2001 resulted in policies made largely to protect the interests of agro-business corporations based in the West, while offering few benefits to farmers in the developing countries (Stiglitz and Charlton, 2006).

In the developing countries, farmers are often forced to sell their products soon after harvest due to difficulty with storage and the need for money to repay debts, which is known as stressed sales.

This study has found that the free trade approach (i.e. trade liberalisation) will deepen the process of uneven development and unequal exchange between poor and rich countries. And free trade in agriculture undermines food sovereignty and adversely affects the possibilities for autonomous development and food self-sufficiency in developing countries. For example, the WTO’s 1994 Agreement on Trade-Related Investment Measures (TRIMs) do not allow the use of local content specification to increase linkages between foreign investors and local manufacturers or restrictions on the outflows of capital by investors. Other WTO policies such as the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) further allow privatisation and concentration of knowledge in the hands of global corporations (Siddiqui, 2016a).

Unlike manufacturing, agricultural production cannot take place throughout the whole year, and therefore prices cannot be lower during the harvest season than during the rest of the year (Siddiqui, 2021b). In the developing countries, subsidies were aimed at reducing production costs by providing inputs lower than market prices, but in the developing countries farmers are often forced to sell their products soon after harvest due to difficulty with storage and the need for money to repay debts, which is known as stressed sales (Siddiqui, 2019d). To ensure prices governments buy agricultural commodities at prices higher than markets to protect farmers from market fluctuations. Additionally, during shortages, governments release agricultural products from storage to stabilise prices in the market. Under WTO rules, such food stock holdings are prohibited and farmers in the developing countries are left entirely at the mercy of the market (Siddiqui, 2015a).

The farmers in North America and the European Union operate highly mechanised capital-intensive agriculture and productivity range between 10,000 and 20,000 quintals of cereals per farmer per year. In developing countries, especially in Africa and Asia, farming is far less mechanised and capital intensive and productivity ranges from just 100 to 500 quintals per farmer per annum (Siddiqui, 2018b).

In 1991with the adoption of neoliberal reforms in India the government reduced its investment in irrigation and extension services in agriculture and for the last two decades the crisis in rural communities has deepened (Siddiqui, 2016a). In addition to cuts in government spending and greater emphasis on market forces farmers have had to suffer the demonetisation and cash crisis of 2016. This was done soon after monsoon harvest and due to lack of banknotes farmers were unable to sell their products or buy inputs to sow winter crops. The agrarian crisis has been reflected in the increasing number of farmers’ suicides and forced migration to the cities. Over the same period the availability of institutional finance to farmers has been reduced, meaning that the cost of borrowing has risen and also global agricultural commodity prices have declined, particularly since 2017. As a result profitability in the agriculture sector has decreased. India is the largest producer of wheat and second largest producer of rice. In 2017, the production of wheat in India was nearly 96.6 million tonnes and consumption was about the same. However, India still exported nearly 3 million tonnes from government stocks. In the same year, rice production was 105 million tonnes and consumption was 103 tonnes, but India exported 11 million tonnes of rice from government stocks. The balance between global food prices, food security, and the living standards of the poor is thus extremely precarious under neoliberal policies, even in an economy as large as that of India.

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The Political Economy of Industrial Policy

I. Introduction

This article aims to discuss industrial policy by focusing on a number of theoretical issues, in particular in relation to manufacturing and the different rationales for industrial policy making. The paper highlights industries by looking into the importance of industrial policy to build and modernise manufacturing and focus the need for rethinking our understanding of industrial policy, especially in developing countries, also called late-developers. 

In developing countries, the agriculture sector is overburdened and huge proportions of their populations rely on the primary sector for their livelihoods and large numbers of people are trapped in low productivity and low income activities. Therefore, there is a need to diversify the economic structure and expand the industrial sector so that it can create employment and increase incomes. The current advanced economies were able to adopt specific industrial policies to build the industrial sector, which had played a very crucial role, and thus these countries were able to successfully increase the value output into their economies. I will briefly discuss the industrial policy experiences of East Asian and Latin American countries. 

Historically, the use of industrial policies by governments has proved beneficial to a number of countries. Structural transformation, technological upgrading, and innovation do not always take place autonomously, but rather require careful and consistent state intervention and support. The global financial crisis of 2008 put industrial policy back on the policy agenda of the developing countries. The issue most governments face today is not whether to have an industrial policy, but how to best design and implement an industrial policy. 

Government intervention in industrial policies has been an issue of contention as long as the economics profession has existed. Early political and developmental economists such as Rosenstein-Rodan, Hirschman, Gerschenkron, and Prebisch emphasized the importance of government intervention and the ability of a state to influence economic activity in ways that would be most beneficial to the country. In contrast, the IMF and World Bank were quietly opposed to such ideas, and during the 1980s, under their pressure, the development policy shifted towards a more market-centred approach, limiting government intervention to create a more competitive environment. Such views were fully supported by mainstream (neo-classical) economists, who claimed that it is best for manufacturing not to have an industrial policy. More recently, however, there has been increased public pressure to reduce unemployment and stimulate economic growth, and, in this context, a revived interest in industrial policy has taken place. (Siddiqui, 2018a; 2017a)

Here, my attempt is to provide a rationale for state policy intervention in the building of manufacturing. My approach is quite different from the traditional one, which was largely limited to subsidies and tariff protection. My focus will be on increased involvement, mainly in the allocation of funds for research and development, and access to cheap credits to publicly fund long-term investments and policy commitments.

II. Policy Debate

There is no agreed definition of industrial policy. However, most researchers generally defined it as including any policy that affects industry (usually interpreted as manufacturing).  (Noman and Stiglitz, 2016; Chang, 1993) Some others included ‘selective’ or ‘targeting’, namely a policy that deliberately favours defining industrial policies to enhance productivity and efficiency. It is argued that industrial policy should focus public goods e.g. on research and development, technology and infrastructure and should not involve ‘picking winners’. 

For instance, Warwick (2013: 16) defines industrial policy as “any type of intervention or government policy that attempts to improve the business environment or to alter the structure of economic activity toward sectors, technologies or tasks that are expected to offer better prospects for economic growth or societal welfare than would occur in the absence of such intervention”. Other researchers Pack and Saggi (2006: 2) consider an industrial policy to be: “any type of selective intervention of government policy that attempts to alter the structure of production towards sectors that are expected to offer better prospects for economic growth than would occur in the absence of such intervention, i.e. market equilibrium.” Here the industrial policy is aimed at altering the economic activity and structure. Another economist, Dani Rodrik (2008) suggests that infrastructure investments are very important and such investments do favour setting up industries, and training and skill programmes to attract an inflow of capital and should be part of the industrial policy. 

It seems that industrial policy is defined as an effort by the state to encourage the development and growth of manufacturing, and its design and implementation needs to take into account both a government’s capabilities and political will. Industrial policy refers to organized government involvement in guiding the economy by encouraging investment in targeted industries. Such policies serve to allocate capital across manufacturing industries by a system of taxes, subsidies, and investment incentives designed to move the economy along a specific pathway. Industrial policy was in place in most of the advanced economies during the post-war economic reconstruction of the 1950s, including the UK, Germany, France, Norway, Sweden, and Japan.

In fact, industrial policy involves more than just manufacturing, but still there is a need in the developing countries to promote manufacturing due to the following reasons: it is widely recognised that historically, the manufacturing sector has been the main source of technology driven productivity growth in advanced economies. Additionally, the increase in agricultural productivity would not have been possible without manufacturing, which provided machinery, irrigation pumps, and so on which made the ‘green revolution’ possible. (Siddiqui, 2021) More recently, rapid increases in productivity in services were made possible due to government support, like logistics, transport equipment, fast delivery system, tracking devices and mechanised warehouses. 

The development economists in their growth model, such as Rosenstein-Rodan, Nurske, Hirschman and others emphasised the need for coordinated investment between activities to promote economic activities and linkages (both forward and backward) to promote industries and particularly strong interdependence between sectors. There are also infant industry arguments, which are based on productive capabilities which could be developed overtime. Infant industries need protection for a certain period, especially when their producers are trying to catch-up with superior producers from overseas. For example, the European governments provided funds for the development of Airbus against US Boeing, which had dominance over the world’s civilian aircraft market. 

Despite the criticisms by mainstream economists regarding the need for an industrial policy, states nevertheless adopted industrial policies, for instance, the US did this throughout its history. Even today, the advanced economies will select and target a few industries known as ‘strategic industries’ and provide funds to enhance research and development and to safeguard, which they consider of national importance. (Siddiqui, 2020a) It requires government support for certain strategic industries (such as high technology), which is considered important to future domestic economic growth and expected to provide wide spread benefits (externalities) to society. The ‘strategic trade policies’ could be described as an attempt by the government to improve economic performance by promoting particular exports or discouraging particular imports, such policies have been extensively practiced by some successful today’s economies like the US, Germany, Japan, and South Korea. 

Despite the criticisms by mainstream economists regarding the need for an industrial policy, states nevertheless adopted industrial policies, for instance, the US did this throughout its history. 

The argument behind ‘strategic trade policy’ is that government can assist domestic companies in capturing profits from foreign competitors. The US has pursued industrial policies to enhance the competitiveness of domestic manufacturers and such policies involves channelling government resources into targeted industries, which it views as important for its economy. For instance, the methods used are loan guarantees, tax guarantees etc. I mean to say that the US government uses various measures to influence the economy, such as in the agriculture sector by providing research and technical assistance and dissemination of such information to farmers through agricultural extension services and investments in irrigation projects. The government in the past also supported a number of industries such as defence, aerospace, and energy. The US government also provides export subsidies to encourage exports through Export-Import Bank (Eximbank) and this support is available to any US export firms irrespective of size. 

 In order to maintain their manufacturing base and technological leadership, for instance, Japan and South Korea have taken policy measures to help, especially in high-tech and electronic industries. (Tsuru, 1993; Amsden, 1989; Johnson, 1982) For example, the Japanese government in the 1960s and 1970s assisted capital intensive industries such as shipbuilding, steel, and high-tech industries like optical fibres and semi-conductors through import protection and R&D subsidies. The government industrial policy became more explicit with the establishment of the Ministry of Economy, Trade, and Industry (METI) to assist targeted industries and support them in the allocation of foreign exchange, credits at low interest rates and R&D subsidies. As a result, Japan became technological leader in a number of key industries including the electronics and auto-industries. 

Joseph Schumpeter (1987) argued that under the conditions of free entry and allocative efficiency, there is little incentive for innovation, because monopoly rent, also known as ‘entrepreneurial profits’ will compete away. Moreover, innovation is important for economic growth and it may be damaged by an improvement in the static allocative efficiency of the economy.

Moreover, industrial policy differs from the macroeconomic policy as under the former the government targets only a subset of the economy, while the macroeconomic policy which includes tax rates, rates of interest, and levels of fiscal spending, generally does not discriminate against companies or industries, whereas industrial policy includes subsidies on R&D, taxes and cheap credits.

The ‘strategic trade policy’ favours the entry of domestic firms into global markets. The policy is that government can assist domestic companies in capturing economic profits from foreign competitors. According to it, the government policy can alter the terms of competition to favour domestic firms over foreign firms and shift profits in imperfectly competitive markets from foreign to domestic companies. The standard example is the aircraft industry, which has a high cost of introducing new aircraft and a significant learning curve in production that leads to decreasing unit production costs. It means that the aircraft industry can support only a small number of producers. This industry is also typically associated with national prestige. It is based on the notion that in some the dynamic economies of scale and the size of global markets, allow for profitable production by few firms. The strategic trade policy, Tyson (1992: 3) notes: “… demonstrate that, under conditions of increasing returns, technological externalities, and imperfect competition, free trade is not necessarily and automatically the best policy.” This policy means that government support of domestic companies to support domestic industries could help to deter foreign companies from entering the market. It is said that a successful state intervention produces insignificant gains for consumers but monopoly profits for domestic firms, hence a net national welfare gain. For example, in the US, a strategic industrial policy in the aerospace industry promoted domestic industries. 

The ‘strategic trade policy’ favours the entry of domestic firms into global markets. The policy is that government can assist domestic companies in capturing economic profits from foreign competitors.

Government interventions have a long history. During the late 18^th and 19^th centuries, politicians: such as Hamilton in the US and List in Germany favoured industrial policy through state intervention to promote domestic industrialisation in the face of British industrial dominance. (Siddiqui, 2020b) The German Historical School supported infant-industry argument, which suggested that new industries take time to get established because of start-up problems, and the need to insulate themselves from the competition. This argument also had support after the 1950s in Africa, East and South Asia and Latin America. Classical economists like Adam Smith and David Ricardo argued that ‘free trade’ benefits all countries, and opposed the idea that countries would benefit more if they engaged in certain forms of state support. (Siddiqui, 2018b; 2016b) However, recent trade theorists like Brander and Spencer, 1985, Krugman, 1986, and Richardson, 1993 have put forward strategic trade theories. For example, suppose the European Union (EU) subsidised their companies and protected domestic markets, they would have to ensure that their companies enter the overseas markets, while deterring US companies, thereby ensuring that the EU, not the US, received the monopoly profits. 

I find that some issues of recent policy such as the rise of the global value chain, neoliberalism, financialization, and increased US control over the global economic policy after the collapse of the Soviet Union and the end of the Cold War. During the 1980s there were wide discussions on East Asian and Chinese industrial policies. (Siddiqui, 2020c; 2016c) Prior to the 1990s debt crisis, many developing countries viewed the industrial policy as an important policy for economic diversification and to get rid of poverty and economic backwardness. Therefore, we should not ignore the differences in relative positions of countries in global geopolitics, particularly the distribution of economic power across countries. The rich and powerful countries with a larger GNP (Gross National Product) have a self-interest in supporting trade, capital liberalisation (Siddiqui, 2017b; 2017c)  and a stable monetary system, since most global companies are based in rich countries and are able to corner the bulk of the benefits. It seems that industrial policy is the one way that the late-developers, who happen to be poor as well, can challenge the global power structure. 

Despite, the relevance of industrial policy, mainstream economists have neglected this area of study due to not taking into consideration crucial issues like uncertainty, macroeconomic management, and role of state, arising from the process of change. They have neglected the increasing financialization of the world economy. The uncertainty arises as firms, in their efforts to control markets, may adopt predatory pricing strategies or mergers and acquisitions to remove rivals. Firms can also reduce uncertainty by increasing control over suppliers through signing long-term contracts or through investments. A number of measures could be taken to reduce uncertainty such as infant industry protection and also guaranteeing demand. By providing government procurement to domestic companies so that they have stable demands, such as the US policy towards Boeing, Finland’s policy towards the electronic industry and the Indian government’s policy towards the software industry. The US government also initially financed computers, the internet and semi-conductors through public funding. 

The IMF (International Monetary Fund) and other international financial organisations imposed SAP (Structural Adjustment Programme), including monetarist macroeconomic policies on the developing countries, especially those which faced a BoP (balance of payment) crisis in the past decades. (Siddiqui, 2020d) The SAP had one policy for all, which included fiscal austerity, trade liberalisation, deregulation, privatisation, and increasing exports. However, when the advanced economies experienced the 2008 global financial crisis, they ignored ‘free market’ mechanisms which preached by them to developing countries, and instead, the state came to rescue their economies. (Siddiqui, 2012; 2015a) Since the early 1990s, the financialization process has affected several developing countries, which could be seen via declining investments/GDP ratios, declining wages, and the growing share of the financial sector in their GDP. (Siddiqui, 2019a; 2019b) Financialization is manifested in a number of ways including an increasing reliance on external finance, increasing share of finance in the economy, and short term investment strategies. Capital liberalisation and the lack of global regulation in areas of capital flows, tax avoidance and evasion have weakened governments in developing countries. 

On world-wide trade liberalisation, following multilateral negotiations in 1995, the GATT’s (General Agreements on Trade and Tariffs) tasks and responsibilities were extended, which was then called the WTO (World Trade Organisation). The WTO demanded all member countries now only adhere to trade and capital liberalisation, but also covered new areas, namely Trade Related Intellectual Property Rights (TRIPs),Trade Related Investment Measures (TRIMs) and General Agreement in Trade in Services (GATs).Under these provisions, copy rights were protected and regulations of the foreign investments and foreign services were removed. These regulations favoured the interests of Western-based multinational companies operating in developing countries. (Siddiqui, 2018c; 2018d)

Table 1 shows that all major economies with largest GDP also have a strong manufacturing sector and the industrial policy has played a key role in building high value manufacturing in these countries (see Figure 1, also see Pie Chart 1).

I mean to say that the global power imbalances have been more visible in recent decades in the areas of industrial policy. (Siddiqui, 2020e) During the colonial period, the European powers banned setting-up high-value manufacturing, and colonies and semi-colonies were encouraged to specialise in the production of primary commodities and low-value products in the name of ‘comparative advantage’, and finally, unequal economic and trade treaties were forced on them. (Siddiqui, 2019c)

A number of studies found that trade and capital liberalisation and the removal of subsidies and other incentives had adversely affected domestic producers and they experienced closures.

Raul Prebisch, a strong proponent of import substitution policy, hoped that such policies would be able to substitute for manufactured imports and also develop technological capabilities. Some economies like Brazil witnessed rapid expansion of manufacturing and were able to increase innovations and productivity, but the country was unable to successfully substitute for foreign companies and also did not lead uninterrupted industrial growth. In the 1980s and 1990sthe constraints in the balance of payment lead to the foreign debt crisis, and most of the Latin American countries abandoned import substitution policies and adopted neoliberal economic policy. However, it did not lead to a positive impact on productivity and capabilities. A number of studies found that trade and capital liberalisation and the removal of subsidies and other incentives had adversely affected domestic producers and they experienced closures.

