Rhine Capitalism

18 April 2014

Friday


rhine castle

Thursday’s Financial Times included a special supplement on “Frankfurt as a Financial Centre,” and this supplement included the article “Deutsche Börse hopes that its philosophy has global appeal.” And what is the philosophy of Deutsche Börse AG? According to chief executive Reto Francioni, the philosophy of Deutsche Börse AG is “Rhine capitalism.” So what is Rhine capitalism?

deutsche-borse-group logo

Here is a quote from Reto Fancioni from the Financial Times article that employs this interesting formulation:

“We share the same basic belief that the market economy also has to fulfill a social obligation, and that the ‘Rhine capitalism’ model of an economy buffered by corporations and focused on the long term, with strictly regulated markets — which are free for that very reason — is fundamentally superior to the Anglo-American capitalism model of deregulation.”

Further along in the same article we find the following:

[Deutsche Börse AG] hopes that its philosophy of a capitalism based on long-term careful planning will find a more receptive audience worldwide.

If you take a minute to read the mission statement and core values on the Deutsche Börse AG website you will find the usual corporate platitudes, though the following sentence underlines the quotes above from the Financial Times article:

We stand for integrity, transparency and the safety of capital markets. We support regulation that advances these qualities.

A New Year’s reception speech by Reto Francioni on the Eurex Group site repeats some of his thoughts on “Rhine capitalism” in a slightly different context. After stating his strong support for the European idea — saying that “there are no alternatives” to a united Europe — Francioni goes on to say:

…we share the same basic belief that the market economy also has to fulfill a social obligation and that the “Rhine capitalism” model of an economy buffered by corporations and focused on the long term, with strictly regulated markets — which are free for that very reason — is fundamentally superior to the Anglo-American capitalism model of deregulation.

This very interesting claim, however, was preceded in the speech by this…

I am a fan of good regulation. But I stress the word “good”, meaning professional. After all, we are involved in a global competition in regulation.

…and this…

The US remains a pioneer in many respects… They are ahead of us in re-regulation of capital markets and they made use of the crisis to rapidly create new and effective banks and stock exchange
organisations which have been strengthened through mergers and disciplined through sanctions.

Francioni really sounds like he’s trying to have it two ways here: he acknowledges that the US is ahead of Europe in re-regulation but then also holds that “Rhine capitalism” is distinctive because it does not endorse the Anglo-American model of deregulation. So which is it? Is the US leading in re-regulation, or is it guilty of a reckless deregulation that stands in stark contrast to “Rhine capitalism”?

Francioni is talking like a politician when he talks about Rhine capitalism embracing regulation and being the stronger for it while saying that there is a global competition in regulation so that “good regulation” is called for. I doubt that you could find an Anglo-American banker who would have anything but praise for “good” regulation. For this statement to have any content at all it would need to explain the difference between good regulation and bad regulation, preferably citing actual examples of each.

Setting aside Francioni’s double-speak about regulation, what are we to understand by “Rhine capitalism” on the basis of his public pronouncements? We can include within “Rhine capitalism” at least the following:

1. the market economy has social obligations

2. corporations “buffer” the market economy

3. the market economy should be focused on the long term

4. the market economy should be strictly regulated

5. free markets are free in virtue of being regulated

6. regulation of the market economy should be professional

All of these are nice ideas, but they all beg the question. What are the social obligations of a market economy? Are they the obligation to increase the wealth of a society, or to attempt to impose an elusive “safety” and “stability” on markets? How do corporations “buffer” the market? Are corporations to have privileges over and against sole proprietors and partnerships in their role as market buffers? Or is this rather a veiled criticism of the role of private equity? What is the long term for Rhine capitalism? Are we talking about ten months, ten years, or ten centuries? I certainly don’t see in Europe (not to speak of the Rhineland) any more willingness to fund the future than I see in the US. What is a strict regulation, and how are we to distinguish between good and bad regulation? Between professional or unprofessional (amateurish?) regulation? How much strict regulation means that a market is free in virtue of its regulation?

Although I don’t expect that my questions will be answered, I don’t ask them merely rhetorically. I really would like to know exactly what “Rhine capitalism” is, though I think the key to understanding the idea is this: Rhine capitalism is not Anglo-American deregulation. In other words, whatever the British and Americans are doing, we aren’t doing, but we’re still capitalists.

I worry that, in the wake of a devastating financial crisis, European bankers selling themselves to a suspicious public now focused on resentment of “the one percent” by defining “Rhine capitalism” as a vague alternative — the one thing that is clear is that it is not Anglo-American deregulation — are really selling a bill of goods. Francioni offers all kinds so reassuring ideas about a carefully planned, strictly regulated market that fulfills social obligations, but we are right to be suspicious of this in the same way that the working class is right to be suspicious of wealthy bankers. Bankers who claim to do good usually end up making a mess of things, and the bankers that usually benefit society the most are those than focus on making the most money.

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Tuesday


future-next-exit

Introduction

Why be concerned about the future? Will not the future take care of itself? After all, have we not gotten along just fine without being explicitly concerned with the future? The record of history is not an encouraging one, and suggests that we might do much better if only provisions were made for the future, and problems were addressed before they become unmanageable. But are provisions being made for the future? Mostly, no. And there is a surprisingly simple reason that provisions are rarely made for the future, and that is because the future does not get funded.

