Like a business cycle, only bigger

In response to Late-stage capitalism --

In the opening paragraph, Lorraine acknowledges (1) "the consequences of profligate state spending" and (2) "recession" as a likely consequence of cuts to that spending. An excellent opening: both sides of the government-spending issue are presented and Lorraine responds as the world has to that issue, going with its gut and resolving nothing. We could go back to LBJ in the mid-1960s for "guns and butter" spending -- which has always been blamed for starting the "Great Inflation" of the 1965-1984 period -- and to the series of recessions, ending with the 1982-83 recession, which has always been given credit for ending that inflation; but the government-spending issue has never been finally resolved and put to bed.

And yet, if "profligate state spending" is not the root problem, then the world's endless discussion of it is an attempt to solve a consequence of the root problem, and it can only fail. I would argue that this is exactly what has happened. 

It may be off-topic for this post, but I identify the root problem as excessive private-sector debt, the cause of which is misguided economic policy that always encourages the growth of finance and always fails to consider the growing cost of it.

 

The Cycle of Civilization

To the subject at hand: the cycle of civilization. Lorraine observes that the cycle I mention would last "perhaps a whole millennium", and that I seem to be saying "that the end of capitalism will be the beginning of another Dark Ages." 

For a successful civilization, "a whole millennium" would be a surprisingly brief duration, I think. Toynbee, in A Study of History (the abridged version), figured it was something like 6000 years "which bridges the interval between the emergence of the earliest known civilizations and our own day". 

Toynbee added: "Now, in surveying the relations of civilizations in time, the highest number of successive generations that we have met with in any case is three".

I take 6000 years, divide by 3 generations, and figure 2000 years as a useful rough idea of the length of life of a single civilization.

His "successive generations" idea fascinates me. In Toynbee's words, "... our Western Society [is] related to the Hellenic Society in a manner comparable (to use a convenient though imperfect simile) with the relationship of a child to its parent." To dumb it down to my level, Western civilization was offspring of the ancient Greek and Roman ("Hellenic") civilization, and Hellenic was offspring of the Minoan. Thus, three generations.

There are dark ages between civilizations, by the way.

//

Carroll Quigley, in his book The Evolution of Civilizations, page 84 (or page 82 of 425 in the PDF reader) provides a list of civilizations and their varying durations. Quigley has the Egyptian and Mesopotamian civilizations lasting more than 5000 years, the Hittite around 900 years, the Islamic and Chinese around 1400 years. His dates show that my "2000 years" is quite ridiculous; I'm fine with that.

Quigley also warned that we should be cautious when putting dates on civilizations (page 124 of 425 in the PDF reader): "... civilizations come into existence, rise and flourish, and go out of existence by a slow process which covers decades or even centuries, and historians are unable to agree on any precise dates for these events. This is perfectly proper...  In the following discussion it should be remembered that the dates given for historical periods are only approximate." 

I'm fine with that, too.

 

Capitalism

I see capitalism as a stage of economic development within the economic cycle that I call the cycle of civilization. Because I happen to live in capitalist times, I see capitalism as the "peak" of the cycle. This means that I must see both a rise to the peak (good capitalism) and a decline from the peak (bad capitalism). I do -- but I am not the only one who does.

I refer next to James R. Crotty's 1990 paper "Keynes on the Stages of Development of the Capitalist Economy: The Institutional Foundation of Keynes's Methodology" (I no longer have a working link).

Crotty says on page 5: "Keynes clearly distinguished two historical stages of capitalist development: pre-World War I or "nineteenth-century" capitalism (which I label Stage One), and post-World War I or modern or twentieth-century capitalism (which I label Stage Two)."

Crotty's "Stage One" is an exact match to Werner Sombart's "heyday of capitalism ... from 1800 to the first World War" as described at Wikipedia. (Sombart is one of the "cyclical history buffs" Lorraine mentions.)

Crotty's Keynes identifies the same stages that I identify in my response to Lorraine, where I said "'early' capitalism is the 'rise to the peak' and 'late' capitalism is the 'decline from the peak'". I take no credit for any of this, by the way; I'm just trying to fit puzzle pieces together.

 

Early, Late, and then what?

My notes here are largely in response to Lorraine noticing that I seem to be saying that "the end of capitalism will be the beginning of another Dark Ages." I do seem to be saying that, yes. But it is not what I intended to say.

In my response I did say "'early' capitalism is the 'rise to the peak' and 'late' capitalism is the 'decline from the peak' which leads to the end of civilization and a 'dark age'."

And in mine of 30 October 2022 I did say "'late' capitalism necessarily implies we are approaching the end of capitalism... After capitalism comes the decline and fall." Ouch! In this shortened version, Lorraine's "the end of capitalism will be the beginning of another Dark Ages" is exactly what I said. Sorry for creating confusion. I was trying to be brief. I guess I was too brief!

Let me soften something I said in the earlier response, and add to it: I might suggest as a metaphorical version of history, that the whole "Republic" (509 BC legendary - 27 BC) period of ancient Rome (after the Monarchy (753 BC legendary - 509 BC legendary) and before the Empire) was late-stage capitalism. 

After the Republic came the Empire (27 BC-AD 476, or about 500 years) which lasted quite a while. And the Dark Age started around the time of the Empire's demise in AD 476.

By my simplistic metaphor, the Roman Monarchy is "early" (good) capitalism, the Roman Republic is "late" (bad) capitalism, the Roman Empire was probably "worse" capitalism (or capitalism becoming something else; dunno), and after the Empire came the Dark Age. There could be quite some time between late capitalism and the Dark Age.