III. Experiences in Latin America and East Asia

For the last three decades or so, in most of the Latin American countries, the service sector is growing faster and their economies are bypassing the industrialisation process which historically happened in the advanced economies. Latin America appears to be the worst hit region since the 2008 global financial crisis. The advanced economies too have experienced a significant fall in employment in manufacturing, which is known as de-industrialisation. However, manufacturing output at constant prices has held its own comparatively well in the advanced economies since much of the discussion on deindustrialisation focuses on nominal rather than real values. Technological progress and productivity are no doubt a large part of the story behind the decline of employment in manufacturing and deindustrialisation in advanced economies. In Latin America, the political consequences of premature deindustrialisation are more subtle, but could be even more significant. In fact, premature deindustrialisation may make the democratisation process less likely and more fragile in the near future.

In the 1950s, Latin American economies were better positioned than the East Asian economies, meaning that the former had more developed industries and technologies than the latter group. However, despite, the Korean war from 1951-53, and the Japanese invasion of China and occupation of most of the East Asian countries such as South Korea, Singapore, and Taiwan, while these countries have substantial differences, they have managed to accumulate capital, expand manufacturing, industrialise and join the advanced economies of the world in a very short period. 

The mainstream economists argue that the reason for differences in performance is mainly due to the adoption of ‘Import-Substitution Industrialisation’ (ISI) by Latin American countries, while East Asia adopted ‘Export-Oriented Industrialisation’ (EOI), which resulted in divergent industrial and economic performances of these two regions. The ISI strategy aims to encourage domestic companies and protect them from foreign competition, and it requires the government to put in place a strategy to protect domestic producers through tariffs, subsidised credits, exports and R&D. The EOI targets setting up industries with a primary focus on overseas markets. This strategy relies on a greater degree of foreign markets and technological support. Both strategies aim to help BoP, spur investments, and create jobs. However, the EOI is helpful for small countries to achieve economies of scale, as this strategy has larger markets rather than just domestic markets. However, EOI needs support from advanced economies and foreign companies to access their technology, capital and markets and is hence more vulnerable to international pressures, as we have seen during the East Asian economic crisis of 1997, when in a very short period the whole region was plunged into a deep crisis. 

However, mainstream studies on East Asian economies ignore the key role played by the state through selective industrial policies in the form of protection of domestic companies, investment incentives, and export promotion. Alice Amsden (1989) found that in South Korea successful industrial transformation was mainly possible due to the selective industrial policy, which was strategically designed to build technical upgrading in export sectors including introducing performances for firms benefitted by the state support. She used the phrase, “getting prices wrong”, meaning that the government deliberately distorted market prices in areas such as long-term interest rates and foreign exchange rates to support the initial period of industrialisation. Similarly, Robert Wade (1990) emphasised that the crucial role of the state in Taiwan’s successful transformation from a poor agrarian dominated economy to a highly advanced world-leader in manufacturing. He found that the state was able to ‘guide the market’ to improve the technical capabilities of the export sector. These studies point out that the state created a complex system of incentives and discipline and a combination of both of ISI and export promotion. 

The rapid transformation of the post-war Japanese economy was also due to state intervention rather than free market policy, as mainstream economists would like us to believe. Japan’s successful industrial policy drew a great deal of attention. In Japan the Ministry of International Trade and Industry (MITI) orchestrated and directed the development of selected industries and products which it deemed necessary for Japan to compete in the international market. (Siddiqui, 2015b) The MITI only assisted the private sector in targeted industries. It generally financed no more than 50 percent of a project, leaving the rest to the private sector and market influences. The MITI is not autonomous but is overseen by various government agencies. Japan’s automobile industry served as a highly successful model where a specific industry was targeted to assume an expanded role in the world markets. As Chalmers Johnson (1982: 17) noted that state policy targeted to promote high tech manufacturing. “the issue is not of the state intervention in the economy. All states intervention in their economies for various reasons… Japan is a good example of a state in which the developmental orientation predominates.” He further said that a development state is where: the political elites are committed to breaking dependency and underdevelopment; their priority is not to enhance their own privileges and accumulate personal wealth, and they are able to build institutions to effectively translate their commitment into reality. Besides building modern manufacturing they were also able to induce their companies to redistribute their profits to society at large.  (Johnson, 1982)

In 1986, the South Korean government introduced the Industrial Development Law (IDL), which helped to implement selective industrial policy and had provisions for sectoral rationalisation programmes. Under IDL, a number of rational programmes were carried out covering a number of industries such as auto-industries, electrical and construction machinery, coal mining and textiles. (Amsden, 1989)

In South Korea, the importation of machines was controlled and the government encouraged the use of domestic machines, credits to imports were only given if this machinery was not available domestically. During the 1970s, the government prescribed for domestic firms to invest in chemical and heavy industries. For example, the ship-building industry grew from scratch and emerged to become the world’s second largest in just ten years. Private investors were encouraged to invest in the ship-building industry and the President Park Chung Hee himself took interest in the growth of this sector. The state-controlled financial institutions provided credits to ship building and other heavy industries, which had a very visible impact on private investors. In 1973, the government imposed a price ceiling when it was seen to be necessary. In addition to price control, the state also put restrictions on entry, wherever it thought there were too many firms, and the state encouraged mergers to promote efficiency. 

In South Korea, the state also saw the dependence on foreign savings to finance investments as problematic, and solutions were seen in building the exports sector without a balance of payment deficit. It was believed that the reason for chronic trade deficits could be the underdevelopment of capital and intermediate goods, and therefore, the development of heavy and capital goods industries was seen as imperative for the overall economic development of the country. To successfully set up a strong manufacturing base in the country, the macroeconomic policy was geared to suit the need of building manufacturing and high levels of investments in the economy were made, with expansionary measures if necessary. The heavy reliance on indirect taxes and consumer credits were banned so that all credits were channelled to industries. Private car ownerships were discouraged by high taxation, foreign holidays and imports of luxury goods were banned prior to 1990 and imports were restricted to high tech and machinery. As Chang (1993: 139) notes: “Despite being citizens of a major exporter of passenger cars, Korean until very recently owned far fewer passenger cars than other developing countries as a comparable income level. In 1985, there were 73.5 people per passenger car in Korea; whereas the corresponding figures in 1983 were 27.0 in Taiwan, 21.8 in Chile, 16.3 in Malaysia and 15.2 in Brazil…. Given such a clear anti-consumption bias, Korean macroeconomic policy may be more appropriately understood as investment management’ rather than as ‘aggregate demand management.”

However, in South Korea, macroeconomic policy measures were considered less-effective to achieve the rapid building of manufacturing and upgrading of industries owing to their uncertain impact on specific sectors. The government industrial policy recognised that ‘the market mechanism’ alone could not achieve a ‘comparative advantage’ and build heavy industries. Therefore, the state identified ‘strategic industries’ i.e. the priority sector, and government supports were extended into such areas as steel, electricity, oil, gas, coal and shipbuilding. To achieve economies of scale and efficient production scale in the priority sector, the government targeted overseas markets from the beginning, in order not to incur low capacity utilisation. The government had tight control over foreign direct investment and vital conditions were negotiated with foreign companies for the transfer of technology to domestic companies. To raise productivity, provisions of subsidised credits for capacity upgrading, import substitution of inputs, and funds were also made available for R&D and skills upgrading programmes. (Amsden, 1989)

The question arises of why state intervention worked in South Korea but not in Africa, South Asia or Latin America. To answer this, we need to revisit Schumpeter (1987) who argued that to start innovation or new industries needs ‘profits far above what is necessary in order to induce the corresponding investment’ i.e. entrepreneurial profits, which makes risk-taking attractive, and what is also called ‘quasi-rents’. Then entrant barriers become necessary to provide incentives for investments in new industries. Similarly, Chang (1993: 145) argues: “In order to set-up an industry, a late-developing country has to import technology, but making the imported technology work requires a period of ‘learning’, which is often a costly activity with highly uncertain returns. Such risk means that those who are starting new industries in a late-developing country have to be provided with some form of entry barrier and the resulting rents… And this is what the states in many late-developing countries, from Germany and Japan down to Korea and others …have tried to provide through tariff protection and other forms of state-created rents like subsidies and preferential loans.”

South Korean large family-controlled businesses are often ‘Chaebols’, and have strong ties with the government. In fact, after taking over the government in a military coup in 1963, President Park Chung-Hee began a modernization drive, known as “guided capitalism.” Under it, the governments elected a few firms and provided them with cheap credits. There are now 45 conglomerates that fit the traditional definition of a Chaebols and the top 10 own more than 27% of all business assets in South Korea. (Amsden, 1989)

In 1994, Korea significantly reduced government regulations for foreign borrowings which led to a rise in foreign debts, which trebled from US$ 44 billion to US$ 120 billion in 1997in just three years. However, the World Bank in 1997 considered debt/GNP ratios under 40% as low risk cases, but Korea’s debt/GNP ratio was only 22%, while it was 70% for Mexico, 33% for Argentina, 57% for Indonesia, and 35% for Thailand. 

IV. Conclusion

Industrial policy should be seen as an important policy for a country aiming to accomplish industrialisation, which needs a long-term policy to reverse pre-mature industrial decline. The industrial policy could be to correct ‘market failure’ and to coordinate a set of state incentives such as subsidies and tariffs on imports. Therefore, state support is crucial in order to establish industries and relying alone on market forces and foreign corporations will be disastrous for the developing countries as shown by the recent experiences of the Latin American countries. 

The study has found that industrial policy is very important for the developing countries in order to diversify their economies and to build the manufacturing sector, which would ultimately raise overall productivity, incomes and employment. To achieve this, the role of the state is crucial and leaving this to the market forces alone is a grave policy mistake and does not have any evidence of success in the past. 

The past industrial policy and its outcomes in Latin America and East Asian countries have been briefly examined. In short, in Latin America, for instance, manufacturing in Brazil grew until mid-1980s and the country was able to build manufacturing in certain area, which was largely focused on domestic demands, but then the country experienced a debt crisis and under IMF pressure adopted ‘pro-market reforms’ i.e. SAP, which led to the abandoning of protections to the domestic industries. And as a result, Brazil witnessed the closure of a number of industries and deindustrialisation and afterwards, it focused more on exports of primary commodities to repay its foreign debts. 

While, in the East Asian countries the neoliberal policies were imposed during the 1997 East Asian crisis and by that time most of these countries, namely South Korea, Taiwan. Singapore and Malaysia were able to build a competitive edge in specific industries. (Siddiqui, 2016a; 2009)  In fact, from the beginning, the East Asian countries began developing their manufacturing sectors by targeting the export markets, and also began for a brief period with ‘import substitution policy’. They realised that their domestic markets were limited and thus manufacturing could not achieve economies of scale. These countries opened their industries to foreign competition, welcomed foreign investment and technologies, and also focused on exports, which was used to stimulate economic development. Manufactured products soon became the principal exports of East Asian economies in contrast to other developing countries that largely focused on exports of agricultural commodities. 

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The Contagion of Capital

The U.S. economy and society at the start of 2021 is more polarized than it has been at any point since the Civil War. The wealthy are awash in a flood of riches, marked by a booming stock market, while the underlying population exists in a state of relative, and in some cases even absolute, misery and decline. The result is two national economies as perceived, respectively, by the top and the bottom of society: one of prosperity, the other of precariousness. At the level of production, economic stagnation is diminishing the life expectations of the vast majority. At the same time, financialization is accelerating the consolidation of wealth by a very few. Although the current crisis of production associated with the COVID-19 pandemic has sharpened these disparities, the overall problem is much longer and more deep-seated, a manifestation of the inner contradictions of monopoly-finance capital. Comprehending the basic parameters of today’s financialized capitalist system is the key to understanding the contemporary contagion of capital, a corrupting and corrosive cash nexus that is spreading to all corners of the U.S. economy, the globe, and every aspect of human existence.

Free Cash and the Financialization of Capital

“Capitalism,” as left economist Robert Heilbroner wrote in The Nature and Logic of Capitalism in 1985, is “a social formation in which the accumulation of capital becomes the organizing basis for socioeconomic life.”¹ Economic crises in capitalism, whether short term or long term, are primarily crises of accumulation, that is, of the savings-and-investment (or surplus-and-investment) dynamics. Investment in new productive capacity in new or existing businesses is what determines growth. Such investment decisions are governed by expected profits on new investments.

Viewed in these terms, the decline in the long-term growth rate experienced by the mature, monopolistic economies of the United States, Europe, and Japan over the last half century can be seen as related principally to the atrophy of net investment.² Existing excess capacity in plant and equipment, a product of the monopolistic structure of accumulation, tends to decrease expected profits on new investment.³ The U.S. economy has seen a long-term decline in capacity utilization in manufacturing, which has averaged 78 percent from 1972 to 2019—well below levels that stimulate net investment.⁴ As a result, the capital accumulation process within production has stagnated, with existing idle capacity tending to shut off the creation of new capacity. From 1960 to 1980, it was common for private net investment to constitute around 40 percent of private gross investment. Since 2000, this has dropped to around 20 percent, even as gross investment has weakened relative to national income.⁵

The significance of the atrophy of net investment in the core capitalist countries cannot be exaggerated. As the foremost emerging economy in the world today, China has what economist Zhun Xu calls a “high Baran ratio,” standing for investment as a share of economic surplus. Conceptually, economic surplus—the difference between national output and wage income or essential consumption—is gross property income (profit, rent, interest). Zhun uses the income of the top 10 percent as a proxy for economic surplus. On this basis, he explains, China has invested around 80 percent of its economic surplus, leading to high growth rates of 7 percent or higher. In contrast, mature, monopolistic economies such as the Group of 7 (the United States, Japan, Germany, the United Kingdom, France, Italy, and Canada) typically have relatively low Baran ratios, investing less than 50 percent of economic surplus, resulting in what for decades have been weak and declining average annual growth rates.⁶

Given these conditions, it is important to ask: What happens to that part of the economic surplus held by corporations and individual capitalists that is not invested in new capacity?⁷ Some of it is used for capitalist consumption, but this has inherent limits. The vast economic surplus (actual and potential) generated by the system of economic exploitation far exceeds what can be spent in the luxury consumption of the wealthy, however ostentatious. More importantly, capitalists do not desire to consume the larger part of the economic surplus at their disposal, since, above all else, they seek to amass wealth.

Government spending absorbs some of the economic surplus, as does waste in the business process. However, government deficit spending also increases corporate profits after taxes above the level determined by capitalist spending on consumption and investment.⁸ Hence, with both the growth of the federal deficit and the stagnation of investment, the amount of free cash in corporate coffers has dramatically expanded. This free cash plays a central role in the financialization of capital and the resulting extreme polarization of society.⁹

As stipulated by Craig Medlen in Free Cash, Capital Accumulation and Inequality, free cash equals corporate profits after taxes plus depreciation minus investment. (In national income accounting, corporate profits after taxes plus depreciation is known as corporate cash flow. The funds associated with depreciation [or capital consumption] are part of the gross surplus available to corporations.)¹⁰

A wider conception of free cash, utilized in this article, also includes net interest. Hence, in the wide version, Free Cash = Corporate Profits After Taxes + Depreciation + Net Interest – Investment.¹¹ This free cash is held by corporations or is distributed to stockholders through dividend payouts and/or stock buybacks.¹²

Building on the research of Michał Kalecki, Medlen demonstrates that the amount of free cash is identical to the federal government deficit minus the excess of savings over investment of the noncorporate sector (now usually negative) plus the current account balance. The three factors of (1) the federal deficit, (2) the country’s current account balance (or the trade deficit), and (3) the deficit spending of the noncorporate sector (encompassing noncorporate business, housing, and personal finance) can therefore be seen as underpinning free cash.¹³

Chart 1 shows the growth of corporate free cash in the U.S. economy from the period immediately after the Second World War to the present. Free cash, as non-invested surplus, became a much bigger and bigger factor in the U.S. economy beginning in the 1980s due mainly to the combined effects of a long-term decline in corporate taxation, the increasing federal deficit, and the atrophy of net investment.¹⁴ Free cash falls in recessions (due to lower business activity and income), but then rockets up soon afterward due to investment not keeping up with increasing economic activity, freeing up more cash after investment. This sudden rebound in cash is also a product of the fact that the Federal Reserve Board now steps in during every recession, at precisely such “Minsky Moments” when the prospects for investment are at their worst, with lavish provision of low-interest credit.

Chart 1. Free Cash, U.S. Corporations, 1957-2019 (5-year Moving Average)

Notes: Free Cash is calculated as the sum of Corporate Profits after tax (W273RC1Q027SBEA), Depreciation (CCFC), and Net Interest (A453RC1Q027SBEA) minus Corporate Fixed Investment, which includes investment in nonresidential structures (FBGFEEQ027S and BOGZ1FA105013005Q), residential structures (BOGZ1FA105012005Q), and inventories (NCBIAVQ027S). The ratio divides by Gross Domestic Product (GDP). Quarterly data reported as 5-year moving averages.

Sources: Bureau of Economic Analysis, Table 1.14. Gross Value Added of Domestic Corporate Business and Federal Reserve (Financial Accounts); Table F.2 Distribution of Gross Domestic Product. Retrieved from FRED, Federal Reserve Bank of St. Louis, November 16, 2020, fred.stlouisfed.org. Series IDs corresponding to FRED variables are included above in parentheses.