The present gets funded, because the present is here with us to plead its case and to tug at our heart strings directly. Unfortunately, the past is also often too much with us, and we find ourselves funding the past because it is familiar and comfortable, not realizing that this works against our interests more often than it serves our interests. But the future remains abstract and elusive, and it is all too easy to neglect what we must face tomorrow in light of present crises. But the future is coming, and it can be funded, if only we will choose to do so.

hundred banknotes

Money, money, everywhere…

The world today is awash in money. Despite the aftereffects of the subprime mortgage crisis, the Great Recession, and the near breakup of the European Union, there has never been so much capital in the world seeking advantageous investment, nor has capital ever been so concentrated as it is now. The statistics are readily available to anyone who cares to do the research: a relatively small number of individuals and institutions own and control the bulk of the world’s wealth. What are they doing with this money? Mostly, they are looking for a safe place to invest it, and it is not easy to find a place to securely stash so much money.

The global availability of money is parallel to the global availability of food: there is plenty of food in the world today, notwithstanding the population now at seven billion and rising, and the only reason that anyone goes without food is due to political (and economic) impediments to food distribution. Still, even in the twenty-first century, when there is food sufficient to feed everyone on the planet, many go hungry, and famines still occur. Similarly, despite the world being awash in capital seeking investment and returns, many worthy projects are underfunded, and many projects are never funded at all.

safe-as-houses

What gets funded?

What does get funded? Predictable, institutional projects usually get funded (investments that we formerly called, “as safe as houses”). Despite the fact of sovereign debt defaults, nation-states are still a relatively good credit risk, but above all they are large enough to be able to soak up the massive amounts of capital now looking for a place to go. Major industries are also sufficiently large and stable to attract significant investment. And a certain amount of capital finds itself invested as venture capital in smaller projects.

Venture capital is known to be the riskiest of investments, and the venture capitalist expects that most of his ventures will fail and yield no returns whatever. The reward comes from the exceptional and unusual venture that, against all odds and out of proportion to the capital invested in it, becomes an enormous success. This rare venture capital success is so profitable that it not only makes up for all the other losses, but more than makes up the losses and makes the successful venture capital firm one of the most intensively capitalized industries in the world.

risk blocks

Risk for risk’s sake?

With the risk already so high in any venture capital project, the venture capitalist does not unnecessarily court additional, unnecessary risks, so, from among the small projects that receive venture funding, it is not the riskiest ventures that get funded, but the least risky that get funded. That is to say, among the marginal investments available to capital, the investor tries to pick the ones that look as close to being a sure thing as anything can be, notwithstanding the fact that most of these ventures will fail and lose money. No one is seeking risk for risk’s sake; if risk is courted, it is only courted as a means to the end of a greater return on capital.

The venture capitalists have a formula. They invest a certain amount of money at what is seen to be a critical stage in the early development of a project, which is then set on a timetable of delivering its product to market and taking the company public at the earliest possible opportunity so that the venture capital investors can get their money out again in two to five years.

Given the already tenuous nature of the investments that attract venture capital, many ideas for investment are rejected on the most tenuous pretexts, rejected out of hand scarcely without serious consideration, because they are thought to be impractical or too idealistic or are not likely to yield a return quickly enough to justify a venture capital infusion.

temperaments

Entrepreneurs, investors, and the spectrum of temperament

Why do the funded projects get funded, while other projects do not get funded? The answer to this lies in the individual psychology of the successful investor. The few individuals who accumulate enough capital to become investors in new enterprises largely become wealthy because they had one good idea and they followed through with relentless focus. The focus is necessary to success, but it usually comes at the cost of wearing blinders.

Every human being has both impulses toward adventure and experimentation, and desires for stability and familiarity. From the impulse to adventure comes entrepreneurship, the questioning of received wisdom, a willingness to experiment and take risks (often including thrill-seeking activities), and a readiness to roll with the punches. From the desire for stability comes discipline, focus, diligence, and all of the familiar, stolid virtues of the industrious. With some individuals, the impulse to adventure predominates, while in others the desire for stability is the decisive influence on a life.

With entrepreneurs, the impulse to adventure outweighs the desire for stability, while for financiers the desire for stability outweighs the impulse to adventure. Thus entrepreneurs and the investors who fund them constitute complementary personality types. But neither exemplifies the extreme end of either spectrum. Adventurers and poets are the polar representatives of the imaginative end of the spectrum, while the hidebound traditionalist exemplifies the polar extreme of the stable end of the spectrum.

It is the rare individual who possesses both adventurous imagination and discipline in equal measures; this is genius. For most, either imagination or discipline predominates. Those with an active imagination but little discipline may entertain flights of fancy but are likely to accomplish little in the real world. Those in whom discipline predominates are likely to be unimaginative in their approach to life, but they are also likely to be steady, focused, and predictable in their behavior.

Most people who start out with a modest stake in life yearn for greater adventures than an annual return of six percent. Because of the impulse to adventure, they are likely to take risks that are not strictly financially justified. Such an individual may be rewarded with unique experiences, but would likely have been more financially successful if they could have overcome the desire in themselves for adventure and focused on a disciplined plan of investment coupled with delayed gratification. If you can overcome this desire for adventure, you can make yourself reasonably wealthy (at very least, comfortable) without too much effort. Despite the paeans we hear endlessly celebrating novelty and innovation, in fact discipline is far more important than creativity or innovation.

