So what about the tides hat shape history?

18 July 2011

They say there are longer term business cycles, called Kondratiev waves , Interesting idea.

Well, I don’t know much about business, there seem to be longer term cycles in politics too. From the 1940’s to the 1970’s there has been a period defined by major commonalities in the policies of the leading countries in the Western world; this approach has different names in different countries: New Deal in the US / Social democratic consensus in GB / Soziale Marktwirtschaft in DE (yes, and I don’t know French ;-).

Whatever it’s name, the policy ended with a ten year economic malaise that was to a large part brought about by these same policies. I remember this little book Capitalism for beginners where the conflicts where explained in great depth and beauty as a an illustrated comic book.

From the 1980s to 00’s, for roughly thirty years, there has been another period of common approaches; this started by a the congruential policies of Ronald Reagan and Margaret Thatcher; again it is known as Reaganomics / Thatcherism / Laissez-fair capitalism . Whatever it all ended in a large bust, also brought about by the effect of same policies; Deregulated banks and rating agencies brought it about; globalization/global reach of finance created vast financial empires that are now ‘too big to fail’, whatever these non-state entities do, it all affects us profoundly; Please note also a marked shift of focus from the nation state to non-state financial empires and super national constructs such as the European Union, all this becomes apparent as the crisis unfolds.

It’s not exact to say that globalization created financial institutions that are ‘too big to fail’; More correct is that the liberated financial institutions enabled an expansion of businesses into foreign domains; it also financed the internet bubble of the late 90ies, which as a valuable by-product created a global communication network, the internet, this alone was an invaluable aid to globalization. Expanded businesses were then feeding back the banks; So this feedback loop created huge financial empires.

Globalization and huge banks go together; huge trade operations have to be insured, well any transaction has to be insured in some way, (See Trade Credit Insurance ) So huge insurance agencies are created and are backed by even larger banks.

What will come next?

Should one now expect a major paradigm shift that would have a lasting effect for the coming 30 year period ? Next time it can’t be a return to previous social democratic system, for the major economies have accumulated vast amounts of debt and cannot tolerate large new expenditures. It can’t be just a continuation of the previous laissez-fair approaches, globalization/global reach of finance created vast financial empires that are now ‘too big to fail’, all large scale operations do screw up occasionally; of course screw ups can happen either by accident or by design. In either event these huge financial empires would have to be bailed out periodically, as it stands now, society will not tolerate periodic rescue missions that entail nationalization of losses, while expecting profits to remain privatized.

What comes now now are speculations on possible policy changes, what directions can be considered.

Is there a possibility to scale back/downsize globalization? After all, without it there could be no huge financial empires, those empires would have to forgo a process of shrinking back. It would be difficult for nations to re-impose trade barriers though; the modern production process is probably too complicated for a medium sized nation state to handle on its own (Well with the exception of North Korea); However both US and EU may tighten up it’s boarders and China can turn inwards. Could such a major change be brought about without violent conflicts? The last downsizing of globalization occurred as a result of World War I.

Maybe change will be brought about by the players themselves; For example China might seek to divest from US sovereign debt for example, the technocrats in charge of China might seek to compartmentalize operations, a huge ship divided into compartments runs a lower risk of sinking; A modern downsizing of globalization might also bring about a fragmentation of the Internet; (i would hate that); the dismantling of the global internet may also come about as a result of cyber weapons, sort of a preemptive defense against stuxnet and its friends.

One tiny model for de-globalization might be the story of Iceland; Before the recession, Iceland was a banking sector that had a nation; the banks where much larger than the national economy; now three years later the economy of Iceland is doing fine; unlike other nations, they did not bail out the banks; they just couldn’t do that, given that the banks where much larger than the national economy, this act evoked the wrath of other nations; Anti-terrorism laws where invoked to seize Icelandic bank assets in GB . This very hostile BBC interview on HARDtalk tries to rip apart the valiant Icelandic finance minister Steingrimur Sigfusson

However a major economic decoupling between the power blocks runs the increased risk of political tensions and conflict between the large power blocks. What about stability during the last global standoff, the Cold War? Depending on the assessment of this issue one will see this as a good/bad/terrible scenario.

So we might stay with globalization, all with the aim to maintain Peace on Earth / Peace between the power blocks. Maybe financial empires will not be touched, and they will still require periodical bailouts of epic proportions; this of course runs the risk of disturbing internal peace. So this analysis exposes an interesting conflict between maintaining an intertwined global economy on the one hand and maintaining internal stability / social peace on the other hand. One possible approach is to scale back the standard of living in the western world, all in order to get the means of financing the big project; this can be justified by the need to care for the environment; after all all the planet can’t sustain it all, can’t it? Of course a strengthening of the police and security forces brought about by the war on terror also helps with maintaining the peace; Under this scenario the world would look more like the Austro-Hungarian empire before the Great War; conservative politics and a lots of internal tensions would create an atmosphere of a kettle that is about to burst; so maybe ubiquitous surveillance with CCTV cameras is the message for the next thirty years.

The ‘soul searching’ for a new modus vivendi usually lasts for a decade; so it is still too early to say which way will be chosen; maybe even a combination of both; For example the Euro fails, then there will be local down scaling within Europe, while the US may choose to muddle along (if it stays out of the falling debris).

Further reasons for hope and despair

However, there might come technological innovations that bring about a change in the equations; In a larger sense this seems to be strongest argument of the optimists.

Of course Capitalism has been the system that encourages innovation in the strongest form; this system has hosted the most number of innovations and thankfully, this system has therefore prevailed so far.

Now during the 70ies some analyst where projecting a process of convergence between the systems of modern Capitalism on the one hand, and State Capitalism of the USSR on the other hand; if these guys do have a point then such a convergence would pose a considerable threat to the continued success of Capitalism as such. A requirement for periodical bail outs can be seen as a move towards State Capitalism; State Capitalism is a very coercive system; every initiative has to originate strictly from top top down; and as such this system does not favor innovation too much.

I hope it will not get that far; there is still too much competition inherent in the system; If one takes for example the high-tech sector; then this industry has seen several waves of consolidation; each period has had its succession of champions - IBM/Microsoft/Google; on each occasion no player was strong enough to dominate the industry completely. Maybe this was due to external pressure though; in the 70ies and early 80ies IBM was subject to a serious anti-trust challenge, so maybe fear motivated them not to deal with PC software too much, all on purpose; in the late 90ies Microsoft was subject to a serious anti-trust investigation, so maybe they did not bother with search engines / online advertising / online retail - again on purpose; very hard to say what is real here and what is not so real, after all its all just software; empires in the sand.