Another way of looking at this phenomenon is to chart the total cash or liquid funds that corporations actually have ready at hand, if they were to choose to invest (or otherwise productively use) the surplus at their disposal. Of course, corporate investment is not dependent on the prior availability of savings/surplus, since capitalism, as Joseph Schumpeter long ago explained, is a system that creates “credit ad hoc”; while John Maynard Keynes and Kalecki taught that investment determines savings, not the other way around.¹⁵ Nevertheless, it is significant that the cash funds of corporations in the current phase of monopoly-finance capital far exceed profitable investment outlets. At the beginning of 2020, nonfinancial corporations were sitting on over $4 trillion dollars in cash; before the end of 2020 this had risen to over $5 trillion.¹⁶ According to the Federal Reserve Flow of Funds data, shown in Chart 2, total cash held by U.S. nonfinancial corporations as a share of gross domestic product (GDP)—much of it parked abroad in tax havens—has almost tripled between the early 1990s and the present.¹⁷

Chart 2. Cash On-Hand, U.S. Nonfinancial Corporations, 1980-2020 (5-year Moving Average)

Notes: Corporate Cash is the sum of lines 1-7 of Table L.102 Nonfinancial Business from Financial Accounts of the United States. Data points are reported as 5-year moving averages.

Source: Retrieved from FRED, Federal Reserve Bank of St. Louis, November 16, 2020, https://fred.stlouisfed.org. Series IDs: FDABSNNCB, BOGZ1FL143020005Q, BOGZ1FL143030005Q,BOGZ1FL143034005Q, SRPSABSNNCB, BOGZ1FL144022005Q, and GDP.

The total cash holdings of nonfinancial corporations on hand at any given time are not to be confused with free cash, which is that part of the corporate cash flow left over after investment in a given year—much of which is not held as cash deposits but instead spent on mergers and acquisitions, stock buybacks, and other financial instruments. Rather, total cash on hand, as defined by the Federal Reserve Flow of Funds, simply measures the actual cash deposits sitting in the accounts of nonfinancial corporations presented as annual averages based on quarterly data. Still, the rapid growth of total cash currently held by nonfinancial corporations in the form of ready monies, both absolutely and as a proportion of GDP (as shown in Chart 2), is a further indication of an economy that has shifted from capital formation to speculation.

As we have seen, when corporations do not invest their economic surplus in new capital formation—primarily due to vanishing investment opportunities in an economy characterized by excess capacity—they are left with abundant free cash that is partly returned to the shareholders through share buybacks and, to a lesser degree, dividends. It is also used for speculation, including mergers, acquisitions, and the panoply of corporate “cash management” techniques that amount to the leveraging of free cash to enhance returns.¹⁸ This gives rise to a whole alphabet soup of financial instruments, in which corporations use the cash at their disposal partly as collateral for debt leverage, with nonfinancial corporate debt rising rapidly as a share of national income. Predictably recurring internal corporate funds in the form of free cash constitute a “flow collateral” allowing for further leverage, feeding speculation. A speculative economy relies on borrowed funds for leverage, backed up in part by cash. Expanding cash reserves are also needed as hedges in case of financial defaults. The whole system is a house of cards.

The progressive financialization of the capitalist economy, whereby the financial superstructure continues to expand as a share of the underlying productive economy, has led to ever-greater asset price bubbles and growing threats of world economic meltdown. So far, a complete meltdown has been headed off by central banks, as in the 2000 and 2008 financial crashes. At every major recurring disturbance, and with serious economic repercussions, the monetary authorities pump massive amounts of cash into the financial superstructure of the economy only to give rise to greater bubbles in the future.

Theoretically, stock values represent future expected streams of earnings arising primarily from production.¹⁹ Nowadays, however, finance has become increasingly autonomous from production (or the “real economy”), relying on its own speculative “self-financing,” leading to financial bubbles, contagions, and crashes, with the monetary authorities intervening to keep the whole house of cards from collapsing. This serves to reduce the risk to speculators, thereby keeping the value of stocks and other financial assets rising on a long-term basis, along with the overall wealth/income ratio. In these circumstances, so-called asset accumulation by speculative means has replaced actual accumulation or productive investment as a route to the increase of wealth, generating a condition of “profits without production.”²⁰

In order to grasp the full significance of the financialization of the economy, it is useful to look at the two conceptions of capital (relative to national income) depicted in Chart 3.²¹ One of these, the numerator of the lower line, is the traditional conception of capital as fixed investment stock (physical structures and equipment) at historical cost minus depreciation. This is called the fixed capital stock of the nation and is tied directly to economic growth.²² It represents what economic theorists from Adam Smith to Karl Marx to Keynes have referred to as the accumulation of capital. Capital formation and national income are closely related, generally rising and falling together, producing the relatively flat line, representing the ratio of fixed capital stock to national income, shown in Chart 3.

Chart 3. Capital and Wealth to Income Ratios, U.S., 1947-2019

Note: Grey bars indicate economic recession periods (USREC).

Sources: Fixed Capital Stock: Bureau of Economic Analysis, Table 4.3. Historical-Cost Net Stock of Private Nonresidential Fixed Assets by Industry Group and Legal Form of Organization. Stock Value: FRED, Federal Reserve Bank of St. Louis, retrieved November 16, 2020, https://fred.stlouisfed.org. Series IDs: BOGZ1FL893064105Q (All Sectors; Corporate Equities; Asset, Level) and GDP.

Yet, capital, as Marx noted very early in the process, has more and more taken on the “duplicate” form of “fictitious capital,” that is, the structure of financial claims (in monetary values) produced by the formal title to this real capital. Insofar as economic activity is directed to the appreciation of such financial claims to wealth relatively independently of the accumulation of capital at the level of production, it has metamorphosed into a largely speculative form.²³

This can be seen by looking again at Chart 3. In contrast to the lower line, the upper line depicts what is traditionally seen as the wealth/income ratio (which some economic theorists, such as Thomas Piketty, conflate with the capital/income ratio, treating wealth as capital).²⁴ The numerator here is the value of corporate stocks. Since the mid–1980s, the ratio of stock value to national income has increased more than 300 percent. This marks an enormous growth of financial wealth, with speculation-induced asset growth sidelining the role of productive investment or capital accumulation as such in the amassing of wealth. This is associated with a massive redistribution of wealth to the top of society. The top 10 percent of the U.S. population owns 88 percent of the value of stocks, while the top 1 percent owns 56 percent.²⁵ Rising stock values relative to national income thus mean, all other things being equal, rapidly rising wealth (and income) inequality.²⁶

The existence of the two conceptions of capital (and of capital/income ratios) presented here—one representing historical investment cost minus depreciation, and conforming to the notion of accumulated capital stock, the other the monetary value of stock equities (in economics traditionally treated as wealth rather than capital)—is often downplayed within establishment economics under the assumption that in the long run they will simply fall in line with each other, and with national income. As leading mainstream economic growth theorist Robert Solow writes: “Stock market values, the financial counterpart of corporate productive capital, can fluctuate violently, more violently than national income. In a recession the wealth-income ratio may fall noticeably, although the stock of productive capital, and even its expected future earning power, may have changed very little or not at all. But as long as we stick to longer-run trends…this difficulty can safely be disregarded.”²⁷

But can the divergence of stock values from income (and from fixed capital stock) in reality be so easily disregarded? Chart 3 depicts a sharp increase in stock values relative to national income, which has now continued for over a third of a century, with decreases in total stock values as a ratio of national income (output) occurring during recessions, then rebounding during recoveries.²⁸ The overall movement is clearly in the direction of compounded financial hyperextension. This conforms to the general pattern of the financialization of the capitalist economy, constituting a structural change in the system associated with the growth of monopoly-finance capital. This has gone hand in hand with a bubblier economy, with financial bubbles bursting in 1987, 1991, 2001, and 2008, but ultimately shored up by the Federal Reserve and other central banks.

Today, vast amounts of free cash are spilling over into waves of mergers and acquisitions, typically aimed at acquiring megamonopoly positions in the economy. A major focus is the tech sector, much of which is directed at commodifying all information in society, in the form of a ubiquitous surveillance capitalism.²⁹ All financial bubbles derive their animus from some common rationale, which claims that this time is different, discounting the reality of a bubble. In the present case, the rationale is that the advance of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), which now comprise almost a quarter of the value of Standard and Poor 500’s total capitalization, is unstoppable, reflecting the dominance of technology. Apple alone has reached a stock market valuation of $2 trillion. All of this is feeding a massive increase in income and wealth inequality in the United States, as the gains from financial assets rise relative to income. Yet, like all previous bubbles, this one too will burst.³⁰

Kalecki determined that the export surplus on the U.S. current account increased free cash, as did the federal deficit.³¹ However, the current account deficit cannot be seen, in today’s overall structural context, as simply reducing free cash, because of the changed role of multinational corporations in late imperialism, which alters other parts of the equation. Due to globalization and the rise of the global labor arbitrage, U.S. multinational corporations in their intrafirm relations have in effect substituted production overseas by their affiliates for parent company exports, thereby decreasing their investment in fixed capital in the United States.³² The sales abroad of goods by majority-owned affiliates of U.S. multinational corporations in 2018 were 14.5 times the exports of goods to majority-owned affiliates.³³ Foreign profits of U.S. corporations as a proportion of U.S. domestic corporate profits rose from 4 percent in 1950 to 9 percent in 1970 to 29 percent in 2019. This mainly reflects the shift in production to low unit labor cost countries in the Global South. Samir Amin described the vast expropriation of surplus from the Global South, based on the global labor arbitrage, as a form of “imperialist rent.”³⁴

This expansion of global labor-value chains is also associated with an epochal increase in what is called the non-equity mode of production, or arm’s length production. Companies like Apple and Nike rely not on foreign direct investment abroad, but instead draw on subcontractors overseas to produce their goods at extremely low unit labor costs, often generating gross profit margins on shipping prices on the order of 50 to 60 percent.³⁵

The loss of investment in the United States, as U.S. multinational corporations have substituted production overseas, coupled with the growth of foreign profits of U.S. megafirms, has further increased the free cash at the disposal of corporations (even with a growing deficit in the current account), thereby intensifying the all-around contradictions of overaccumulation, stagnation, and financialization in the U.S. economy. Much of this free cash is parked in tax havens overseas to escape U.S. taxes.³⁶

Washington uses its printing press, through the federal deficit, to compensate for the U.S. current account deficit. Foreign governments cooperate, providing the “giant gift” of accepting dollars in lieu of goods, thereby acquiring massive dollar reserves.³⁷ At some point, however, these contradictions are bound to undermine the hegemony of the dollar as the world’s reserve currency, with dire ramifications for the U.S.-based world empire.

The COVID-19 Crisis and the Great Divide

Received economic ideology, with its compartmentalized view, treats the COVID-19 pandemic as simply an external shock to the economy emanating from the natural environment and thus unrelated to capitalism. However, as Rob Wallace and his colleagues have shown, contagions like COVID-19 arise from the worldwide circuits of capital associated with the global labor arbitrage and the accelerated extraction of the planet’s resources.³⁸ This is tied especially to global agribusiness, which displaces, often forcibly, subsistence farmers while advancing into wilderness areas, destroying ecosystems, and disrupting wildlife. The result is a growing spillover of zoonoses (or diseases from other animals that are capable of being transmitted to human populations). From the standpoint of the Structural One Health tradition in epidemiology, the COVID-19 pandemic can therefore be seen as part of the larger planetary ecological crisis or metabolic rift engendered by twenty-first-century capitalism.³⁹

In March 2020, the U.S. stock market saw a sharp dip as COVID-19 spread in the United States. The Federal Reserve immediately brought out its firehose to flood the market with liquidity, purchasing, from March to June 2020, $1.6 trillion in U.S. Treasuries and $700 billion in mortgage-backed securities, and letting markets know that there was virtually no limit to the trillions that they were ready to pour into markets.⁴⁰ The result was that—just as social distancing and lockdowns were being instituted and unemployment was soaring to the highest levels since the Great Depression, reaching almost seventeen million—the U.S. stock market experienced its biggest increase since 1974 in the week of April 6 to 10.⁴¹ Wall Street profits rose in the first half of 2020 by 82 percent over the year before.⁴² The total wealth of U.S. billionaires skyrocketed by $700 billion between March and July 2020, even as the number of those dying from COVID-19 in the United States continued to mount and as millions of U.S. workers found themselves hit hard by the crisis.⁴³ Amazon centi-billionaire Jeff Bezos experienced an increase in his total wealth by more than $74 billion in 2020, while Tesla megacapitalist Elon Musk saw his wealth increase in 2020 by $76 billion, making him too a centi-billionaire. (For comparison, the Supplemental Nutrition Assistance Program benefits provided by the federal government in Fiscal Year 2019, aiding tens of millions of low-income families, seniors on fixed incomes, and disabled people, amounted to $62.3 billion.)⁴⁴ All of this points to the continuing operation of what Marx termed “the absolute general law of capitalist accumulation,” polarizing wealth and poverty, or what Solow, commenting on the work of Piketty, calls “the rich-get-richer dynamic.”⁴⁵

The wreckage inflicted on the U.S. population as a whole has been enormous. In mid–October 2020, more than 25 million workers in the United States were hurt in the pandemic crisis. According to official unemployment figures, 11.1 million workers in the United States were officially unemployed; another 3.1 million had lost their jobs but were misclassified as a result of the lockdowns; 4.5 million had dropped out of the labor force since the pandemic; and 7 million were still employed but experiencing cuts in pay and hours due to the coronavirus crisis. The number claiming unemployment compensation in all programs in October equaled 21.5 million people.⁴⁶ Millions are behind in payments for rent, home mortgages, and student loans while food insecurity has grown from 35 million to over 50 million as a result of insufficient government help during the pandemic.⁴⁷

According to the 2020 U.S. Financial Health Pulse Report, published by the U.S. Financial Network, more than two-thirds of the U.S. population at present are in a financially unhealthy condition. Of these, more than 20 percent are concerned about not having enough food, while more than a quarter are worried about their ability to pay their next month’s rent or mortgage. Ironically, the financial health of the bottom two-thirds of the population at the time the survey was completed (August 2020) was slightly improved compared to 2019 (prior to the present economic and epidemiological crisis), due to the temporary relief mainly in the form of unemployment compensation provided by the federal government in response to the pandemic.⁴⁸ In the third quarter of 2020, the U.S. economy was still 3.5 percent smaller than in the fourth quarter of 2019, with tens of millions of people suffering as a result of the crisis.⁴⁹

Exploiting these conditions, the richest 1 percent saw their financial assets skyrocketing as a share of national income. FAANG stocks led the way as corporations and the wealthy turned increasingly from investment to speculative outlets, focusing on the big tech monopolies. By October 2020, Facebook, Apple, Amazon, Netflix, and Google had seen the value of their shares rise year-to-date by 29, 61, 77, 64, and 61 percent respectively.⁵⁰

Such frenetic speculation naturally carries with it the growing danger of a financial meltdown. At present, the U.S. economy is faced with a stock market bubble that is threatening to burst. Two of the more influential ways of ascertaining whether a financial crisis centered on the stock market is imminent are: (1) the stock price to company earnings ratios (P/E) of stocks, and (2) Warren Buffett’s Expensive Market Rule. The historical average P/E ratio, according to the Shiller Index, is 16. In August 2020, the U.S. stock market was priced at more than twice that, at 35. On Black Tuesday during the 1929 stock market crash, which led to the Great Depression, the P/E ratio had reached 30. The 2000 stock market crash that ended the tech boom of the 1990s occurred when the P/E ratio reached 43.⁵¹

According to Buffett’s Expensive Market Rule, the mean average of stock values (measured by Wilshire 5000 market-value capitalization index) as a ratio of GDP is 80 percent. The 2000 tech crash occurred when the stock to income ratio, measured in this way, reached 130 percent, while the 2007 Great Financial Crisis occurred when it reached 110 percent. In August 2020, the ratio was at 180 percent.⁵²

Another key indicator of growing financial instability is the ratio of nonfinancial corporate debt to GDP, depicted in Chart 4. Corporations flush with free cash have taken on debt, available at very low interest rates, in order to further pursue nonproductive ventures such as mergers, acquisitions, and various forms of speculation, using the free cash as flow collateral. In each of the three previous economic crises of 1991, 2000, and 2008, nonfinancial corporate debt reached cyclical peaks in the range of 43 to 45 percent of national income. In 2020, nonfinancial corporate debt in relation to national income reached a record 56 percent. This is a sure sign of a financial bubble stretched beyond its limits.

Chart 4: Debt as a Percent of GDP, U.S. Nonfinancial Corporations, 1949-2020

Note: See Chart 3. Based on quarterly data.

Source: Retrieved from FRED, Federal Reserve Bank of St. Louis, November 16, 2020, https://fred.stlouisfed.org. Series IDs: BCNSDODNS (Nonfinancial Corporate Business; Debt Securities and Loans; Liability, Level) and GDP.

The entire world economy, apart from China, is now in crisis, with over a million and a half lives lost worldwide to COVID-19 as of the beginning of December, disrupting normal production relations. The International Monetary Fund has projected a -5.8 percent rate of growth in the advanced economies in 2020 and a -4.4 percent rate of growth in the world.⁵³ In these circumstances, there will be no fast recovery from the current capitalist crisis. Heavy storm winds will continue. The U.S. ability to print dollars to stave off financial crises as well as its capacity to devalue its currency so as to increase its exports (thereby reducing the value of dollar reserves held by countries around the world) may both come up against mounting resistance to the dollar system, further hastening the decline of U.S. hegemony. As in other areas, the contagion of capital, which spreads like a virus, ultimately undermining its own basis, is operative here.⁵⁴ Washington’s attempt to create trade pacts that will ensure the continued dominance of U.S.-centered global commodity chains is running into increasing competition from Beijing. The 2020 Regional Comprehensive Economic Partnership, the largest trade bloc in the world, accounting for around 30 percent of the global economy, has China as its center of gravity.