The bottom line is that the people who have a stranglehold on the world’s capital are not intellectually adventuresome or imaginative; on the contrary, their financial success is a selective result of their lack of imagination.

giving_money

A lesson from institutional largesse

The lesson of the MacArthur fellowships is worth citing in this connection. When the MacArthur Foundation fellowships were established, the radical premise was to give money away to individuals who could then be freed to do whatever work they desired. When the initial fellowships were awarded, some in the press and some experiencing sour grapes ridiculed the fellowships as “genius grants,” implying that the foundation was being a little too loose and free in its largesse. Apparently the criticism hit home, as in successive rounds of naming MacArthur fellows the grants become more and more conservative, and critics mostly ceased to call them “genius grants” while sniggering behind their hands.

Charitable foundations, like businesses, function in an essentially conservative, if not reactionary, social milieu, in which anything new is immediately suspect and the tried and true is favored. No one wants to court controversy; no one wants to be mentioned in the media for the wrong reason or in an unflattering context, so that anyone who can stir up a controversy, even where none exists, can hold this risk averse milieu hostage to their ridicule or even to their snide laughter.

Who serves on charitable boards? The same kind of unimaginative individuals who serve on corporate boards, and who make their fortunes through the kind of highly disciplined yet largely unimaginative and highly tedious investment strategies favored by those who tend toward the stable end of the spectrum of temperament.

Handing out “genius grants” proved to be too adventuresome and socially risky, and left those in charge of the grants open to criticism. A reaction followed, and conventionality came to dominate over imagination; institutional ossification set in. It is this pervasive institutional ossification that made the MacArthur awards so radical in the early days of the fellowships, when the MacArthur Foundation itself was young and adventuresome, but the institutional climate caught up with the institution and brought it to heel. It now comfortably reclines in respectable conventionality.

clock with dates

Preparing for the next economy

One of the consequences of a risk averse investment class (that nevertheless always talks about its “risk tolerance”) is that it tends to fund familiar technologies, and to fund businesses based on familiar technologies. Yet, in a technological economy the one certainty is that old technologies are regularly replaced by new technologies (a process that I have called technological succession). In some cases there is a straight-forward process of technological succession in which old technologies are abandoned (as when cars displaced horse-drawn carriages), but in many cases what we see instead is that new technologies build on old technologies. In this way, the building of an electricity grid was once a cutting edge technological accomplishment; now it is simply part of the infrastructure upon which the economy is dependent (technologies I recently called facilitators of change), and which serves as the basis of new technologies that go on to become the next cutting edge technologies in their turn (technologies I recently called drivers of change).

What ought to concern us, then, is not the established infrastructure of technologies, which will continue to be gradually refined and improved (a process likely to yield profits proportional to the incremental nature of the progress), but the new technologies that will be built using the infrastructure of existing technologies. Technologies, when introduced, have the capability of providing a competitive advantage when one business enterprise has mastered them while other business enterprises have not yet mastered them. Once a technology has been mastered by all elements of the economy it ceases to provide a competitive advantage to any one firm but is equally possessed and employed by all, and also ceases to be a driver a change. Thus a distinction can be made between technologies that are drivers of change and established technologies that are facilitators of change, driven by other technologies, that is to say, technologies that are tools for the technologies that are in the vanguard of economic, social, and political change.

From the point of view both of profitability and social change, the art of funding visionary business enterprises is to fund those that will focus on those technologies that will be drivers of change in the future, rather than those that have been drivers of change in the past. This can be a difficult art to master. We have heard that generals always prepare for the last war that was just fought rather than preparing for the next war. This is not always true — we can name a list of visionary military thinkers who saw the possibilities for future combat and bent every effort to prepare for it, such as Giulio Douhet, Billy Mitchell, B. H. Liddell Hart, and Heinz Guderian — but the point is well taken, and is equally true in business and industry: financiers and businessmen prepare for the economy that was rather than the economy that will be.

The prevailing investment climate now favors investment in new technology start ups, but the technology in question is almost always implicitly understood to be some kind of electronic device to add to the growing catalog of electronic devices routinely carried about today, or some kind of software application for such an electronic device.

The very fact of risk averse capital coupled with entrepreneurs shaping their projects in such a way as to appeal to investors and thereby to gain access to capital for their enterprises suggests the possibility of the path not taken, and this path would be an enterprise constituted with the particular aim of building the future by funding its sciences, technology, engineering, and even its ideas, that is to say, but funding those developments that are yet to become drivers of change in the economy, rather than those that already are drivers of change in the economy, and therefore will slip into second place as established facilitators of the economy.

open door on road

What is possible?

If there were more imagination on the part of those in control of capital, what might be funded? What are the possibilities? What might be realized by large scale investments into science, technology, and engineering, not to mention the arts and the best of human culture generally speaking? One possibility is that of explicitly funding a particular vision of the future by funding enterprises that are explicitly oriented toward the realization of aims that transcend the present.

Business enterprises explicitly oriented toward the future might be seen as the riskiest of risky investments, but there is another sense in which they are the most conservative of conservative investments: we know that the future will come, whether bidden or unbidden, although we don’t know what this inevitable future holds. Despite our ignorance as to what the future holds, we at least have the power — however limited and uncertain that power — to shape events in the future. We have no real power to shape events in the past, though many spin doctors try to conceal this impotency.

Those who think in explicit terms about the future are likely to seem like dreamers to an investor, and no one wants to labeled a “dreamer,” as this a tantamount to being ignored as a crank or a fool. Nevertheless, we need dreamers to give us a sense as to what might be possible in the future that we can shape, but of which we are as yet ignorant. The dreamer is one who has at least a partial vision of the future, and however imperfect this vision, it is at least a glimpse, and represents the first attempt to shape the future by imagining it.