 

Anti-Trust

In her "Late-stage capitalism" discussion, Lorraine wonders "Is there a possibility of forestalling late capitalism and the subsequent Dark Age by getting aggressive on antitrust legislation or adjudication?"

Short answer: If merger and acquisition (M&A) was the root problem, then yes; but "a possibility" will in no way suffice.

Long answer: Antitrust is not an area of the economy that I focus on, so I have no links or quotes to offer; but I have read more than once that antitrust actions were much less favorable to mergers and acquisitions before Reagan, and are much more favorable to M&A since Reagan. Even if this is true, before Reagan the merging and acquiring share of total US business was growing relative to the total. It's not like M&A was prevented before Reagan. It was only slower. (I don't have data of this, but I am pretty sure what I say here is correct.)

Pondering the decline and fall of Rome, Vladimir Simkhovitch gathers his evidence from the writings passed down to us from ancient Rome. "The testimony of the eyewitnesses", he calls it. There was some decline in agricultural output, and thus some decline of income. But Rome was an agricultural society, so the decline of income was widespread. People were taking on debt to get by, thinking the next year would be better.

But as Simkhovitch lays it out, the gradual decline of agricultural output was due to gradual exhaustion of the soil. So things could not get better. They could only get worse. And indeed, things progressed to the point where "labor could not support life".

Simkhovitch describes the problem: "The increasing weight of accumulated interest on the loan and the decreasing productivity of the land seal the fate of the landowner."

Destitute farmers would sell their land, move to Rome, and live on the free grain the Emperor was distributing. More prosperous Romans would buy up the land and merge it into their holdings.

Simkhovitch writes: "In this way a farmer will be driven off the land and the holdings of some one else increased. That is the process of concentration of landed property. If this process should appear as a general phenomenon, as it did in Rome as well as in Greece, it is a factor of momentous social significance."

I come now to the point: Today's global corporations are the Roman latifundia of our time. Oh, and by the way: You don't need exhaustion of the soil to create insurmountable debt problems for the economy. It can be done with a simple commitment to a little bad policy.

Simkhovitch continues: "The entire history of Rome is but a series of illustrations of this story. Steady is the legislation against interest and drastic are the measures against the money lenders, but unchecked is the concentration of landed property even in spite of social resolutions and social wars."

Again: Steady is the legislation against interest and drastic are the measures against the money lenders, but unchecked is the concentration of landed property.

Simkhovitch doesn't say it, so I must: The legislation against interest, and the drastic measures against money lenders, were evidently not the correct policies. That legislation and those measures addressed consequences of the problem, rather than the root problem itself. 

If, as Simkhovitch suggests, the root problem was exhaustion of the soil, then to stop the concentration of landed property it would have been necessary to make better farmland management part of economic policy. If you just leave it to people that can't afford to do it, it won't get done.

In ancient Rome, land was wealth. Those who could afford to do so purchased land. The result was latifundia, the gigantic estates. In our time, a successful business is wealth. I simplify, but those who can afford to do so buy up successful businesses. The results are the growing dominance of merger and acquisition, and the gigantic conglomerates.

Legislation against interest and moneylenders was not successful against the rise of latifundia. Clearly, it was the wrong policy.

Antitrust legislation, even with favorable adjudication before Reagan, did not halt the process of merger and acquisition. As Annie Lowrey described Ernest Mandel's view in mine of 30 October: "'late capitalism' denoted the economic period that started with the end of World War II and ended in the early 1970s, a time that saw the rise of multinational corporations..."

Most of the grunt work of merger and acquisition was already done before 1980. More of the same sort of ineffective policy, today, is unlikely to prevent additional mergers and acquisitions. It might help a little, yes. But applying policy that undermines the driving force behind M&A would be far more effective.

"The engine which drives Enterprise," Keynes wrote, "is not thrift but Profit." If mergers and acquisitions are unstoppable, it is because they are profitable. The key word here is profit. If you spend a dollar producing your product, and you sell the product for $1.05, the five cents is your profit. Your five cent profit is subject to the business income tax. The balance of your $1.05 income, the dollar, is your recovered capital, and you do not pay business income tax on recovered capital. (I'm not an account or a tax guy, but this is my understanding of how the business income tax works.)

The more capital you can keep cycling through your business, the more income you do not pay tax on. If I can only spend a dollar in my business and you can spend $10 of yours, you have a bigger tax advantage than I do. If you are the size of a multinational corporation, you have a far bigger tax advantage than I do.

Suppose there are two good-sized, independent companies that pay the business income tax. If one of them buys the other, it will henceforth write off all of the revenue that the two, combined, wrote off previously. The bigger the business, the bigger the tax advantage.

Note, however, that the bigger guy only gets the bigger tax advantage because THAT IS HOW THE BUSINESS INCOME TAX IS SET UP. Change the tax code, and you change everything. Change the tax code, and you can remove the tax advantage that makes M&A so appealing to business people.

Hey, I'm not a tax guy. What do I know. But if mergers and acquisitions were not profitable, they wouldn't be so common. 

Check this out.

Conclusion

Lorraine asks: "Is there a possibility of forestalling late capitalism and the subsequent Dark Age by getting aggressive on antitrust legislation or adjudication?"

Suppose instead we ask a different question: "Is there a possibility of forestalling late capitalism and the subsequent Dark Age by other means?

Yes. Most definitely yes. First, however, we must discover the root problem that is the source of our economic troubles. But perhaps you don't agree that there is only one such source. 

I can identify many, many economic problems of our time as consequences not of excessive government, but of excessive finance and excessive private sector debt. All my eggs are in that basket. If excessive finance is not the root cause of all our economic problems, it is surely the root cause of many of them. And my money says most of the rest are consequences of the consequences of excessive finance.

For now, I'll leave it at that.