Faced with economic stagnation, periodic financial crises, and declining economic hegemony, and confronted with rapid Chinese growth, the United States is heading toward a New Cold War with China. This was made clear in the November 2020 U.S. State Department report, The Elements of the China Challenge, accusing the “People’s Republic of China of authoritarian goals and hegemonic ambitions.” The State Department report proceeded to outline a strategy for the defeat of China by targeting the Chinese Communist Party (CCP), exploiting the CCP’s economic and other “vulnerabilities.”⁵⁵

Here, the chief economic weapon of the United States is its dominance over world finance. Former Chinese Finance Minister, Lou Jiwei, recently indicated that the United States is preparing to launch a “financial war” against China. U.S. attempts at “the suppression of China” by financial means under a Joe Biden administration, he says, “will be inevitable.” Under these circumstances, Lou insists, China’s earlier goals of internationalizing its currency and initiating full capital account convertibility, which would lead to the loss of its control of state finance, are “no longer safe options.” If Washington were to use its power over the world financial system to smother Chinese growth, Beijing, according to Chen Yuan, a former Chinese central bank deputy governor, could be forced to weaponize its holdings of U.S. sovereign debt (totaling $1.2 trillion) in response. This is viewed as the financial equivalent of nuclear war. A financial (not to mention military) war between the United States and China, driven by U.S. attempts to shore up its declining economic hegemony by attempting to derail its emerging rival, could well spell utter disaster for the global capitalist economy and humanity as a whole.⁵⁶

The Boundary Line and the Contagion of Capital

The crisis of the U.S. system and of late capitalism as a whole is one of overaccumulation. Economic surplus is generated beyond what can profitably be absorbed in a mature, monopolistic system. This dynamic is associated with high levels of idle capacity, the atrophy of net investment, continuing slow growth (secular stagnation), enhanced military spending, and financial hyperexpansion. The inability of private investment (and capitalist consumption) to absorb all of the surplus actually and potentially available, coupled with government deficit spending, leads to growing amounts of free cash in the hands of corporations. The result is the rise of a system of asset speculation that partially stimulates the economy due to the wealth effect (increases in capitalist consumption fed by a part of the increased returns on wealth), but which is unable to overcome the underlying tendency toward stagnation.⁵⁷

Hence, monopoly-finance capital of today is a deeply irrational system, in which money is seen as begetting more money without the mediation of production, or what Marx characterized as M-M’ (Money-Money + Δm or surplus value).⁵⁸ “The viability of today’s money manager capitalism,” as the heterodox economist Hyman Minsky called it,

depends upon not having a serious depression: tc There is a basic contradiction in money manager capitalism which makes continued success ever more dependent upon an apt structure of supportive government interventions. Money manager capitalism rests upon the power of government to prevent a sharp decline in aggregate business profits.… We can expect future crises to be met with some form of ad hoc intervention which will in part reflect an unwillingness by policy makers to appreciate that once again capitalism has changed.⁵⁹

A rational strategy with which to escape this trap—if only partially—would be to increase the direct U.S. governmental role in investment and consumption in order to address the multiple crises of society, including public spending in response to: (1) the climate emergency; (2) the public health crisis; (3) the shortage of adequate housing for much of the population; (4) the deterioration of the public education system under neoliberalism; (5) the absence of a national mass transit system, and so on. Yet, for the government to enter directly into such areas would involve crossing the private sector-government boundary line, which ensures the present near-complete dominance of the economy by the private sector, a phenomenon first critically diagnosed by Marxist economists Paul A. Baran and Paul M. Sweezy in Monopoly Capital in 1966.⁶⁰ As Medlen writes, “the institutional arrangements for profit-seeking investment are simply taken for granted as a boundary line that is not to be violated.”⁶¹

So strict is the boundary line in the U.S. economy that outside of the Tennessee Valley Authority, as well as various municipal utilities and land leases, government-owned productive facilities cannot be said to produce internal revenues sufficient to compensate for costs of production. “This is primarily because the government, outside a considerable land mass, the public school system, the U.S. Postal Service and toll-free roads, owns essentially nothing.”⁶² The bulk of federal government discretionary spending goes to the military, which constitutes a huge subsidy to private capital while avoiding any intrusions on the private sector. Meanwhile, the privatization of public health infrastructure and public education is further pushing the boundary line in the direction of the complete dominance of a private sector already prone to overaccumulation and the contagion of capital.

A little more than forty years ago in “Whither U.S. Capitalism?,” Sweezy, writing in Monthly Review, questioned the then common view that the United States, caught in economic stagnation, was headed inevitably to “an American version of the corporate state, authoritarian and repressive internally, increasingly militaristic and aggressive externally.”⁶³ His reasoning is worth recalling today:

There are at least two problems with this “solution” to the crisis of U.S. capitalism. First, it assumes that because the working class has never yet organized itself for effective independent political action it never will in the future either. In my view this reflects a simplistic view of the history of class struggles in the United States and quite unjustifiably rules out the emergence of new patterns of behavior and forms of struggle. Second, it assumes that the capitalists will be united behind a fascist-type policy of repression, and this seems to me doubtful too. Not only is a strategy of this kind costly to large elements of the middle and upper classes, as the whole history of fascism shows, but even more important, it is no solution at all to the real problems of U.S. capitalism. The basic disease of monopoly capitalism is an increasingly powerful tendency to overaccumulate. At anything approaching full employment, the surplus accruing to the propertied classes is far more than they can profitably invest. An attempt to remedy this by further curtailing the standard of living of the lower-income groups can only make things worse. What is needed, in fact, is the exact opposite, a substantial and increasing standard of living of the lower-income groups, not necessarily in the form of more individual consumption: more important at this stage of capitalist development is a greater improvement in collective consumption and the quality of life.⁶⁴

Sweezy followed this up with the notion of building a “cross-class alliance” between those suffering most from monopoly capitalism and the more far-seeing elements of the ruling class, a kind of new New Deal, but with the working class as the organizing and hegemonic force. This was consistent with a political praxis emphasizing protecting the population in the immediate present while working toward the long-run revolutionary reconstitution of society at large.

More than four decades later, in 2021, the basic conditions are similar, if more serious and threatening. The current struggle for a People’s Green New Deal, based on a just transition, is a call for a cross-class movement to protect humanity as a whole, one which, however, can only be successful by going against the logic of capital and establishing the basis for a new society geared to substantive equality and environmental sustainability: the historical struggle for socialism. If the danger of “a fascist-type policy of repression” of the kind that Sweezy pointed to has reemerged in the twenty-first century in the context of the contagion of capital, so has a new socialist movement from below aimed at ensuring a world of sustainable human development. Predictions as to the future are meaningless in this context. The point is to struggle.

Notes

1. ↩ Robert Heilbroner, The Nature and Logic of Capitalism (New York: W. W. Norton, 1985), 143.
2. ↩ Excess capacity is both a cause of the atrophy of net investment, given monopolistic pricing and output strategies, and a manifestation of overaccumulation and stagnation. The issue of excess capacity was extensively examined in Josef Steindl, Maturity and Stagnation in American Capitalism (New York: Monthly Review Press, 1976), 127–37.
3. ↩ Timothy Taylor, “Declining U.S. Investment, Gross and Net,” Conversable Economist (blog), February 17, 2017. Productive capacity can of course expand even with no net investment since used up plant and equipment is replaced with more efficient plant and equipment paid out of depreciation funds. Luke A. Stewart and Robert D. Atkinson, “The Greater Stagnation: The Decline in Capital Investment Is the Real Threat to the U.S. Economy,” Information Technology and Innovation Foundation, October 2013.
4. ↩ Although recognizing that economic surplus can be conceived of as the gross property income from production, in his study, Zhun uses the income of the top 10 percent of the population as a rough proxy for economic surplus, allowing for comparisons between a wide number of countries. He does a reliability check and shows that there is no significant distortion between this method and the two other measures of economic surplus: based on (1) surplus as the residual after essential consumption, and (2) the property share method (used by Thomas Piketty). The top 10 percent method has the advantage of allowing comparisons between a wide variety of countries and historical situations where the data to utilize the other two methods is not available. Zhun Xu, “Economic Surplus, the Baran Ratio, and Capital Accumulation,” Monthly Review 70, no. 10 (March 2019): 25–39; Foster and McChesney, The Endless Crisis, 4; “S. GDP Growth Rate 1961–2020,” Macrotrends. For another article employing the Baran ratio, see Thomas E. Lambert, “Paul Baran’s Economic Surplus Concept, the Baran Ratio, and the Decline of Feudalism,” Monthly Review 72, no. 7 (December 2020): 34–49.
5. ↩ In macroeconomic terms, economic surplus that is not invested or consumed (either by private or public entities) represents a loss to society. But the losses do not necessarily fall on corporations and the wealthy—instead, they manifest in the form of “forced dissavings” of the population. Corporations are thus able to use the money capital available to them in other (nonproductive) ways, which have the effect of slowing the rate of growth while also in many cases increasing corporate assets and the earnings on these assets. Economic stagnation under monopoly capital thus leads to a redistribution of wealth and income toward the top.
6. ↩ As Michał Kalecki wrote: “A budget deficit has an effect similar to that of an export surplus. It also permits profits to increase above that level determined by private investment and capitalists’ consumption.” Michał Kalecki, Selected Essays on the Dynamics of the Capitalist Economy (Cambridge: Cambridge University Press, 1971), 85; Craig Medlen, Free Cash, Capital Accumulation and Inequality (London: Routledge, 2010), 13. The term free cash was first introduced in Michael Jensen, “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,” American Economic Review: Papers and Proceedings 76, no. 2 (1986): 322–29.
7. ↩ Craig Medlen, “Free Cash, Corporate Taxes, and the Federal Deficit,” Journal of Post-Keynesian Economics 38, no. 1 (2015): 21.
8. ↩ Medlen, Free Cash, Capital Accumulation and Inequality, 6.
9. ↩ Medlen, “Free Cash, Corporate Taxes, and the Federal Deficit,” 21, 26. As Medlen writes in connection to the wide definition of free cash, including net interest, “It might be objected that ‘net interest’ ought not to be included in any ‘free cash’ measure as ‘interest’ is a committed obligation. For the portion of the corporate sector whose cash is inadequate to sponsor investment, such ‘interest’ does, indeed, reflect the debt necessary to carry out the given investment expenditure. But since the corporate sector—taken as a consolidated whole—had enough profit and depreciation charges after taxes to fund internal investment, the net interest portion represents free cash on a consolidated basis.” Craig Medlen, “Two Sets of Twins? An Exploration of Domestic Saving-Investment Imbalances,” Journal of Economic Issues 39, no. 3 (September 2005): 564.
10. ↩ Besides speculation, free cash can also be used for foreign direct investment. On the role of corporate cash flow in the economy, see Thomas B. King, “Corporate Cash Flow and Its Uses,” Federal Reserve Board of Chicago, Chicago Fed Letter 368 (2016).
11. ↩ Kalecki, Selected Essays on the Dynamics of the Capitalist Economy, 85–86. “Kalecki’s conviction that aggregate demand drove economic activity underpinned his interpretation of accounting identities as ‘models.’ Under the assumption that only capitalists save, an absence of government deficits and export surpluses would mean that ‘capitalists earn what they spend.’ But by providing additional aggregate demand, government deficits act as an artificial ‘export surplus’ that generates additional profits above capitalist’s spending.… Noncorporate deficit spending by consumers and noncorporate businesses has an analogous effect to that of government deficits and adds to the generation of corporate gross profits in excess of corporate investment (free cash).” Medlen, “Free Cash, Corporate Taxes, and the Federal Deficit,” 20, 23. When noncorporate savings minus investment is negative, as it was prior to the bursting of the housing bubble in 2007–08, it contributes to free cash.

In calculating noncorporate S-I , in this formulation, Medlen makes adjustments to avoid double counting. Thus, he subtracts from the free cash the savings from dividends (and savings from net interest in the wide version of free cash), and adds to investment the amount spent on capitalist consumption out of dividends. Medlen, Free Cash, Capital Accumulation and Inequality, 88.

12. ↩ The increased reliance on federal government deficits was connected to reductions in taxes on corporations and the wealthy. See Craig Medlen, “Corporate Taxes and the Federal Deficit,” Monthly Review 36, no. 6 (November 1984): 10–26. The process Medlen identified in the early 1980s was, as is now clear, only in its earliest stages.
13. ↩ Joseph A. Schumpeter, The Theory of Economic Development (New York: Oxford University Press. 1961), 107, 126; Joseph A. Schumpeter, Essays (Cambridge, MA: Addison-Wesley, 1951), 170; Joan Robinson, Introduction to the Theory of Employment (London: Macmillan, 1937), 11.
14. ↩ Kristine W. Hankins and Mitchell Petersen, “Why Are Companies Sitting on So Much Cash?,” Harvard Business Review, January 17, 2020.
15. ↩ Chart 2 is derived from Michael W. Faulkender, Kristine W. Hankins, and Mitchell A. Petersen, “Understanding the Rise in Corporate Cash,” National Bureau of Economic Research, Working Paper 23799, August 2018., Figure 1, 49.
16. ↩ If the rate paid on credits secured in part by dependable internal cash flow is lower than that on financial instruments purchased with that credit, “cash management” requires that the latter be pursued.
17. ↩ Medlen, Free Cash, Capital Accumulation and Inequality, 51. Stock values represent discounted profit expectations due to the time value of money. The discount is normally calculated by how many current dollars at the compounded current long-term rate of interest will produce the expected profit at some specific future time. The higher the rate of interest, the larger the discount. And as the interest rates approach zero, the discount—also irrationally—approaches zero. “Minsky moments” when the Fed steps in to reinforce capital to suppress the crisis now occur in every recession, at precisely the moment that the prospects for new investment are at their worst. This has therefore become a regular part of the financialization process with major structural effects. With the lavish provision of central bank credit in spring 2020 at a near-zero rate of interest, the rate of discount went into an asymptotic movement that raised stock values ceteris paribus, but that wildly privileged certain high-growth (monopoly) sectors (communications tech and pharmaceutical) and their stock values. Thus, the value of stocks now became a combination of expected streams of profit from production and evermore extreme discount rates tied to the provision and distribution of central bank credit, that is, stock values now reflect a structure of finance that is relatively autonomous from the real economy.
18. ↩ Costas Lapavitsas, Profiting Without Production: How Finance Exploits Us All (London: Verso, 2013); James Tobin, Asset Accumulation and Economic Activity (Chicago: University of Chicago Press, 1980).
19. ↩ Chart 3 is derived from Medlen, Free Cash, Capital Accumulation and Inequality, Figure 8.3 , 141.
20. ↩ The flat line of capital stock to income is a product of the mutual conditioning of investment and national income.
21. ↩ Karl Marx, Capital, vol. 3 (London: Penguin, 1981), 607–10, 707; Karl Marx and Frederick Engels, Selected Correspondence (Moscow: Progress Publishers, 1975), 396–402; Jan Toporowski, Theories of Financial Disturbance (Northampton, MA: Edward Elgar, 2005), 54; Samir Amin, Modern Imperialism, Monopoly Finance Capital, and Marx’s Law of Value (New York: Monthly Review Press, 2018), 197. For a detailed description of Marx’s theory of “fictitious capital,” see Michael Perelman, Marx’s Crises Theory (New York: Praeger, 1987), 170–217. See also Foster and McChesney, The Endless Crisis, 55–57.
22. ↩ On Piketty’s conflation of capital as the accumulation of fixed stock and “capital” as wealth, see Thomas Piketty, Capital in the Twenty-First Century, 47; Robert M. Solow, “The Rich-Get-Richer Dynamic,” New Republic, May 12, 2014, 51–52; Craig Medlen, Free Cash, Capital Accumulation and Inequality, 139–40: John Bellamy Foster and Michael D. Yates, “Thomas Piketty and the Crisis of Neoclassical Economics,” Monthly Review 66, no. 6 (November 2014): 11–12.
23. ↩ Robin Wigglesworth, “How America’s 1% Came to Dominate Stock Ownership,” Financial Times, February 10, 2020. The logic of this process of wealth concentration under monopoly-finance capital is vicious. As Medlen writes: “In lowering rates of equity returns and interest rates, higher stock valuations drive an ongoing feedback loop that tilts the capital/income ratio upwards. The rate of equity returns and the capital/income ratio are therefore codependent with the interest (discount) rate having a supporting role. Moreover, there is an amplification effect: An expectation of lower and lower rates of return on equity and bonds is compensated by a larger offsetting gain in capital values thereby driving a higher and higher share of income towards the wealthy.” Craig Medlen, “Piketty’s Paradox, Capital Spillage, and Inequality,” Journal of Post-Keynesian Economics 40, no. 4 (2017): 630.
24. ↩ “If you multiply the rate of return on capital [wealth] by the capital-income ratio, you get the share of capital in the national income.… It is always the case that wealth is more highly concentrated among the rich than income from labor…and this being so, the larger the share of income from wealth, the more unequal the distribution of income among persons is likely to be.” Solow, “The Rich-Get-Richer Dynamic,” 53.
25. ↩ Robert M. Solow, “The Rich-Get-Richer Dynamic,” 52.
26. ↩ This is often called the capital output ratio, though it is more properly referred to as the wealth/income (output) ratio.
27. ↩ John Bellamy Foster and Robert W. McChesney, “Surveillance Capitalism,” Monthly Review 66, no. 3 (July–August 2014): 1–31; Shoshana Zuboff, The Age of Surveillance Capitalism (New York: Public Affairs, 2019).
28. ↩ Ronald Surz, “If COVID-19 Won’t Pop the Stock Market, What Will?,” Nasdaq, August 20, 2020. Jacob A. Robbins, “Capital Gains and the Distribution of Income in the United States,” National Bureau of Economic Research (2018). It is the nature of asymptotes to signal a contradiction in the system under study that presages a qualitative change—here, the divergence between hypertrophied finance, asset prices, and the value of labor.
29. ↩ Kalecki, Selected Essays on the Dynamics of the Capitalist Economy, 85.
30. ↩ Medlen, Free Cash, Capital Accumulation and Inequality, 112–13; Intan Suwandi, R. Jamil Jonna, and John Bellamy Foster, “Global Commodity Chains and the New Imperialism,” Monthly Review 70, no. 10 (March 2019): 1–24.
31. ↩ For the basic data on affiliates abroad and exports, see Bureau of Economic Analysis, “International Data, Direct Investment and MNE, Data on Activities of Multinational Enterprises, U.S. Direct Investment Abroad, All Majority-Owned Foreign Affiliates (Data for 2009 and Forward), Goods Supplied,” and “International Data, Direct Investment and MNE, Data on Activities of Multinational Enterprises, U.S. Direct Investment Abroad, All Majority-Owned Foreign Affiliates (Data for 2009 and Forward), S. Exports of Goods,” accessed December 8, 2020; Craig Medlen, Free Cash, Capital Accumulation and Inequality, 121.
32. ↩ “National Data, National Income and Product Accounts, Tables 6.16A, 6.16B, 6.16C, 6.16D Corporate Profits by Industry,” Bureau of Economic Analysis, accessed December 11, 2020, lines 2 (Domestic Industries) and 5 (Rest of the World); Medlen, Free Cash, Capital Accumulation and Inequality, 126. See also Joe Weisenthal, “Chart of the Day: What Percent of Corporate Profits Come from Overseas?,” Business Insider, May 17, 2011; “The share of national corporate profits accounted for by foreign profits (receipts from the rest of the world) has trended upwards for the last 60 years, peaking at 45.3 percent in 2008.” Andrew W. Hodge, “Comparing NIPA Profits with S&P 500 Profits,” Survey of Current Business (March 2011): 23.