Everyone who has ever dreamed big dreams knows what it is like to attempt to share these dreams and have them dismissed out of hand. Those who dismiss big dreams for the future usually are not content merely to ignore or to dismiss the dreamer, but they seem to feel compelled to go beyond dismissal and to ridicule if not attempt to shame those who dream their dreams in spite of social disapproval.

The tactics of discouragement are painfully familiar, and are as unimaginative as they are unhelpful: that the idea is unworkable, that it is a mere fantasy, or it is “science fiction.” One also hears that one is wasting one’s time, that one’s time could be better spent, and there is also the patronizing question, “Don’t you want to have a real influence?”

There is no question that the attempt to surpass the present economic paradigm involves much greater risk than seeking to find a safe place for one’s money with the stable and apparent certainty of the present economic paradigm, but greater risks promise commensurate rewards. And the potential rewards are not limited to the particular vision of a particular business enterprise, however visionary or oriented toward the future. The large scale funding of an unconventional enterprise is likely to have unconventional economic outcomes. These outcomes will be unprecedented and therefore unpredictable, but they are far more likely to be beneficial than harmful.

There is a famous passage from Keynes’ General Theory of Employment, Interest and Money that is applicable here:

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

John Maynard Keynes, General Theory of Employment, Interest and Money, Book III, Chapter 10, VI

For Keynes, doing something is better than doing nothing, although it would be better still to build houses than to dig up banknotes buried for the purpose of stimulating economic activity. But if it is better to do something than to do nothing, and if it is better to do something constructive like building houses rather than to do something pointless like digging holes in the ground, how much better must it not be to build a future for humanity?

If some of the capital now in search of an investment were to be systematically directed into projects that promised a larger, more interesting, more exciting, and more comprehensive future for all human beings, the eventual result would almost certainly not be that which was originally intended, but whatever came out of an attempt to build the future would be an unprecedented future.

The collateral effect of funding a variety of innovative technologies is likely to be that, as Keynes wrote, “…the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.” Even for the risk averse investor, this ought to be too good of a prospect to pass up.

vision

Where there is no vision, the people perish

What is the alternative to funding the future? Funding the past. It sounds vacuous to say so, but there is not much of a future in funding the past. Nevertheless, it is the past that gets funded in the present socioeconomic investment climate.

Why should the future be funded? Despite our fashionable cynicism, even the cynical need a future in which they can believe. Funding a hopeful vision of the future is the best antidote to hopeless hand-wringing and despair.

Who could fund the future if they wanted to? Any of the risk averse investors who have been looking for returns on their capital and imagining that the world can continue as though nothing were going to change as the future unfolds.

What would it take to fund the future? A large scale investment in an enterprise conceived from its inception as concerned both to be a part of the future as it unfolds, and focused on a long term future in which humanity and the civilization it has created will be an ongoing part of the future.

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Tuesday


industrial accidents

In Industrial-Technological Disruption I tried to describe the systemic disruptions to the cycle that drives industrial-technological civilization — science inventing technologies that are engineered into industries that create new instruments for science, leading to further inventions. This cycle of escalation is impeded by counter-cyclical trends such as science experiencing model crisis, stalled technologies, and unintended consequences of engineering.

Among the unintended consequences of engineering I specifically cited industrial accidents. I explicitly discussed industrial accidents in Impossible Desires and Industrialized Civilization and its Accidents. I also discussed industrial accidents obliquely in Complex Systems and Complex Failure, which was concerned with the ways in which complex systems fail; it is a feature of industrial-technological civilization that as science and technology become more sophisticated, the systems that they produce become more complex and therefore exemplify complex failure when they fail. We like to think that we learn the lessons of our accidents and do better next time. And we do. We learn some hard lessons at the cost of lives, capital, and wasted time.

Learning our lessons, however, does not prevent future industrial accidents, because the cycle that drives industrial-technological civilization develops by continually revolutionizing production, and the continual revolutionizing of production means that there are always new scientific discoveries, new technologies, and new industrial processes. New and unfamiliar industrial processes mean new and unprecedented industrial accidents. And it is for this reason that industrial-technological civilization will always involve industrial accidents. One could say that industrial accidents are the natural disasters of industrial-technological civilization.

Thus while industrial accidents seem to be mere contingencies, ultimately irrelevant to the great project of industrialization, they in fact play a constitutive role in industrial-technological civilization, much as natural disasters play a decisive and constitutive role in agrarian-ecclesiastical civilization. It cannot be otherwise, living, as we do, in an accidental world, in which the importance of the uniqueness of the individual also attaches to the uniqueness of individual events, including accidental events.

There is another sense in which industrial accidents shape industrial-technological civilization that is perhaps even more radical than that outlined above because of the way that it ties in which the maturation of industrial-technological civilization, and therefore with its potential axialization.

Many observers of the regime of contemporary industrial civilization have noted that regulation almost always comes after there has been a major accident that results in multiple deaths. This is one of the ways in which the representatives of the institutions of industrial-technological civilization attempt to demonstrate to their constituents that they have learned the lessons of industrial accidents and are taking measures to address the problem. But, as observed above, industrial-technological civilization will always produce industrial accidents. This means that as industrial-technological civilization develops, it will always produce more accidents, these accidents will usually result in legislation and regulation to address the causes of the accident (ex post facto), and the regulatory burden on industrial will always increase even as new technologies are introduced — technologies which often make past dangers (and past regulations) irrelevant.