On “imperialist rent” see Amin, Modern Imperialism, Monopoly Finance Capital, and Marx’s Law of Value, 110–11; Foster and McChesney, The Endless Crisis, 140, 173; Kenneth L. Kramer, Greg Linden, and Jason Dedrick, “Capturing Value in Global Networks,” Paul Merage School of Business, University of California, Irvine, July 2011, 5, 11; John Smith, Imperialism in the Twenty-First Century (New York: Monthly Review Press, 2016).

33. ↩ Nicholas Shaxson, Treasure Islands (London: Palgrave Macmillan, 2011).
34. ↩ Martin Feldstein, “Resolving the Global Imbalance: The Dollar and the U.S. Saving Rate,” Journal of Economic Perspectives 33, no. 3 (2008): 115.
35. ↩ Rob Wallace, Dead Epidemiologists: On the Origins of COVID-19 (New York: Monthly Review Press, 2020), 42–57; John Bellamy Foster and Intan Suwandi, “COVID-19 and Catastrophe Capitalism,” Monthly Review 72, no. 2 (June 2020): 1–20.
36. ↩ Robert G. Wallace et al., “The Dawn of Structural One Health: A New Science Tracking Disease Emergence Along Circuits of Capital,” Social Science and Medicine 129 (2015): 68–77.
37. ↩ Lorie K. Logan, “Treasury Market Liquidity and Early Lessons from the Pandemic Shock” (speech, Brookings-Chicago Booth Task Force on Financial Stability Meeting, Federal Reserve Bank of New York, October 23, 2020).
38. ↩ Fred Imbert and Pippa Stevens, “S&P Index Jumps More than 1%, Capping Off Its Best Week Since 1974,” CNBC, April 9, 2020.
39. ↩ Mark DeCambre, “Wall Street Profits Soared in First Half of 2020 Amid the Worst Pandemic in a Century, Report Says,” Market Watch, October 20, 2020.
40. ↩ “If you multiply the rate of return on capital [wealth] by the capital-income ratio, you get the share of capital [as a flow] in the national income. For example, if the rate of return is 5 percent a year and the stock of capital is six years’ worth of national income, income from capital will be 30 percent of national income, and so income from work will be the remaining 70 percent.… As long as the rate of return exceeds the rate of growth, the income and wealth of the rich will grow faster than the typical income from work. (There seems to be no offsetting tendency for the aggregate share of capital to shrink.)” Solow, “The Rich-Get-Richer Dynamic,” 53.
41. ↩ Heidi Shierholz, “More than 25 Million Workers Are Being Hurt by the Coronavirus Downturn,” Economic Policy Institute, November 6, 2020.
42. ↩ Bridget Balch, “54 Million People in America Face Food Insecurity During the Pandemic. It Could Have Dire Consequences for Their Health,” Association of American Medical Colleges, October 15, 2020.
43. ↩ Robert Francis, “FAANG Stocks and COVID-19,” Global Banking and Finance Review, October 11, 2020.
44. ↩ Surz, “If COVID-19 Won’t Pop the Stock Market, What Will?”
45. ↩ Surz, “If COVID-19 Won’t Pop the Stock Market, What Will?”
46. ↩ “Former China Finmin Says Trade Frictions with U.S. Could Remain Under Biden,” Nasdaq, November 11, 2020; “China-U.S. Rivalry on Brink of Becoming a ‘Financial War,’ Former Minister Says,” South China Morning Post, November 9, 2019; Julian Gewirtz, “Look Out: Some Chinese Thinkers Are Girding for a ‘Financial War,’” Politico, December 17, 2019.
47. ↩ On the wealth effect, see Dean Baker, The End of Loser Liberalism(Washington DC: Center for Economic and Policy Research, 2009), 18; Christopher D. Carroll and Xia Zhou, “Measuring Wealth Effects Using U.S. State Data,” Federal Reserve Board of San Francisco, October 26, 2010.
48. ↩ Marx, Capital, vol. 3, 515.
49. ↩ Hyman Minsky, “Financial Crises and the Evolution of Capitalism,” in Capitalist Development and Crisis Theory, ed. Mark Gottdiener and Nicos Komninos (London: Macmillan, 1989), 398, 402. See also Riccardo Bellofiore, “Hyman Minsky at 100: Was Minsky a Communist?” Monthly Review 71, no 10 (March 2020): 6–10.
50. ↩ Medlen, Free Cash, Capital Accumulation and Inequality, 5.
51. ↩ Medlen, Free Cash, Capital Accumulation and Inequality, 149.
52. ↩ Paul M. Sweezy, “Whither U.S. Capitalism?” Monthly Review 31, no. 7 (December 1979): 11.
53. ↩ Sweezy, “Whither U.S. Capitalism?” 12.

Speed, Power and the Physics of Finance Capitalism

The French urbanist and philosopher Paul Virilio is one of the principal theorists of speed. After many years pursuing the relationship between concepts of velocity and the paradox of being in a virtual world – of being somewhere and nowhere at the same time – Virilio explains how real time has supplanted real space such that “A synchronization has taken place of customs, habits, mores, ways to react to things, and also, of emotions,” exemplified in the hysteria that followed the global financial crisis. He maintains: “Since speed earns money, the financial sphere has attempted to enforce the value of time above the value of space” and while this has led to massive profits for the few and increasing inequalities, to truly understand the phenomenon of an economy of speed, the left has to jettison its old framework that insists capitalism is dead, and all we need is more social justice. This is a false deduction that proceeds from adopting the same old materialist analysis.”

Whether one accepts Virilio’s analysis or his predictions, it is clear that speed and velocity are the main aspects of a new finance capitalism that operates at the speed of light based on sophisticated “buy” and “sell” algorithms. Already researchers have demonstrated that data transfer using a single laser can send 26 terabits per second down an optical fiber and there are comparable reports that lasers will make financial “high-frequency” trading even faster.

This is how Tyler Falk blogging for Smartplanet describes it: “With high-frequency trading, firms use complex algorithms to exploit price discrepancies in the stock market. All of this trading happens in a flash, microseconds… Dealing in microseconds means companies need to have the fastest technology to complete their transactions. Superfast fiber-optic networks were the hot technology, then microwave networks came along, and now: lasers?”

He notes that two companies, Anova and AOptix, are pursuing this vision that looks to a new technology that will shave microseconds off financial trades. As a BBC story explains: “High-frequency trading (HFT) is driven by complex algorithms that allow traders to jump ahead of competitors by exploiting minute discrepancies in price on exchanges in different cities.”

In such trading, every millisecond counts and the competition to provide ever-faster trading networks is fierce. The first microwave connection between London and Frankfurt was turned on last October by Perseus Telecom. According to the company, the system cut about 40 percent off the time taken to complete a trade compared with traditional fibre-optic networks.

Western modernity (and developing Global systems) exhibit long-term tendencies of an increasing abstraction described in terms of formalization, mathematicization, aestheticization and biologization of life. These are characteristic of otherwise seemingly disparate pursuits in the arts and humanities as much as science and technology and driven in large measure through the development of logic and mathematics especially in digital systems. Much of this rapid transformation of the properties of systems can be captured in the notion of “bioinformational capitalism” that builds on the literatures on “biocapitalism” and “informationalism” (or “informational capitalism”) to develop the concept of “bio-informational capitalism” in order to articulate an emergent form of capitalism that is self-renewing in the sense that it can change and renew the material basis for life and capital as well as program itself. Bioinformational capitalism applies and develops aspects of the new biology to informatics to create new organic forms of computing and self-reproducing memory that in turn have become the basis of bioinformatics.

The notion of “algorithmic capitalism” as I have previously described it is “an aspect of informationalism (informational capitalism) or “cybernetic capitalism,” a term that recognizes more precisely the cybernetic systems similarities among various sectors of the post-industrial capitalist economy in its third phase of development – from mercantilism, industrialism to cybernetics – linking the growth of the multinational info-utilities (e.g., Goggle, Microsoft, Amazon) and their spectacular growth in the last twenty years, with developments in biocapitalism and the informatization of biology, and fundamental changes taking place with algorithmic trading and the development of so-called financialization.”

I used the notion to examine and explain the phenomenon of the “Flash Crash” when the Dow Jones lost 700 points (some $800 billion) – one of its biggest one-day falls in history – and recovered within minutes.

Algorithmic trading is sometimes seen as an explanation of market volatility especially when risk is not transparent or able to be effectively tracked and monitored. Automated buy-sell programs now account for over 80 per cent of all US equity trading. Increasingly, global information systems that operate at the speed of light are now harnessed by HFT (high frequency trading) firms to create Automated Trading Desks that are capable of trading hundreds of millions of shares daily. So-called “quant trading”, after “quantitative trading programs” are now designed by mathematicians and underlie HFT, where stocks are held often for only microseconds.

The staggering growth of the finance industry sometimes referred to as “financialization” represents a set of overlapping processes that refer not only to the rapid expansion of the financial sector of the capitalist system – to the growth of financial institutions of all kinds – but also to a qualitative change in the mode of production where banking systems jettison traditional banking practices to become commercial investors and multinational corporations develop as financial institutions able to invest and trade directly in financial markets.

Richard Peet (2011) writing for Monthly Review puts it succinctly: “Over the last thirty years, capital has abstracted upwards, from production to finance; its sphere of operations has expanded outwards, to every nook and cranny of the globe; the speed of its movement has increased, to milliseconds; and its control has extended to include “everything.” We now live in the era of global finance capitalism.

Some critics argue that the rise of neoliberalism is explained by the growing role and power of finance in the political economy of capitalism and that neoliberalism “is the expression of the desire of a class of capitalist owners and the institutions in which their power is concentrated, which we collectively call ‘finance,’ to restore … the class’s revenues and power…” Others suggest that financialization is result of neoliberal restructuring, but has deeper historical roots. Financialization is not just quantitative expansion, but change in nature of financial institutions and banks that have jettisoned traditional banking practices to pursue the creation and sale of their own financial instruments. As many theorists suggest, neoliberalism, beginning 1980 in US, encouraged a shift from state-regulated capitalism to deregulated neoliberal capitalism. The Glass-Steagall Act, the mainstay of the 1933 Banking Act, up until recently had controlled commercial banks from engaging in securities trading – including the capacity to gamble with depositors funds through affiliated banks. These controls were finally removed with the repeal of affiliation restrictions (Sections 20 and 32) in 1999 under the Clinton regime – which permitted financial institutions to diversify their products and increase their sources of revenue.

Financialization is a systematic transformation of capitalism based on the following trends: 1. the massive expansion of the financial sector where finance companies have taken over from banks as major financial institutions and banks have moved away from old lending practices to operate directly in capital markets; 2. large previously nonfinancial multinational corporations have acquired new financial capacities to operate and gain leverage in financial markets; 3. domestic households have become players in financial markets (the ascendancy of shareholder capitalism) taking on debt and managing assets; and 4. in general, financialization represents the dominance of financial markets over declining production by the traditional industrial economy and a corresponding abstraction of “fictionalized” capital that increasingly controls price mechanisms, but adds little or nothing to real value.

The remarkable growth of finance capital in relation to real wealth is represented in the graph below from the McKinsey Global Institute.

Figure 2: Financial and Real Wealth

Source: McKinsey Global Institute.

This unreal growth is also demonstrated in statistics that record that in 2011, the Gross World Product (GWP) totaled approximately $79.39 trillion while the world derivatives market was estimated in excess of $1.2 quadrillion, some twenty times larger than the world’s productive economy.

Some commentators argue that these derivatives are not attached or anchored to anything physical and that they have also contributed to the unsustainable sovereign debt problem with central banks following quantitative easing policies. After the Lehmann collapse, the big investment banks stepped in to create a shadow banking system through new forms of money proxies. Now the United States faces trillion dollar deficits every year for the foreseeable future and a huge $16.4 trillion public debt which has led to austerity politics. As Mark Congloff of the Huffington Post reports a recent paper in the Journal of International Money and Finance argues “that derivatives, namely credit default swaps, have actually made the European debt crisis worse, driving up interest rates for shaky sovereign borrowers such as Greece and Italy.” Congloff goes on to say: “Credit derivatives played a clearly important role in the US financial crisis, but in a much different way. AIG was nearly dragged under by its massive portfolio of CDS, which nearly brought down the entire financial system and required a massive government bailout of the insurance giant. And CDS helped make it easier for banks to load up on other weapons of mass financial destruction, bundles of risky mortgage securities.”

Because derivatives are bundled, sliced and on-sold many times over, financial risk is not transparent. Add to this the new physics of HFT and the problem becomes hugely magnified, defying the ability of world governments or any monitoring agency to track the quantity and direction of these global trades.

To return to Virilio’s remark that the old left approach of demanding yet more social justice is just not going to get us very far: If we accept that the financial crisis and increasing financialization is an expression of the exhaustion of the neoliberal model of capitalist development, that its continuing abstraction and increasing speed are ultimately unstable, untraceable and unable to be properly regulated, and that its perpetual expansion while not anchored in anything productively real nonetheless controls the price mechanism and leads to extensive global inequalities, then how long can it last and where are its suitable substitutes? Financialization characterizes the politics of late neoliberal capitalism allowing it to extract value from the commons: to raid social security and medicare, to privatize education and infrastructure, to monetize medicine and medical insurance, to massively mortgage student debt, to confiscate depositors’ funds, to asset-strip state enterprises. These are all forms of enclosure that permit a tiny but powerful minority to plunder the commonwealth in the same way that this global elite plundered the personal wealth of the majority via the housing bubble and the huge drop in household wealth for all but the very very few. Finance capitalism trumps industrial capitalism, but what trumps finance capitalism? This is the first planetary crisis of this global magnitude and it is linked closely with a wider ecological, social and unemployment crisis. Both the scale and speed of its inexorable development might indicate that nothing can save the system and it must continue to the end of an inevitable collapse. The new logic of post-finance capitalism must recognize the failure of deregulation policies and debt-driven growth and may be forced to accept again as at the height of the 2008 crisis the opening for big government solutions in an era of global sustainability and social solidarity.

The Physics of Capitalism

People tend to think of capitalism in economic terms. Karl Marx argued that capitalism is a political and economic system that transforms the productivity of human labor into large profits and returns for those who own the means of production.¹ Its proponents contend that capitalism is an economic system that promotes free markets and individual liberty.² And opponents and advocates alike most often measure capitalism’s impact in terms of wealth and income, wages and prices, and supply and demand.

However, human economies are complex biophysical systems that interact with the wider natural world, and none can be fully examined apart from their underlying material conditions. By exploring some fundamental concepts in physics, we can develop a better understanding of how all economic systems work, including the ways that the energy-intensive activities of capitalism are changing humanity and the planet.

This article will explain how the fundamental features of both our natural and economic existence depend on the principles of thermodynamics, which studies the relationships between quantities such as energy, work, and heat.³ A firm grasp of how capitalism works at a physical level can help us understand why our next economic system should be more ecological, prioritizing long-run stability and compatibility with the global ecosphere that sustains humanity.

Such an understanding requires a glance at some central concepts in physics. These include energy, entropy, dissipation, and the various rules of nature that bind them together. The central features of our natural existence, as living organisms and as human beings, emerge from the collective interactions described by these core physical realities. Although these concepts can be difficult to define without reference to specific models and theories, their general features can be outlined and analyzed to reveal the powerful intersection between physics and economics.

The exchange of energy between different systems has a decisive influence on the order, phase, and stability of physical matter. Energy can be defined as any conserved physical property that can produce motion, such as work or heat, when exchanged among different systems.⁴ Kinetic energy and potential energy are two of the most important forms of energy storage. The sum of these two quantities is known as mechanical energy.⁵ A truck speeding down the highway packs a good amount of kinetic energy—that is, energy associated with motion. A boulder teetering at the edge of a cliff has great potential energy, or energy associated with position. If given a slight push, its potential energy transforms into kinetic energy under the influence of gravity, and off it goes. When physical systems interact, energy is converted into many different forms, but its total quantity always remains constant. The conservation of energy implies that the total output of all energy flows and transformations must equal the total input.

Energy flows among different systems represent the engine of the cosmos, and they happen everywhere, so often that we hardly notice them. Heat naturally flows from warmer to colder regions, hence our coffee cools in the morning. Particles move from high-pressure areas to low-pressure areas, and so the wind starts to howl. Water travels from regions of high potential energy to regions of low potential energy, making rivers flow. Electric charges journey from regions of high voltage to regions of low voltage, and thus currents are unleashed through conductors. The flow of energy through physical systems is one of the most common features of nature, and as these examples show, energy flows require gradients—differences in temperature, pressure, density, or other factors. Without these gradients, nature would never deliver any net flows, all physical systems would remain in equilibrium, and the world would be inert—and very boring. Energy flows are also important because they can generate mechanical work, which is any macroscopic displacement in response to a force.⁶ Lifting a weight and kicking a ball are both examples of performing mechanical work on another system. An important result from classical physics equates the quantity of work to the change in the mechanical energy of a physical system, revealing a useful relationship between these two variables.⁷

Although energy flows can produce work, they rarely do so efficiently. Large macroscopic systems, like trucks or planets, routinely lose or gain mechanical energy through their interactions with the external world. The lead actor in this grand drama is dissipation, defined as any process that partially reduces or entirely eliminates the available mechanical energy of a physical system, converting it into heat or other products.⁸ As they interact with the external environment, physical systems often lose mechanical energy over time through friction, diffusion, turbulence, vibrations, collisions, and other similar dissipative effects, all of which prevent any energy source from being converted entirely into mechanical work. A simple example of dissipation is the heat produced when we rapidly rub our hands together. In the natural world, macroscopic energy flows are often accompanied by dissipative losses of one kind or another. Physical systems that can dissipate energy are capable of rich and complex interactions, making dissipation a central feature of the natural order. A world without dissipation, and without the interactions that make it possible, is difficult to imagine. If friction suddenly disappeared from the world, people would slip and slide everywhere. Our cars would be useless, as would the very idea of transportation, because wheels and other mechanical devices would lack any traction with the ground and other surfaces. We would never be able to hold hands or rock our babies. Our bodies would rapidly deteriorate and lose their internal structure. The world would be alien and unrecognizable.

Dissipation is closely related to entropy, one of the most important concepts in thermodynamics. While energy measures the motion produced by physical systems, entropy tracks the way that energy is distributed in the natural world. Entropy has several standard definitions in physics, all of them essentially equivalent. One popular definition from classical thermodynamics states that entropy is the amount of heat energy per unit of temperature that becomes unavailable for mechanical work during a thermodynamic process.⁹ Another important definition comes from statistical physics, which looks at how the microscopic parts of nature can join to produce big, macroscopic results. In this statistical version, entropy is a measure of the various ways that the microscopic states of a larger system can be rearranged without changing that system.¹⁰ For a concrete example, think of a typical gas and a typical solid at equilibrium. Energy is distributed very differently in these two phases of matter. The gas has a higher entropy than the solid, because the former’s particles have far more possible energy configurations than the fixed atomic sites in solids and crystals, which have only a small range of energy configurations that will preserve their fundamental order.¹¹ We should emphasize that the concept of entropy does not apply to a specific configuration of macroscopic matter, but rather applies as a constraint on the number of possible configurations that a macroscopic system can have at equilibrium.

Entropy has a profound connection to dissipation through one of the most important laws of thermodynamics, which states that heat flows can never be fully converted into work.¹² Dissipative interactions ensure that physical systems always lose some energy as heat in any natural thermodynamic process, where friction and other similar effects are present. Real-world examples of these thermodynamic losses include emissions from car engines, electric currents encountering resistance, and interacting fluid layers experiencing viscosity. In thermodynamics, these phenomena are often considered irreversible. The continuous production of heat energy from irreversible phenomena gradually depletes the stock of mechanical energy that physical systems can exploit. According to the definition of entropy, depleting useful mechanical energy generally implies that entropy increases. Formally stated, the most important consequence of any irreversible process is to increase the combined entropy of a physical system and its surroundings. For an isolated system, entropy continues to rise until it reaches some maximum value, at which point the system settles into equilibrium. To clarify this last concept, imagine a red gas and a blue gas separated by a partition inside a sealed container. Removing the partition allows the two gases to mix together. The result would be a gas that looks purple, and that equilibrium configuration would represent the state of maximum entropy. We can also relate dissipation to the concept of entropy in statistical physics. The proliferation of heat energy through physical systems changes the motion of their molecules into something more random and dispersed, increasing the number of microstates that can represent the macroscopic properties of the system. In a broad sense, entropy can be seen as the tendency of nature to reconfigure energy states into distributions that dissipate mechanical energy.

The traditional description of entropy given above applies in the regime of equilibrium thermodynamics. But in the real world, physical systems rarely exist at fixed temperatures, in perfect states of equilibrium, or in total isolation from the rest of the universe. The field of non-equilibrium thermodynamics examines the properties of thermodynamic systems that operate sufficiently far from equilibrium, such as living organisms or exploding bombs. Non-equilibrium systems are the lifeblood of the universe; they make the world dynamic and unpredictable. Modern thermodynamics remains a work in progress, but it has been used to successfully study a broad spectrum of phenomena, including heat flows, interacting quantum gases, dissipative structures, and even the global climate.¹³ There is no universally accepted meaning of entropy in non-equilibrium conditions, but physicists have offered several proposals.¹⁴ All of them include time when analyzing thermodynamic interactions, allowing us to determine not just whether entropy goes up or down, but also how quickly or slowly physical systems can change on their path to equilibrium. The principles of modern thermodynamics are therefore essential in helping us understand the behavior of real-world systems, including life itself.

The central physical objective of all life forms is to avoid thermodynamic equilibrium with the rest of their environment by continuously dissipating energy, as the physicist Erwin Schrödinger suggested in the 1940s, when he used non-equilibrium thermodynamics to study the key features of biology.¹⁵ We may call this vital objective the entropic imperative. All living organisms consume energy from an external environment, use it to fuel vital biochemical processes and interactions, and then dissipate most of the energy consumed back to the environment. The dissipation of energy to an external environment allows organisms to conserve the order and stability of their own biochemical systems. The essential functions of life critically depend on this entropic stability, including functions like digestion, respiration, cell division, and protein synthesis. What makes life unique as a physical system is the sheer variety of dissipation methods that it has developed, including the production of heat, the emission of gases, and the expulsion of waste. This sweeping capacity to dissipate energy is what helps life to sustain the entropic imperative. Indeed, physicist Jeremy England has argued that physical systems in a heat bath flooded with large amounts of energy can tend to dissipate more energy.¹⁶ This “dissipation-driven adaptation” can lead to the spontaneous emergence of order, replication, and self-assembly among microscopic units of matter, providing a potential clue into the very dynamics of the origin of life. Organisms also use the energy they consume to perform mechanical work by, for example, walking, running, climbing, or typing on a keyboard. Those organisms with access to many energy sources can do more work and dissipate more energy, satisfying the central conditions of life.

The thermodynamic relationships among energy, entropy, and dissipation likewise impose powerful constraints on the behavior and evolution of economic systems.¹⁷ Economies are dynamical and emergent systems compelled to function in certain ways by their underlying social and ecological conditions. In this context, economies are non-equilibrium systems capable of rapidly dissipating energy to some external environment. All dynamical systems gain strength from some energy reservoir, reach peak intensity by absorbing a regular supply of energy, then unravel from internal and external changes that either disrupt vital energy flows or make it impossible to keep dissipating more energy. They can even experience long-term undulations by growing for some time, then shrinking, then growing again, before finally collapsing. Interactions between dynamical systems can produce highly chaotic results, but energy expansions and contractions are the core features of all dynamical systems. The energy consumed by all economic systems is either converted into mechanical work and the physical products derived from that work, or is simply wasted and dissipated to the environment. We can define the collective efficiency of an economic system as the fraction of all energy consumed that goes into creating mechanical work and electrical energy. Economies that increase the amount of mechanical work they generate can produce more goods and services. But however important it may be, mechanical work represents a relatively small fraction of total energy use in any economy; the vast majority of the energy consumed by all economies is routinely squandered to the environment through waste, dissipation, and other kinds of energy losses.

Throughout history, economic growth has depended heavily on people consuming more energy from their natural environments.¹⁸ When humans were hunters and foragers, the primary asset that performed mechanical work was the human muscle.¹⁹ Our nomadic way of life lasted for some 200,000 years, but underwent significant disruptions after the Ice Age. Over millennia, changing ecological conditions around the world compelled numerous groups to adopt pastoralist and agricultural strategies. Agrarian economies relied heavily on cultivated plants and domesticated animals to help generate surpluses of food and other goods and resources. These agrarian modes of production and consumption dominated human societies for almost ten thousand years, but were eventually replaced by a new economic system. Capitalism emerged and spread through colonial expansion, waves of industrialization, the proliferation of epidemic diseases, genocidal campaigns against indigenous populations, and the discovery of new energy sources.

The global economy has since become an interconnected system of finance, computers, factories, vehicles, machines, and much more. Creating and sustaining this system required a major upward transition in the rate of energy throughput from our natural environments. In our nomadic days, the daily rate of per capita energy consumption was around 5,000 kilocalories.²⁰ By 1850, per capita consumption had risen to roughly 80,000 kilocalories per day, and has since ballooned to about 250,000 kilocalories today.²¹ From a physics perspective, the fundamental feature of all capitalist economies is an excessive rate of energy consumption focused on boosting economic growth and material surpluses. The collective deployment of capital assets can generate incredible levels of mechanical work, allowing people to produce more, travel great distances, and lift heavy objects, among other tasks. Capitalism is far more energy-intensive than any previous economic system, and it has wrought unprecedented ecological consequences that may threaten its very existence. It remains uncertain how long humanity can sustain capitalism’s energy-intensive activities, but there is no doubt that the fantasy of endless growth and easy profits cannot continue. All dynamical systems must eventually come to an end.

Over the last two centuries, inefficient capitalist economies have unloaded large amounts of energy losses to their natural environments in the forms of waste, chemicals, pollutants, and greenhouse gases. The aggregate effect of all this waste and dissipation has been fundamentally to alter critical energy flows throughout the ecosphere, triggering a major social and ecological crisis in the natural world. This socioecological crisis is still in its early phases, but has already spawned calamities like deforestation, global warming, ocean acidification, and substantial losses in biodiversity.²² Barring revolutionary changes to our socioeconomic system, this crisis will only continue and intensify. As this occurs, accumulating problems in the natural world will threaten the long-term viability of global civilization. The products we dissipate to the environment may be useless to us, but they often serve as energy reservoirs for other dynamical systems. Energy losses often have an amplifier effect on human civilization, meaning their true costs are far greater than may be visible or superficially understood. Consider the unsanitary conditions in cities throughout much of human history. Cities in pre-modern economies were typically filthy, with trash and waste overwhelming many public spaces. Yet these energy losses were a critical source of food and nourishment for a wide variety of other living organisms, especially insects and other small animals that could survive in the midst of human civilization. When these creatures became hosts to deadly diseases, human waste helped to concentrate their numbers in precisely the worst places: high-density areas like cities. As a consequence, epidemic diseases usually generated far larger death tolls than they would have otherwise, with the unimaginable carnage of the Black Death as a primary example.²³

Today we face our own versions of this ancient problem, but on a much bigger scale. There are several kinds of gases in the atmosphere, known as greenhouse gases, able to absorb outgoing heat radiation.²⁴ When these gases in the atmosphere trap and emit radiation back to the surface of the planet, large numbers of photons excite the electrons, atoms, and molecules on the surface to higher energy states, in a process called the greenhouse effect. These additional excitations and fluctuations at the microscopic level collectively represent the warmth we experience at the macroscopic level. The greenhouse effect is critical because it makes the Earth warm enough to be habitable.²⁵ Over the last two centuries, however, wealthy and industrialized nations have been reinforcing this natural process by pumping vast amounts of new greenhouse gases into the atmosphere, in turn causing more global warming. This artificial reinforcement of the greenhouse effect has already had profound consequences for our species and others. Thermal excitations from an amplified greenhouse effect often act as a powerful energy reservoir for other dynamical systems and natural phenomena, including storms, floods, droughts, cyclones, wildfires, insects, viruses, bacteria, and algae blooms.²⁶

A warming planet could also reinforce positive feedback mechanisms in the climate capable of inducing even more warming, beyond that already caused by our greenhouse gas emissions. These mechanisms, such as melting sea ice and thawing permafrost, would allow the planet to absorb more solar energy while naturally emitting vast quantities of greenhouse gases.²⁷ The resulting chaos would render any human attempts to mitigate global warming futile. This is precisely what should worry us: the chaos we are unleashing on the planet through the capitalist system will find a way to produce a new kind of order, one that threatens human civilization itself. As capitalism expands, the ecological crisis will worsen. The intensifying dynamical systems of nature will increasingly interact with our civilizations and could severely disrupt the vital energy flows that support social reproduction and economic activities. Regions with high population densities subject to recurring natural disasters are especially vulnerable. Cyclone Bhola killed about 500,000 people when it struck East Pakistan in 1970, triggering a series of massive riots and protests that culminated in a civil war and contributed to the establishment of a new country, Bangladesh.²⁸ Numerous studies have concluded that the worst drought to strike Syria in almost a thousand years was partly responsible for the social and political tensions that culminated in the current civil war.²⁹ The climate is a resilient dynamical system capable of assimilating many different physical changes, but this resilience has its limits, and humanity will be in deep trouble if it keeps trying to transgress them.

These arguments highlight one of the deepest flaws in modern economic theory: it lacks a scientific foundation. Orthodox economic philosophies, from monetarism to the neoclassical synthesis, focus on describing the transient financial features of capitalism, mistaking these for immutable and universal laws of nature. Capitalist economics has largely been transformed into a metaphysical philosophy whose goal is not to provide a scientific foundation for economics, but to produce sophisticated propaganda designed to protect the wealth and power of a global elite. Any scientific explanation of economics must begin with the realization that energy flows and ecological conditions—not any “invisible hand” of the market—dictate the long-term macroscopic parameters of all economies. Important contributions along these lines have come from the field of ecological economics, especially in seminal works by the economists Nicholas Georgescu-Roegen and Herman Daly, but also from the systems ecologist Howard Odum.³⁰ Marx himself incorporated ecological concerns into his economic and political thought.³¹ The contributions of these and other thinkers revealed that the economic features of the world are emergent properties shaped by underlying physical realities and ecological conditions, making an understanding of these conditions critical to any basic understanding of economics.

Ecological thought differs from the orthodox schools of economics in fundamental ways. Most importantly, ecological theory contends that we can no longer treat waste and dissipative losses as “externalities” and “costs of doing business,” given how important these energy losses can be in shaping the dynamical evolution of economic systems. What mainstream economists call “externalities” include the physical products we dump into the environment—everything from pollutants and plastic trash to toxic chemicals and greenhouse gases. The consequences of extreme energy losses can have a profound effect on the future evolution of dynamical systems. As scientists continually stress, the energy losses from our modern economies are so large and intense that they are starting to fundamentally alter the energy flows of the entire ecosphere, from the reinforcement of the greenhouse effect to the changing chemistry of the oceans. Some of these new concentrations of energy then act as reservoirs that power the formation and operation of other dynamical systems, which often disrupt the normal activities of civilization. Hence the fundamental reason our economic actions cannot be decoupled from the natural world: if the effects associated with our energy losses become powerful enough to destroy the normal functions of our civilizations, then no number of ingenious economic policies will save us from the wrath of nature.

Most people in power today believe we can carefully manage capitalism and prevent the worst effects of the ecological crisis. A popular strain of technological optimism holds that innovation can solve the fundamental ecological problems that humanity faces. Several different solutions have been proposed to fix our ecological woes, from the adoption of renewable energy sources to more outlandish programs like carbon storage and sequestration. All these ideas share the presumption that capitalism itself does not have to change, because technological solutions will always be available to deliver more economic growth and a healthier environment. From Beijing to Silicon Valley, technocapitalists are fond of arguing that capitalism can keep humming along through gains in energy efficiency.³² The ultimate reason why this strategy will fail over the long run is that nature imposes absolute physical limits on efficiency that no extent of technological progress can overcome. The recent breakdown in Moore’s Law because of quantum effects is a notable example.³³ Another is the efficiency barrier that the Carnot cycle poses for all practical heat engines.³⁴

But our most pressing concerns have to do with the underlying relationships between technological innovation and economic growth. Faith in technological solutions helps to foster further technological innovation and economic growth, increasing the overall demands placed on the biophysical world and the dissipation associated with the capitalist system. We can examine these relationships by first looking at how people and economic systems respond to efficiency gains. For a sense of whether capitalism can deliver major improvements in efficiency, we need to develop a general theory that explains how the collective efficiency of our economic systems changes over time.