Thus the maturation of industrial-technological civilization becomes not an expression of the central idea of the civilization in mythological form — as with the axialization of the nomadic paradigm in the great cave art of paleolithic prehistory, or with the Axial Age religions delineated by Jaspers — but a legalistic compilation of regulations (and it could be argued that this formal legalism represents the essential idea of industrial-technological civilization). We have seen this before in civilization, as with the Corpus Iuris Civilis of the Byzantines, also known as Justinian’s Code.

The increasing legal formalism of mature industrial-technological civilization has significant consequences. In an early post, Exaptation of the Law, I argued that law has an intrinsic bias in favor of the past. In that post I wrote the following:

If we think of the common law tradition, in which there is no constitutional basis but only a history of case law, it is obvious that precedent plays a central role. A ruling in the past establishes a convention that is followed in later rulings preserves the past into the present. And we may think of the establishment of a constitution or formal statutes as a “re-setting” of precedent. Laws and constitutions are not written in a vacuum, and the legal history that precedes such an effort must loom large in the minds of those so occupied.

Industrial-technological civilization develops by continually revolutionizing production, and yet it is being driven by its own institutions in the direction of legalistic regulation biased in favor of the past. This tension comes dangerously close to institutionalizing permanent stagnation, which suggests that the development of industrial-technological civilization carries within itself the seeds of its own existential risk.

And we must not fail to see the central role of procedural rationality in industrial-technological civilization. In Capitalism and Human Rights I argued that the rule of law essential to the emergence of industrial capitalism was subsequently exapted by human rights advocates, and since a rigorous conception of property rights, rigorously observed, is a necessary condition of the development of industrialized capitalism, once these rigorous legal institutions began to be applied to human rights such claims could not be readily denied without calling into question the same property rights that made that civilization possible.

Thus we already have a reference in which industrial-technological civilization has been forced by its own institutions to accept principles that could be said to compromise the unconditioned pursuit of industrial capitalism. It is, then, not unprecedented to speculate that these same rigorous legal institutions of industrial-technological civilization may force that civilization into strangling itself with regulations and legislation that is feels compelled to observe even at the expense of its continued vitality. Indeed, in so far as the first signs of stagnation are social ossification and a de facto feudalism within industrial society, we can see that this growing legalism is perfectly consistent with the view that crony capitalism may be the mature form of industrial-technological civilization.

While this is not a happy prospect for me, the good news here is that, in so far as permanent stagnation is an existential risk of industrial-technological civilization, if we can understand the structures that generate this risk, we can employ our knowledge in the mitigation of that risk.

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Saturday


Yesterday in Marxist Eschatology I wrote:

Marx is the greatest exemplar of a perennial tradition of human thought that has been with us from the beginning and which will be with us as long as civilization and human life endures. This tradition wasn’t always called Marxism, and it won’t always be called Marxism, but the perennial tendency will remain. There will always be individuals who are attracted to the perennial idea that Marx represents, and as of the present time Marx remains the most powerful advocate of these ideas.

While on my other blog in Marx and Fukuyama I wrote:

With Marx, we can identify a “bend in the road” of history at which point Marx might be proved right or wrong. For some people — wrongly to my mind — this point was identified as the end of the Cold War. To my mind, it is the full industrialization of the world’s economy. Thus Marx’s thesis has the virtue of falsification.

This calls for a little clarification, since if interpreted uncharitably it might be found contradictory for Marxism to be a perennial idea and to be falsifiable, since what distinguishes a perennial idea is that it is not falsifiable — at least, not in a robust sense of falsification.

Karl Popper was the philosopher who formulated falsifiability as a criterion of scientificity (I’m not certain he was the first, be he has definitely been the most influential in advancing the idea of falsifiability, especially in contradistinction to the logical positivist emphasis on the verifiability criterion), and he discussed Marx at some length. Here’s nice summary from one of Popper’s later works:

“As I pointed out in my Open Society, one may regard Marx’s theory as refuted by events that occurred during the Russian Revolution. According to Marx the revolutionary changes start at the bottom, as it were: means of production change first, then social conditions of production, then political power, and ultimately ideological beliefs, which change last. But in the Russian Revolution the political power changed first, and then the ideology (Dictatorship plus Electrification) began to change the social conditions and the means of production from the top. The reinterpretation of Marx’s theory of revolution to evade this falsification immunized it against further attacks, transforming it into the vulgar-Marxist (or socioanalytic) theory which tells us that the ‘economic motive’ and the class struggle pervade social life.”

Karl Popper, Unended Quest, “Early Studies,” p. 45

I should point out that I agree with Popper’s arguments, and that Marxism construed in the narrow sense that Popper construed it was falsified by the events of the Russian Revolution. Lenin’s “weakest link of capitalism” theory was instrumental in the reinterpretation of Marxism that Popper mentioned. Beyond Lenin, Mao made even more radical changes by shifting the focus from the industrial proletariat to the agricultural peasant. It is a testament to the extent to which the twentieth century was not fully industrialized that it was Maoism rather than Marxism or Leninism that was the form of communism that reached the masses during the last century.

However, I think that there is a species of Marxism that lies between Popper’s narrowly conceived Marxism and the vulgar Marxism reinterpreted in the light of apparent falsification, and this is a Marxism that has been generalized beyond the historically specific conditions of the Russian Revolution, and even beyond the Cold War, which had almost nothing to do with democracy or communism and almost everything to do with national rivalry and the great game of power politics.