When fuel efficiency improves, we often drive longer distances. When electricity becomes cheaper, we often power more appliances. Even those who proudly save energy at home through recycling, composting, and other activities are more than happy to jump on an airplane and fly halfway around the world for a vacation. People often take savings in one area and exchange them for expenses in another. What we end up doing with efficiency gains can sometimes be just as important as the gains themselves. In ecological studies, this phenomenon is generally known as the Jevons Paradox, which reveals that the intended effects of efficiency improvements do not always materialize.³⁵ First formulated in the mid-nineteenth century by the British economist William Stanley Jevons, the paradox states that increases in energy efficiency are generally used to expand accumulation and production, leading to greater consumption of the very resources that the efficiency improvements were supposed to conserve. Boosting efficiency leads to cheaper goods and services, which encourages more demand and more spending, leading to the consumption of more energy.³⁶ Jevons first described this effect in the context of coal power and steam engines. He observed that efficiency improvements in steam engines had encouraged more consumption of coal in Britain, implying that increased energy efficiency did not actually yield energy savings.

Variations of this paradox are known in economics as the rebound effect. Most economists accept that some versions of the effect are real, but disagree over the size and the scope of the problem. Some believe rebound effects are irrelevant, arguing that efficiency improvements do encourage lower levels of energy consumption in the long run.³⁷ In a comprehensive review of the literature on the subject, the UK Energy Research Centre determined that the most extreme versions of the rebound effect probably no longer apply to developed economies. However, they also argued that large rebound effects across our economies can still occur. They reached the following conclusion: “it would be wrong to assume that…rebound effects are so small that they can be disregarded. Under some circumstances (e.g. energy efficient technologies that significantly improve the productivity of energy intensive industries) economy-wide rebound effects may exceed 50% and could potentially increase energy consumption in the long-term.”³⁸ The fact that significant economy-wide rebound effects are possible should give us pause about the utility of efficiency strategies in combating the ecological crisis and climate change. In fact, this entire argument obscures a more important uncertainty: the problem of whether efficiency improvements can come fast enough to alleviate the worst consequences of the ecological crisis, which are still ahead of us. Given the mechanics and incentives of capitalism, we should beware the current infatuation with efficiency optimism.

To clarify these arguments, we need a theory that explains the role of efficiency in the wider context of technological progress. The rebound effect and the Jevons Paradox focus on understanding how people and economic systems behave in response to efficiency gains. More fundamental, however, is the task of understanding the general evolution of collective efficiencies over long periods of time. The dominant theme of technological innovation throughout history has been the effort to shift the burden of energy use from human muscles to other physical and biological systems, such as animals, machines, and computers. Consider cars, bicycles, airplanes, microwaves, dishwashers, vacuum cleaners, and virtually all the “wonders” of modern life: their central goal is to exploit energy and perform tasks that would normally require the exertion of human muscles. Robots and artificial intelligence have recently become all the rage, ready to swoop in and perform menial tasks that we have no desire to do. The expansion in mechanical output facilitated by technological progress typically leads to more energy-intensive societies where those who control the means of production can generate greater surpluses and profits. Technological innovation under capitalism in particular has boosted the collective amount of mechanical work that economies can generate, and has also ballooned the rate of energy consumption from our natural environments. But it has not fundamentally changed collective efficiencies, implying that higher rates of economic growth have usually been accompanied by larger energy losses.

Economic systems typically use new sources of energy to expand production, consumption, and accumulation, not to fundamentally improve efficiency. From the cultivation of plants and the domestication of animals to the burning of fossil fuels and the invention of electricity, the mastery and discovery of new energy sources has generally produced more energy-intensive societies. Although any economic system may make efficiency gains, these are incidental and secondary to the wider goal of accumulation. The overall efficiency of an economic system is highly inertial, changing at a glacial pace. We see this very process playing out now with greenhouse gas emissions, although the ecological crisis extends far beyond this problem. Political and business leaders have hoped for years that technological progress will somehow deliver both higher rates of economic growth and a sharp reduction in greenhouse gas emissions. Things have not gone according to plan. The year 2017 saw a substantial global rise in harmful emissions, defying even the modest goals of the Paris Agreement.³⁹ Even before that, the United Nations had warned of an “unacceptable” gap between government pledges and the emission reductions needed to prevent some of the worst consequences from climate change.⁴⁰ The challenges of boosting efficiency are more apparent when we view capitalism on a global scale: although many developed nations have made modest but measurable improvements in their collective efficiencies, these gains have been undercut by developing economies still in the process of industrialization.⁴¹ Evidently, substantial changes in the collective efficiency of any economic system rarely materialize in short periods of time. Technological growth under the regime of capitalism will deliver some additional progress on efficiency, but certainly not enough to prevent the worst consequences of the ecological crisis.

One of the best ways to understand the inertia of collective efficiencies is to compare energy efficiencies under capitalism with those of humanity’s nomadic days, more than ten thousand years ago. Recall that human muscles performed most of the work in nomadic societies, and the efficiency of our muscles is roughly 20 percent, perhaps much more under special circumstances.⁴² For comparison, most gasoline-powered combustion engines have an efficiency of roughly 15 percent, coal-fired power plants come in at a global average of about 30 percent, and the vast majority of commercial photovoltaics are somewhere around 15 to 20 percent.⁴³ All these figures vary depending on a wide array of physical conditions, but when it comes to efficiency, we can safely conclude that the dominant assets of capitalism hardly do better than human muscles, even after three centuries of rapid technological progress. Cost and convenience are the main reasons why technological innovation works this way, emphasizing mechanical output and the scale of production at the expense of efficiency. Large gains in efficiency are extremely difficult to achieve, in both physical and economic terms. From time to time, a James Watt or an Elon Musk comes along with an amazing invention, but such products do not represent the entire economy. The Watt steam engine was a major improvement over previous models, but its thermal efficiency was only 5 percent at best.⁴⁴ And although Musk’s Tesla motors have a phenomenal operating efficiency, the electricity needed to run them often comes from much more inefficient sources, such as coal-fired power plants. If you drive a Tesla in Ohio or West Virginia, the dirty sources of energy powering it mean that your amazing technological product produces roughly the same carbon emissions as a Honda Accord.⁴⁵ The collective efficiency of capitalist economies remains relatively low because these economies are interested in growing their profits and production levels, not in making the enormous investments needed for significant improvements in efficiency.

In November 2017, a group of 15,000 scientists from more than 180 nations signed a letter sounding the alarm on the ecological crisis and what awaits us in the future.⁴⁶ Their prognosis was grim, and their proposals—intentionally or not—amounted to a wholesale repudiation of modern capitalism. Among their many useful recommendations was a call for “revising our economy to reduce wealth inequality and ensure that prices, taxation, and incentive systems take into account the real costs which consumption patterns impose on our environments.” Our fundamental problem is easy to state: modern civilization uses far too much energy. And the solution to this problem is equally easy to state, but very difficult to implement: humanity must reduce the rate of energy consumption that has prevailed in modern times. The best way to drive down that rate is not through messianic delusions of technological progress, but rather by breaking the structures and incentives of capitalism, with their drive for profits and production, and establishing a new economic system that prioritizes a compatible future with our natural world.

Governments and popular movements around the world should develop and implement radical measures that will help to move humanity from capitalism toward ecologism. These measures should include punitive taxes and caps on extreme wealth, the partial nationalization of energy-intensive industries, the vast redistribution of economic goods and resources to poor and oppressed peoples, periodic restrictions on the use of capital assets and technological systems, large public investments in more efficient renewable energy technologies, sharp reductions in work hours, and perhaps even the adoption of mass veganism among industrialized nations that no longer rely on animals for food production. The economic priorities of the ecological project should focus on improving our existing quality of life, not on trying to generate high levels of economic growth to boost capitalist profits. If human civilization is to survive for thousands of years, and not just a few more centuries, then we must drastically scale back our economic ambitions and focus instead on improving the quality of life in our communities, including our community with nature. Rather than trying to dominate the natural world, we should change course and coexist with it.

Notes

1. ↩ Karl Marx, Capital, vol. 1 (London: Penguin, 1976), 929–30.
2. ↩ Edward W. Younkins, Capitalism and Commerce (New York: Lexington, 2002), 57.
3. ↩ Peter Atkins, Four Laws That Drive the Universe (Oxford: Oxford University Press, 2007), preface.
4. ↩ Robert L. Lehrman, “Energy Is Not the Ability to Do Work,” Physics Teacher 11, no. 1 (1973): 15–18.
5. ↩ Larry Kirkpatrick and Gregory E. Francis, Physics: A Conceptual Worldview (Boston: Cengage, 2009), 124
6. ↩ Atkins, Four Laws That Drive the Universe, 23.
7. ↩ Debora M. Katz, Physics for Scientists and Engineers, vol. 1 (Boston: Cengage, 2016), 264.
8. ↩ William Thomson, “On a Universal Tendency in Nature to the Dissipation of Mechanical Energy,” in Proceedings of the Royal Society of Edinburgh 3 (Edinburgh: Neill and Company, 1857), 139–42.
9. ↩ Douglas C. Giancoli, Physics for Scientists and Engineers (London: Pearson, 2008), 545.
10. ↩ John M. Seddon and Julian D. Gale, Thermodynamics and Statistical Mechanics (London: Royal Society of Chemistry, 2001), 60–65.
11. ↩ Seddon and Gale, Thermodynamics and Statistical Mechanics, 65.
12. ↩ Atkins, Four Laws That Drive the Universe, 53.
13. ↩ For the famous reciprocal relations that describe heat flows, see Lars Onsager, “Reciprocal Relations in Irreversible Processes I,” Physical Review Journals 37 (1931): 405–26. It was mainly for this work that Onsager won the Nobel Prize in Chemistry in 1968. For a study of bosonic quantum gases in a one-dimensional trap, see Miguel Ángel García-March et al, “Non-Equilibrium Thermodynamics of Harmonically Trapped Bosons,” New Journal of Physics 18 (2016): 1030–35. For an exhaustive review of modern thermodynamics and an explanation of dissipative structures, which earned Ilya Prigogine his Nobel Prize, see Dilip Kondepudi and Ilya Prigogine, Modern Thermodynamics (Hoboken: Wiley, 2014), 421–41. In 2009, Alex Kleidon wrote an important theoretical study and review of the climate system using non-equilibrium thermodynamics. See Alex Kleidon, “Nonequilibrium Thermodynamics and Maximum Entropy Production in the Earth System,” Science of Nature 96 (2009): 1–25.
14. ↩ A notable idea from the physicist Phil Attard looks at entropy as the number of particle configurations associated with a physical transition in a given period. See Phil Attard, “The Second Entropy: A General Theory for Non-Equilibrium Thermodynamics and Statistical Mechanics,” Physical Chemistry 105 (2009): 63–173. Perhaps the most technically rigorous model of entropy imagines it to be a collection of two functions that describe the changes happening among a restricted class of non-equilibrium systems. See Elliott H. Lieb and Jakob Yngvason, “The Entropy Concept for Non-Equilibrium States,” Proceedings of the Royal Society A 469 (2013): 1–15. The physicist Karo Michaelian has provided an intuitive definition of entropy, viewing it as the rate at which physical systems explore available energy microstates (“Thermodynamic Dissipation theory for the origin of life,” Earth System Dynamics (2011): 37–51).
15. ↩ Erwin Schrödinger, What Is Life? The Physical Aspect of the Living Cell (Ann Arbor: University of Michigan Press, 1945), 35–65.
16. ↩ Natalie Wolchover, “A New Physics Theory of Life,” Quanta Magazine, January 22, 2014.
17. ↩ Carsten Hermann-Pillath, “Energy, Growth, and Evolution: Towards a Naturalistic Ontology of Economics,” Ecological Economics 119 (2015): 432–42.
18. ↩ Numerous studies from around the world have revealed a powerful relationship between energy use and economic growth. For a review of the statistical relationship between energy use and GDP growth worldwide, see Rögnvaldur Hannesson, “Energy and GDP growth,” International Journal of Energy Management 3 (2009): 157–70. For a major study on the link between energy and income in certain Asian countries, see John Asafu-Adjaye, “The Relationship Between Energy Consumption, Energy Prices, and Economic Growth: Time Series Evidence from Asian Developing Countries,” Energy Economics 22 (2000): 615–25. For a general overview of the ways energy use has shaped human history, see Vaclav Smil, Energy and Civilization (Cambridge: MIT Press, 2017).
19. ↩ Vaclav Smil, Energy in Nature and Society (Cambridge: MIT Press, 2008), 147-49.
20. ↩ Jerry H. Bentley, “Environmental Crises in World History,” Procedia – Social and Behavioral Sciences 77 (2013): 108–15.
21. ↩ Bentley, 113.
22. ↩ Robert Falkner, “Climate Change, International Political Economy and Global Energy Policy,” in Andreas Goldthau, Michael F. Keating, and Caroline Kuzemko, eds., Handbook of the International Political Economy of Energy and Natural Resources (Cheltenham: Elgar, 2018), 77-78.
23. ↩ Edward Humes, Garbology: Our Dirty Love Affair with Trash (London: Penguin, 2013), 30.
24. ↩ W. J. Maunder, Dictionary of Global Climate Change, (New York: Springer, 2012), 120.
25. ↩ Maunder, Dictionary of Global Climate Change, 120.
26. ↩ One of the major papers linking climate change to forest fires in the United States came out in 2016; see John T. Abatzoglou and A. Park Williams, “Impact of Anthropogenic Climate Change on Wildfire across Western US Forests,” PNAS 113 (2016): 11770–75. For a comprehensive guide to some recent research on hurricanes and climate change, see Jennifer M. Collins and Kevin Walsh, eds., Hurricanes and Climate Change, vol. 3 (New York: Springer, 2017). For a review of the role of climate change plays in the spread of infectious diseases, see Xiaoxu Wu et al., “Impact of Climate Change on Human Infectious Diseases: Empirical Evidence and Human Adaption,” Environment International 86 (2016): 14–23. For the relationship between climate change and algae blooms, see Daniel Cressey, “Climate Change Is Making Algal Blooms Worse,” Nature, April 25, 2017.
27. ↩ Jonathan A. Newman et al., Climate Change Biology (Oxfordshire: CABI, 2011), 220–21.
28. ↩ Alan H. Lockwood, Heat Advisory: Protecting Health on a Warming Planet (Cambridge: MIT Press, 2016), 103.
29. ↩ Bruce E. Johansen, Climate Change: An Encyclopedia of Science, Society, and Solutions (Santa Barbara: ABC–CLIO, 2017), 19–20.
30. ↩ For one of the first major works attempting to ground economics in physics, see Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (Cambridge, MA: Harvard University Press, 1971). Georgescu-Roegen’s initial arguments have been refined and developed by subsequent generations of thinkers who recognize that economic activity is constrained by physical laws. Among them was Herman Daly, a leading exponent of the idea that economic growth will not last forever, whose works have had a profound influence on the ecological movement. For a succinct overview of his thought, see Herman E. Daly, Beyond Growth (Boston: Beacon, 1997). Perhaps the greatest ecological systems theorist was Howard Odum, who did a masterful job explaining the mechanisms that link human societies to their natural environments. For an explanation of his theories, see Howard Odum, Environment, Power, and Society for the Twenty-First Century (New York: Columbia University Press, 2007).
31. ↩ John Bellamy Foster, Marx’s Ecology (New York: Monthly Review Press, 2000), 9–10.
32. ↩ For a formal academic explanation of this view, see Lea Nicita, “Shifting the Boundary: The Role of Innovation,” in Valentina Bosetti et al., eds., Climate Change Mitigation, Technological Innovation, and Adaptation (Cheltenham: Elgar, 2014), 32–39.
33. ↩ Tom Simonite, “Moore’s Law Is Dead. Now What?” MIT Technology Review, May 13, 2016.
34. ↩ Atkins, Four Laws That Drive the Universe, 51-52.
35. ↩ John Bellamy Foster, Ecology Against Capitalism (New York: Monthly Review Press, 2002), 94.
36. ↩ Foster, Ecology Against Capitalism, 94.
37. ↩ Evan Mills, “Efficiency Lives—The Rebound Effect, Not So Much,” ThinkProgress, September 13, 2010, http://thinkprogress.org/.
38. ↩ Steven Sorrell, The Rebound Effect (London: UK Energy Research Centre, 2007), 92.
39. ↩ Jeff Tollefson, “World’s Carbon Emissions Set to Spike by 2% in 2017,” Nature, November 13, 2017.
40. ↩ Fiona Harvey, “UN Warns of “Unacceptable” Greenhouse Gas Emissions Gap,” Guardian, October 31, 2017.
41. ↩ Nijavalli H. Ravindranath and Jayant A. Sathaye, Climate Change and Developing Countries (New York: Springer, 2006), 35.
42. ↩ Zhen-He He et al, “ATP Consumption and Efficiency of Human Single Muscle Fibers with Different Myosin Isoform Composition,” Biophysical Journal 79 (2000): 945–61.
43. ↩ On the efficiency of internal combustion engines, see Efstathios E. Stathis Michaelides, Alternative Energy Sources, (New York: Springer, 2012), 411. For coal-fired power plants, see R. Sandström, “Creep Strength of Austenitic Stainless Steels for Boiler Applications,” in A. Shibli, ed., Coal Power Plant Materials and Life Assessment (Amsterdam: Elsevier, 2014), 128. On the efficiency of photovoltaic cells, see Friedrich Sick and Thomas Erge, Photovoltaics in Buildings (London: Earthscan, 1996), 14.
44. ↩ Robert T. Balmer, Modern Engineering Thermodynamics (Cambridge: Academic Press, 2011), 454.
45. ↩ Will Oremus, “How Green Is a Tesla, Really?” Slate, September 9, 2013, http://slate.com.
46. ↩ William J. Ripple et al., “World Scientists’ Warning to Humanity: A Second Notice,” BioScience 20, no. 10 (2017): 1–3.