I have called a generalized Marxism a species of Marxism, and herein lies to clue to the distinction between Marxism and a perennial idea in the strict sense. Marxism (of one variety or another) is a species that falls under the genera of collectivist political thought. The latter — collectivist political thought — is a perennial idea, and lies beyond falsification. It is neither true nor false, but an ongoing influence, just like its implied contrary, which is individualist political thought. Individualism also lies beyond falsification, and is neither true nor false but remains an ongoing influence in human affairs.

Most forms of capitalism are individualist in orientation, though not all: oligarchical capitalist societies (like medieval Venice) had little to do with individualism. Thus a generalization of capitalism does not always lead to individualism. A generalization of capitalism, depending on its subtle differences in tone of market activity from one society to another, may lead to individualism, but it may also lead to a profoundly hierarchical crony capitalism, or to some other socio-economic formation.

Speaking generally for ideas, and not just communism and capitalism, and indeed not just political and economic ideas but all ideas, the generalization of an historically situated and therefore specific idea usually leads to a perennial idea if the generalization is sufficiently radical. The generalization of capitalism may or may not lead to individualism, but it will eventually lead to some perennial idea which lies beyond falsification, whether that idea is patriarchalism or something else. The generalization of Marxism, I think, leads more directly to a perennial form of collectivist thought, which at its greatest reach of generality is scarcely distinguishable from a vague sentimental connection to others.

The species of Marxism that I have posited — midway between Marxism narrowly conceived and Marxism generalized to the point of a vague feeling of cooperative common cause — is falsifiable, but it is not falsifiable by experiment. It is only falsifiable by history. It shares this property with other theses in the philosophy of history. This is one of the fundamental distinctions between the natural sciences and at least some of the historical sciences: theses in some of the historical sciences are falsifiable, but they are not falsifiable on demand. One can only wait and see if they are eventually falsified. With the passage of time the inductive evidence of an unfalsifiable thesis in the philosophy of history increases, but is never confirmed. Thus the philosophy of history, contrary to most expectations, is the most science-like of the branches of philosophy.

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Globalization and Marxism

7 December 2008


Redeeming a promissory note

In Yesterday’s Marxism Lite I quoted the eminent Marxist historian Eric Hobsbawm from a BBC radio interview as follows: “Globalisation, which is implicit in capitalism, not only destroys the heritage and tradition but it is incredibly unstable, it operates through a series of crises, and I think this has been recognised to be the end of this particular era,” ( “Marx popular amid credit crunch” 20 October 2008).

Eric Hobsbawm

Eric Hobsbawm

I remarked in a note that this quote deserves a fuller exposition, so now it is time to redeem in gold the promissory note. And although I can’t do justice to all that is implied in this single sentence, I can at least make some remarks, perhaps redeeming the note in silver if not gold.

Sentimental forms of exploitation

Hobsbawm mentions the destruction of heritage and tradition wrought by globalization, and this has been a perennial theme of Marxism. In one of the many famous passages from the Communist Manifesto, Marx writes:

“The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound man to his ‘natural superiors’, and has left remaining no other nexus between man and man than naked self-interest, than callous ‘cash payment’. It has drowned the most heavenly ecstasies of religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. It has resolved personal worth into exchange value, and in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom – Free Trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation. ”

One doesn’t ordinarily think of Marx as a sentimentalist, but here Marx sounds as though he prefers the “feudal, patriarchal, idyllic” relations of the pre-industrial past to “callous cash payment”, and that exploitation veiled by religious and political illusions is a better thing than exploitation that is “naked, shameless, direct, brutal.” While this would be a good place for a digression on Freud concerning the future of such illusions, we will leave this for another time (another promissory note to redeem). Of all people, Marx sounds closest to Edmund Burke in this passage, even down to the metaphor of nakedness and the implied comfort of illusions; perhaps the resemblance is intentional, an allusion, as Marx had no doubt read Burke. But one would scarcely be more surprised to find Marx quoting Joseph de Maistre.

Edmund Burke and Karl Marx tête-à-tête in prose

Edmund Burke and Karl Marx tête-à-tête in prose

Edmund Burke, in his Reflections in the Revolution in France, similarly expressed himself on sentimental forms of exploitation thus:

“All the pleasing illusions which made power gentle and obedience liberal, which harmonized the different shades of life, and which, by a bland assimilation, incorporated into politics the sentiments which beautify and soften private society, are to be dissolved by this new conquering empire of light and reason. All the decent drapery of life is to be rudely torn off. All the super-added ideas, furnished from the wardrobe of a moral imagination, which the heart owns and the understanding ratifies as necessary to cover the defects of our naked, shivering nature, and to raise it to dignity in our own estimation, are to be exploded as a ridiculous, absurd, and antiquated fashion.”

One can immediately perceive the parallelism of this from Burke with the above quoted passage from the Communist Manifesto; not only the references, but even the rhythm and cadence, are similar. This sentimental side of Marxism, apparently tolerant of feudal exploitation so long as it is modestly draped in moral rhetoric, illustrates the lengths to which Marx (and his followers) will go to make a point, but it is a mere distraction from the more significant content of Hobsbawm’s above quote.

The development of the heretofore undeveloped world

For much of the twentieth century the political left engaged in ostentatious hand-wringing over the conditions in poor countries around the world. This hand-wringing was best exemplified in dependency theory, which held that poor countries were being “underdeveloped” (instead of simply being “developed”) as part of a nefarious capitalist scheme to keep them poor. Now, some of these countries are no longer poor; certainly, many are no longer as poor as they once were. Countries like India and China have begun to industrialize, and their industrialization is changing conceptions of economic development, international relations, and indeed civilization itself.

Globalization is nothing but the long-awaited development of the undeveloped and underdeveloped world. That globalization is attended by much lamentation and gnashing of teeth in both the developed and in the un- and underdeveloped world is in itself a demonstration that globalization is no respecter of persons and is as blind as justice. The peoples of the developed world complain that jobs are being “exported” to the industrializing nation-states, while the peoples of industrializing nation-states complain about the conditions of industrialization, notwithstanding the fact that industrialization in the twenty-first century is a very different beast than industrialization in the nineteenth century.

If any political entity not affiliated with the left attempted to obstruct globalization, they would be accused of attempting to keep poor countries poor, just as when any political entity in the US points out the counter-productive character of attempting to protect politically visible jobs (by singling out particular industries for protection) such an entity can expect to be pilloried by those claiming to speak on behalf of workers.

Industrialization before revolution

Many are the economists and political theorists who have rightly observed that Marx maintained that industrialization was a necessary preliminary to communist revolution. Marx himself was lukewarm about the enthusiastic Russian reception of Das Kapital, because Russia, being not yet industrialized and lacking an industrial proletariat, was not primed for revolution like heavily industrialized Western Europe. Lenin made some revisions to Marx and attempted to legitimize revolution in Russia from a Marxist theoretical perspective. Mao later went much farther, and made the obviously non-industrialized Chinese peasant the basis of his revolutionary movement. If Marx was right, and we can take him at his word, the communist revolutions in Russia and China were premature revolutions, and had Marx seen them he might well have predicted their failure.

If, as I have stated above, globalization is nothing other than the extension of the industrial revolution to regions of the world previously untouched by it, and if Marx was right that communist revolution must emerge from the industrialized armies created by the factory system, then globalization must precede any genuine communist revolution. Hobsbawm said that globalization is implicit in capitalism, but he might just as well have said that globalization is implicit in Marxism. In other words, Marx may yet be right, and he may yet be proved right at some distant point in the future, but the conditions under which Marx might be proved right (or wrong) have simply not yet obtained.

Marxism and its experimentum crucis

It is easy to imagine a point in time when all the world is industrialized, and Africa has followed in the footsteps of Asia’s present capitalist development (and, in a sufficiently warm world, Antarctica as well). At such a point in history, the world entire would be ripe for revolution, as financial crises today that are limited to the industrialized and developed world would at that time involve the whole world. When industrialization is world-wide, the mechanisms employed today to stabilize developed economies may no longer function and we could yet see escalating crises of the kind predicted by Marx. But this has not yet happened; it cannot happen until the entire world has industrialized, and the process by which the world is industrialized is globalization.

Globalization is thus a precondition of a sufficiently catastrophic crisis that a communist revolution could unfold as predicted by Marx. After the initial industrialization of western Europe, followed shortly thereafter by the industrialization of North America and Japan, it seemed that the rest of Eurasia and Africa would follow in sequence. But industrialization stalled; while some industries were established in Asia and Africa, society was not transformed by an industrial revolution, and industry after the model of Europe remained economically marginal throughout much of the world. Near the end of the twentieth century, when China began to industrialize in earnest, it seemed again as though the rest of the world would follow in sequence, and this may yet happen, but it is too soon to judge.

So, Marx may yet be proved right. But there is a twist. Depending upon the direction that history takes, Marx’s theories may never be tested properly because the conditions under which they could be tested may never obtain. Firstly, and most obviously, if the world never fully industrializes, the conditions under which communist revolution ought to take place will never obtain; hence, Marx’s theory can never be exposed to its experimentum crucis. Secondly, by the time the developing world industrializes, those economies that were initially transformed by industrial revolutions may have already transitioned to post-industrial economies (e.g., information societies), so that the economic and industrial infrastructure of the world remains uneven and global economic crises do not play out as they would under globally uniform economic and industrial infrastructure. Thirdly, and (in my view) more interestingly, if human civilization establishes itself off the surface of the earth, and industrialization has the indefinite extent of known space into which to expand, the potential infinity of the human future will defy any “complete” industrialization, and hence, again, the conditions needed to test Marx’s theory the way he himself interpreted it may never obtain. An “open” future can never converge on an historical totality of industrialization, therefore the conditions under which communist revolution can take place and be successful would be pushed further and further into an indefinite future, never to be realized.

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Almost four years after writing the above, Eric Hobsbawm passed away on 01 October 2012 at the age of 95. He left an estate of nearly two million pounds.

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A New Bogey Man: Market Fundamentalism

The purveyors of economic ressentiment have introduced a novel term of abuse — market fundamentalism. We are to understand that the ills that have been with us since the dawn of civilization — poverty, war, exploitation, injustice, inter alia — so recently credited to globalization and other bogey men, are now to be laid at the door of market fundamentalism. Part of the abuse heaped upon market fundamentalism can be put to hardships following upon the business cycle in contraction (such criticism is muted during periods of expansion), part to perennial discontent on the political left, and part to the widespread belief in Europe that they have transcended the crude capitalism that brought them to their current enviable economic success.