How Long Can Neoliberalism Withstand Climate Crisis?

A man in a wheelchair is seen amid tear gas during a protest against Chile’s government in Santiago, Chile, November 5, 2019. Photo / Agencies.

The climate crisis is proving to be antithetical to the neoliberal machines that define current forms of social organization. On the one hand, reducing fossil fuel consumption, the largest contributor to climate change, requires collaborative efforts. These efforts must take into consideration the foundational role of fossil fuels in modern economies. We must acknowledge, for instance, that most peoples’ livelihoods are tethered to fossil fuels, which recent studies have demonstrated is not the result of random historical development but deliberate policy.¹ Fossil fuels continue to be used as a form of social domination—a means to expropriate productive and reproductive labor. In the meantime, renewable sources of energy have become a favored climate-conscious alternative to fossil fuels. Yet, renewables lack many of the characteristics that have made fossil fuels so desirable in production processes, limiting their ability to expropriate human labor. Renewables do not lend themselves to centrally located reserves or the formalized distribution patterns that allow firms to profit from the extraction, production, and consumption of energy, as fossil fuels do. At the same time, climate catastrophes, such as wildfires and hurricanes, disrupt the infrastructural momentum of fossil fuel economies, destabilizing the mechanisms of capital accumulation that derive from the production and consumption of these fuels. We see both of these problems coming to a head in the recent crises unfolding in Chile and California.

In the context of the recent Chilean protests and electricity blackouts across the state of California, it is worth reflecting on the ever-growing and increasingly apparent connections between neoliberalism and climate crisis. The people in Chile protested the widespread inequality that neoliberal climate mitigation policies threaten to exacerbate. Specifically, the recent move by the Chilean government to increase electricity rates by 9.2 percent for over seven million households and raise fares for public transit by 3.75 percent, due to expanded renewable energy consumption, was largely responsible for the protests. Meanwhile, in California, residents braced themselves for yet another round of planned blackouts implemented by private utility companies—a move intended to prevent future fires. These blackouts affected around three million people over the last few months of 2019 and led many Californians to call for the deprivatization of utilities in the state.²

These crises have long and complex histories rooted in Chile’s U.S.-backed coup d’état in 1973, which established a junta and ousted the democratically elected socialist leader Salvador Allende. The coup opened the door for a neoliberal experiment on electricity markets, the results of which have taken hold in Chile, California, and around the world, and are largely responsible for current electrical power-related crises. It is precisely neoliberalism’s legacy that resulted in the propagation of the wholesale energy market systems wreaking havoc in California and Chile. What is more, the social disruption borne from the institution of these complex market structures has been made more acute due to corporate and political reliance on similar approaches to managing the fallout of climate change.

Wholesale energy trading began as an experiment in Chile during the 1980s. Prior to the coup, the Allende-led administration had nationalized its copper industry and utilities as part of an organized effort to transition peacefully to socialism. Following the coup, a new military dictatorship headed by Augusto Pinochet began to reprivatize the recently nationalized markets, an effort that included allowing ExxonMobil to buy copper mines from the government.³ As is true for many of Chile’s social and economic policy strategies during Pinochet’s seventeen years of brutal dictatorship, the junta relied on the guidance of Chicago School economists when it came to reprivatizing energy. This meeting of the minds ultimately led Chile to design a system of energy trading that allowed electricity producers to speculate on future electricity demand and, thereby, to profit from changes in electricity prices. The newly established economic structure, an institution commonly referred to as a wholesale energy trading market, was intended as a way to profit from electricity distribution without increasing the retail price paid by consumers and at first appeared to do so. After the introduction of wholesale trading in Chile, the model quickly spread across the world.

According to its proponents, the wholesale energy market in Chile had the benefit of separating the business of energy production from the business of distributing energy to the public. It was believed that this separation would benefit end users and improve the efficiency of energy systems by inducing competition between firms. Despite this tagline, the faults in Chile’s wholesale energy market are now visible to all. One of the most glaring fissures is manifesting itself in the ongoing struggle to introduce renewable sources of energy without increasing the cost of electricity to households. Ironically, it was claimed that wholesale energy markets were created to prevent this very situation from arising. The people in Chile protested in response to this tension, as costs of public transit and electricity, which have widened the already high levels of inequality, were in the works.⁴

In the eyes of energy producers around the world, Chile’s Atacama Desert is one of the largest solar energy reserves available to humankind—a value derived from the region’s dry climate and extreme insolation. In early 2019, Spain’s Solarpack Corp. Tecnologica won the auction to produce 123 megawatts of solar energy in Chile. The company has already started installing solar panels in the area and is now positioned to generate the most cost-efficient electricity in the world.⁵ This massive spike in renewable energy production is set to increase the percentage of renewable energy consumed in Chilean households and to make Santiago’s subway system one of the first in the world to source most of its power from renewables.⁶ To cover the cost of these changes without cutting into profits, the Chilean government intended to increase household electricity prices by 9.2 percent and the cost of Santiago’s metro system (already one of the most expensive in Latin America) by 3.75 percent by 2021. These two changes are widely acknowledged as having sparked the resentment that resulted in mass protest across the country. The protests were largely successful and in late October the president of Chile, Sebastián Piñera, signed the Electricity Rates Stabilization Bill to overturn the energy price increases, as well as a bill reversing the metro fare increases, to quell the unrest.⁷ The energy price increase was intended to protect the profitability of the wholesale energy market, which was subject to price fluctuation after the introduction of newer sources of renewable energy and a stronger peso. That is, in classic neoliberal fashion, the state extracted revenue from the people to help stabilize—even increase—the rate of capital accumulation during the transition to renewables.

To its credit, Chile is on a path to have renewables make up 70 percent of its energy by 2050. However, because storage systems for renewable energy are still lacking, banks are reluctant to invest. Concerns such as these raise questions for investors about how well renewables can compete with fossil fuels on the wholesale stage. Thus, to add more security to wholesale energy trading, Chile sought to increase the cost of consumption. Over the years, the austerity imposed on the subway system in Chile has sparked numerous protests as the government continues to rely on efficiency standards determined by economists while ignoring the needs of the people. The system has continually served middle-class communities in an effort to maintain economic efficiency while forcing lower-income earners to rely on private busing systems. Although this has changed somewhat in recent years, as Chile has transitioned to a democracy (in the 1990s, the metro system merged with private buses), the bottom line has continued to emphasize economic efficiency at the expense of the people.

In California, wholesale energy markets came through Assembly Bill 1890 in 1996. Among other things, the bill deregulated energy monopolies across the state to encourage competition, enforced a 10 percent decrease in energy prices, and limited the ability of energy monopolies to increase rates on customers. Assembly Bill 1890 also required publicly traded utility companies in California, such as Pacific Gas and Electric (PG&E), to sell the majority of their generating capacity to independent producers, where it could be traded on the wholesale market.

The problem with deregulated energy markets is that they rely on an assumption of endless cheap energy and historical data on weather patterns to forecast demand. They are ill-equipped to handle changes in weather patterns produced by climatic shifts.

For decades, California has obtained at least a quarter of its energy from neighboring states despite the assumption of abundance in its wholesale markets. A significant portion of this imported energy comes from hydroelectric dams in Oregon and Washington. In 2000, the Pacific Northwest was hit with a drought that limited the electrical capacity of their hydroelectric dams, which, in addition to the profitable but highly criminal activities of opportunistic companies such as Enron, resulted in PG&E filing for bankruptcy in 2001.

The inability to increase rates on end users coupled with the loss of surplus energy from the Pacific Northwest during a season of high energy demand resulted in large revenue losses. To emerge from bankruptcy, PG&E turned to the state, which in turn backtracked on its previous policies protecting households from the wholesale energy market and forced ratepayers to front the bill. A $2.50 surcharge was added to bills to help pay for PG&E’s debt. This tactic of expropriation mirrors those used by financial markets to stave off economic crisis and is a hallmark of neoliberalism. With a new safety net in place, PG&E was able to emerge from bankruptcy by 2004, but the surcharge used to bail out PG&E remained intact nonetheless. This surcharge has now transformed into a disaster fund that the state of California intends to use to bail out its utilities in case they are liable for future fires.

This brings us to the present, when PG&E has yet again filed for bankruptcy due to climatic shifts. In 2017 and 2018, PG&E power lines sparked both the Wine Fire and the Camp Fire in Northern California due to abnormally dry weather and the lasting impacts of a historic drought. The Camp Fire alone was the largest and deadliest wildfire in many generations; nineteen thousand homes were destroyed, over two thousand acres were burned, and eighty-five people died. Each of these fires could have been prevented had PG&E updated its power lines (some of which are one hundred years old) to be safer in dry weather. A recent article in the Wall Street Journal details that PG&E had been aware of the risk of its outdated power lines for decades, yet the company found it more financially viable to postpone safety updates. The secret of the neoliberal scam of a profitable wholesale market for energy supposedly without higher retail rates was exposed; necessary maintenance for safety was abandoned in the interest of profit.

In addition to destroying the livelihoods of thousands, these fires have become a nightmare for one of neoliberalism’s most coveted markets—insurance. The recent wildfires in California have cost insurance companies an estimated $24 billion.⁸ In response to escalating concerns, insurance companies have raised premiums and, in some instances, refused to renew customers. Insurers are also holding PG&E responsible for their large payouts to customers, forcing PG&E into bankruptcy. This has become a financial opportunity for hedge funds, which have bought insurance claims in an effort to profit from PG&E’s mounting debt. Hedge funds such as Elliott Corp. and Baupost are now vying for an opportunity to restructure PG&E under chapter 11 bankruptcy laws.

In an effort to stave off further debt, PG&E and other utility companies in California have resorted to shutting off power to over three million people during periods of abnormally high winds and dry weather. This type of weather is predicted to continue into the future due to climate crisis, alternating between heavy precipitation (a problem that will put water utilities in a bind) and droughts.⁹ Of course, PG&E has shut off customers’ electricity with little regard for vulnerable populations. People with disabilities and the elderly are especially vulnerable to blackouts, and blackouts in general have been associated with increased death rates.¹⁰ An outcome of this expropriation is the increasing social and political disposability of those who have been expropriated. The people who rely on energy to survive are being hurt at no fault of their own—they are simply living their lives at the mercy of energy providers who see them as a source of capital rather than as human beings.

Energy systems in capitalist markets are predicated on ongoing processes of profit upon expropriation. In general, expropriation refers to forms of social, economic, and political domination unmediated by a wage contract and that function to support the exploitation of labor.¹¹ To understand this, we can look to how the majority of electricity consumed by individuals, even in wealthy nations, is used to reproduce basic needs. Heating, cooling, food storage, cleaning, and travel account for the majority of individuals’ energy use. Most people rely on external sources of energy to meet these needs and lack the knowledge to reproduce these amenities without energy available on demand. This creates a power imbalance between energy consumers and energy providers that helps subordinate the interests of labor to the needs of capital.

Originally, fossil fuel-based energy was a form of resource expropriation that supported the exploitation of labor. This form of expropriation expedited the exploitation of workers by increasing the efficiency of both reproductive and productive labor. Electricity allowed laborers to produce goods more cheaply and to do it for longer periods of time than could have ever been imagined before fossil fuels were incorporated into the production chain. It also cut down the amount of time needed to perform reproductive labor, not least by increasing the efficiency of cooking and cleaning. As if that were not enough, electrification provided a new way for energy producers to profit from reproductive labor. Namely, the introduction of electricity made reproductive labor more dependent on electronic household appliances. Wholesale energy trading expands on the original model of energy expropriation by turning the individual’s basic needs (such as the demand for energy) into a speculative market.

With all this in mind, it seems pertinent to ask: How long can neoliberalism withstand climate crisis and what are the consequences of continually supporting the neoliberal model? Let us start with the latter part of this question by noting three such consequences. First, the attempt to combat climate change through the wholesale energy market in Chile threatened to exacerbate preexisting inequality. Secondly, renewable energy consumption worldwide has fared better at mitigating emissions when it expands inequality.¹² Lastly, it is clear that the people of Chile have had enough with widening inequality and took to the streets in protest, as have others around the globe, such as the Yellow Vests in France.

The energy cost hike was intended to protect the market from the volatility of renewable electricity systems. Through this volatility, renewable sources of energy such as wind and solar threaten the viability of the wholesale-energy-for-profit model. To put it differently, these energy sources are subject to ecology, not the market. The large fluctuation in energy supply, characteristic of highly intermittent sources (for example, renewables), make it difficult to profit from demand. Recall that this was what the wholesale market system was largely crafted to do. Nevertheless, this is a market problem, not a practical issue. Fossil fuels can easily become a backstop energy source for consumption during periods of low renewable supply or moments of peak usage when demand outstrips supply (while this is done to some degree now, it still occurs under the wholesale model). However, this would require the transformation of an energy system predicated on expropriation into one predicated on appropriation. By appropriation we mean energy production that is free from the alienation embedded in commodities. As a commodity, energy’s value derives from unequal exchange, specifically, individuals pay more for energy than it costs to produce it. This form of unequal exchange is maintained through private ownership of distribution infrastructures, which limits the agency of households by creating an intermediary between the production and appropriation (that is, consumption) of energy. In this case, the intermediary is the wholesale energy market, which sets prices and determines what type of energy is used and when. To appropriate energy is to use it when it is useful to the individual, unmediated by unequal exchange, embedded in and limited by ecological cycles and thus free from alienation that derives from market pricing.

If peoples’ agency were constrained by ecology and not the market, they could easily choose to perform energy-intensive tasks—such as traveling, cooking, cleaning, and charging batteries—during the peak hours of renewable energy supply and reduce their energy consumption during hours of low renewable supply. Under this model, individuals would respond to changes in weather patterns to reduce their impact on the climate without a market determining costs to generate greater profits.

While giving people the choice to live within the parameters of the earth’s ecology seems like a fantasy, this is exactly what PG&E is forcing people to do during fire season in California. The only difference is that PG&E is making this decision for people. And they are doing it to reduce the likelihood that they will be implicated in and financially responsible for any future fires. Dry weather poses a danger for PG&E because it has continually refused to adapt its infrastructure to the changing climate. Even without weather patterns altering due to anthropogenic climate change, dry weather is a possibility—and an inevitability—that should be addressed when building energy infrastructures. Failing to do so poses a danger to life and the greater social good. In truth, we are rather lucky it has only recently become a problem. Ultimately though, the increasing frequency of dry weather brought about by climate crisis has forced the issue by posing a threat to PG&E’s profits, and in doing so climate change has brought the financial solvency of the largest private utility firm in the nation into question. To protect the future of PG&E, the state of California has created a fund that will insulate the behemoth from the insurance claims of the public. This is the neoliberal model of energy production: externalize costs and internalize surplus. It is a model that turns human beings into disposable objects; objects whose energy needs are determined by what is profitable and not what is hospitable or necessary to survival. Subjecting these energy sources to the faulty logic of an expropriative market rather than building systems that reflect the ecology is what people protested in Chile and are enduring in California. So, how long can neoliberalism withstand climate crisis? As long as we accept ourselves as disposable and firms like PG&E as essential, and not a moment more.

Notes

1. Andreas Malm, Fossil Capital (New York: Verso, 2016); Simon Pirani, Burning Up (Chicago: University of Chicago Press, 2018).
2. Alexander Sammon, “Could California Take Public Ownership of PG&E?,” Pacific Standard, February 7, 2019.
3. Lewis H. Divguid, “Exxon Buys Mine in Chile,” Washington Post, January 25, 1978.
4. John Authers, “Chile’s Violence Has a Worrisome Message for the World,” Bloomberg, October 23, 2019.
5. Felicia Jackson, “Chile’s Cheap Power—Sign of a Solar Future?,” Forbes, June 5, 2019.
6. “Chile’s President Inks Bill to Cut Electricity Costs Amid Unrest,” Xinhua, October 26, 2019; Rachelle Krygier, “Chile’s Protesters Got a Subway Fare Hike Reversed. Now They Want a New Political System,” Washington Post, October 30, 2019.
7. Matt Wirz and Juliet Chung, “PG&E Trade Punishes Hedge Funds as California Burns,” Wall Street Journal, October 30, 2019.
8. Daniel L. Swain, Baird Langenbrunner, J. David Neelin, and Alex Hall, “Increasing Precipitation Volatility in Twenty-First-Century California,” Nature Climate Change 8 (2018): 427–33.
9. Brooke Anderson and Michelle L. Bell, “Lights Out: Impact of the August 2003 Power Outage on Mortality in New York, NY,” Epidemiology 23, no. 2 (2012): 189–93.
10. John Bellamy Foster and Brett Clark, “The Expropriation of Nature,” Monthly Review 69, no. 10 (March 2018): 1–27.
11. Julius Alexander McGee and Patrick Trent Greiner, “Renewable Energy Injustice: The Socio-Environmental Implications of Renewable Energy Consumption,” Energy Research & Social Science 56 (2019).

Julius Alexander McGee is assistant professor of sociology at Portland State University. 

Patrick Trent Greiner is assistant professor of sociology at Vanderbilt University.

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