If by market fundamentalism we mean an economic system in which market forces are allowed to function with a minimum of interference from government regulation and centralized economic planning, then the closer we approximate market fundamentalism, the more rapidly the market will be able to accommodate changed conditions, and the smoother the transition will be in times of dramatic economic change. This does not mean that a dramatic economic disruption can be smooth in an absolute sense, only that it will be less disruptive and less prolonged than if well-intentioned intervention prevents market forces from operating. The more vigorously we try to delay the market’s day of reckoning, the more brutal the reckoning will be when it arrives.

Marx Knew Better

If we attempt to fix industrial, commercial, and financial arrangements in a manner that reflects the economic reality of one particular moment in history, as soon as that moment passes the fixed arrangements cease to function and there is not only an economic reckoning, but a potentially disastrous reckoning on the part of a society that deluded itself into believing that it could define the terms of its own participation in History. Marx knew better. In The Eighteenth Brumaire of Louis Napoleon he wrote, “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past. The tradition of all dead generations weighs like a nightmare on the brains of the living.” (1852)

"History does nothing; it does not possess immense riches, it does not fight battles. It is men, real, living, who do all this." Hence the role of individual intiative and self-interest, thought Marx didn't see it this way.

Marx: "History does nothing; it does not possess immense riches, it does not fight battles. It is men, real, living, who do all this." Hence the role of individual initiative and self-interest, thought Marx didn't see it this way.

The attempt to regulate our way out of market adjustments to prevailing conditions will foster precisely the catastrophic economic crises that Marx predicted, and if the response to such crises is more regulation, the severity of these crises will increase and perhaps even lead to a generalized economic crisis. Moreover, the institutions that manage financial crises on behalf of nation-states (or, at least, which attempt to manage financial crises) must be counted along with the industries they regulate as part of the economic system (not least due to regulatory capture). They, too, must be allowed to fail. If they are ineffective, they will be swept away as certainly as a failing industry.

Time and Tide

Time and tide, we are told, wait for no man. The business cycle is a tide, and it is no respecter to persons or nations but ebbs and floods according to market forces. Marx thought he could prove that the crises of industrialization that follow from the business cycle would increase in severity until the system of capitalism destroyed itself and was superseded by communism. Marx’s vision was somewhat myopic in this respect. Compared to the Great Depression of the first half of the twentieth century and the Great Inflation of the second half of the twentieth century, our financial crises are, in general, less severe than those of the past. We have, quite simply, gotten better at managing the business cycle.

The business cycle is the concrete embodiment of what Schumpeter famously called creative destruction. The upswing of the business cycle is the creative phase; the downside of the business cycle is the destructive phase. Let us not mince our words: the destructive phase of creative destruction can be excruciatingly painful. Industries are destroyed, careers are ruined, families suffer and individuals are reduced to despair.

Machiavelli Knew Better

The ugly truth of capitalism is that obsolete and decrepit industries must be ruined, and the uglier truth is that all who invested in or are employed by doomed industries will be ruined along with them. From the ashes of the ruins will rise the Phoenix of a transmogrified economy, but those who have been ruined will not be able to derive much hope or enjoyment from the perspective of their drastically reduced circumstances. This rude awakening to what the market can do if it turns against you is perhaps more than many can bear. Machiavelli claimed that a man would sooner forgive the execution of his father than the loss of his patrimony.

"...when it is necessary for a prince to proceed against the life of someone, he must do it on proper justification and for manifest cause, but above all things he must keep his hands off the property of others, because men more quickly forget the death of their father than the loss of their patrimony." The Prince, Chap. XVII

"...when it is necessary for a prince to proceed against the life of someone, he must do it on proper justification and for manifest cause, but above all things he must keep his hands off the property of others, because men more quickly forget the death of their father than the loss of their patrimony." The Prince, Chap. XVII

Most advanced industrialized economies have a social welfare net, the intention of which is to catch those who have been ruined and to save them from the most abject poverty. This, however, is cold comfort to those who have once experienced affluence. To be saved from starvation and homelessness is a profoundly humiliating experience to those who have been more accustomed to handing out charity rather than receiving it.

We might call these sad souls financial exiles, as their condition is analogous to the ancient punishment of exile, the poignancy of which Ovid so eloquently attested. Financial exiles retain their lives, their families, their citizenship, and a few tokens of their former affluent lives, but they have come down in the world abruptly, and are unlikely to again enjoy the considerable rewards of financial success.

Dreams of a Post-Industrial Twilight

If it were the case that all the political entities in the world could unanimously agree to desist from the ruthless ways of capitalism, and the great globe of the earth could be handed over whole to collectivist cooperation, the entire internationalism system could quietly allow itself to slip into a long, post-industrial twilight, in which each sector of society gets to keep the privileges and standards of living of the immediately previous generation by preserving the economic arrangements of that generation in the economic equivalent of a glass case, like a museum piece. However, we already know this not to be the case.

Whatever the absurdities of collectivist rhetoric that may come from the leaders of Russia and China, it is evident to the most cursory examination that these are nation-states bent upon economic dominance at any cost. Capitalism, by any other name, is just as ruthless. Whether the currency of competition is technology, natural resources, armaments, population, or any other measure by which one state can gain an advantage over another, we can be certain that other nations will pursue these advantages to the best of their abilities. As a result of historical accident, the West currently retains economic and technological advantages that can keep it from being swept aside by other powers, but this dominance could be forfeited in a single generation so that the historical accidents of our time could efface those of earlier times.

As Husserl noted in another context, though not a necessarily unrelated context, “The Dream is over.”

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“Après moi le déluge.”

Edmund Husserl: "The dream is over." In other words: “Après moi le déluge.”

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