Why economists must think in terms of the cycle of civilization

I've been hearing the phrase "late capitalism" for so long that I'm forced to conclude that the very concept of late capitalism is nothing but wishful thinking.

- Lorraine

I never heard the phrase myself, so I looked it up. In an article that relies not at all on economic thought or analysis (it is more of a social commentary), quoting one of her sources, Annie Lowrey at The Atlantic wrote:

‘Late capitalism’ necessarily says, ‘This is a stage we’re going to come out of at some point ... It hints at a sort of optimism amongst a post-Bernie left, the young left online.

I agree that "late" capitalism necessarily implies we are approaching the end of capitalism. Lorraine seems to see that ending as a source of optimism. I don't, because I interpret economic society in the context of a cycle of civilization. After capitalism comes the decline and fall. There is no cause for optimism.

Late capitalism is by itself evidence of the decline.

Lowrey writes:

“Late capitalism,” in its current usage, is a catchall phrase for the indignities and absurdities of our contemporary economy...

In its current usage, in other words, it is just another way to complain about today's world. (No economic thought or analysis, as I said.) But then Lowrey summarizes the history of the term. Below, I use almost exact quotes from the article, modified to suit the bullet-point format:

• A German economist named Werner Sombart seems to have been the first to use the term, around the turn of the 20th century
• A Marxist theorist and activist named Ernest Mandel popularized it a half-century later
• For Mandel, “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, mass communication, and international finance. 
• It was Duke University’s Fredric Jameson who introduced the phrase to a broader English-speaking audience of academics and theorists [in this 1984 paper]
  

Since then, it has become "a catchall phrase" people use when complaining about the economy. 

That's enough Annie Lowrey for me.

That isn't the only disappointing link Google turned up. Under "Late Stage Capitalism - Reddit" we read that r/LateStageCapitalism is "A One-Stop-Shop for Evidence of our Social, Moral and Ideological Rot." That is, a place for social, moral and ideological complaints, not economic thought.

Wikipedia offers a better (less giddy than Lowrey's) summary of Late capitalism. This is excellent:

The term "late capitalism" was first used by Werner Sombart in his magnum opus Der Moderne Kapitalismus, which was published from 1902 through 1927, and subsequent writings; Sombart divided capitalism into different stages: (1) proto-capitalist society from the early middle ages up to 1500 AD, (2) early capitalism in 1500–1800, (3) the heyday of capitalism (Hochkapitalismus) from 1800 to the first World War, and (4) late capitalism since then.

Excellent, because I've been working toward exactly that sort of analysis of civilization's cycles. Wikipedia's phrase "the early middle ages" is a reference to what was formerly (and innocently enough) called "the Dark Ages". It is the "interregnum" between civilizations. Sombart's analysis, like mine, starts in the dark age and describes the whole cycle of civilization as an economic cycle.

Sombart's "early capitalism" is generally called "mercantilism" in what I've read. His "heyday of capitalism" is a period of around 114 years that corresponds to Keynes's "greatest age of the inducement to investment". Keynes described it as "a period of almost one hundred and fifty years", a time when  interest rates were low enough to allow employment to be "not intolerably low". 

Sombart apparently held to a higher standard for the acceptable level of employment, as he includes fewer years than Keynes does. But Keynes and Sombart are describing the same phase of the cycle of civilization.

Elsewhere in the Wikipedia article:

In his work Late Capitalism, Mandel distinguished three periods in the development of the capitalist mode of production. 

• Freely competitive capitalist production, roughly from 1700 to 1870, through the growth of industrial capital in domestic markets
• The phase of monopoly capitalism, roughly from 1870 to 1940, is characterized by the imperialist competition for international markets, and the exploitation of colonial territories.
• The epoch of late capitalism emerging out of the Second World War, which has as its dominant features the multinational corporation, globalized markets and labor, mass consumption, and the space of liquid multinational flows of capital.

Now we're getting somewhere!

Note that Sombart's "heyday" begins about 70 years before the end of Mandel's "freely competitive" period of capitalist production. That puts the change from "freely competitive" to "monopoly capitalism" somewhere near the middle of the heyday years. This makes it easy to imagine the heyday stage in two phases: rise-to-peak during the "freely competitive" period, and decline-from-peak in the "monopoly capitalism" period. The puzzle pieces fit together perfectly. The puzzle begins to look like a cycle.

In my response to Lorraine I wrote:

If, as I think, the cycle of civilization is an economic cycle (like a massive business cycle), then "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".

Now I have Sombart and Mandel to back me up. And Keynes.

 

All good economists learn by observing the economy of their time. And the economy changes. For these reasons, older economic thought is always being replaced by more current thought. But economic history is too valuable to be forgotten.

For Sombart (1863-1941) late capitalism started with the first World War. For Mandel (1923-1995) it started with the second World War. If we forget Sombart's view and fully embrace Mandel's, we may come to believe there was nothing wrong with the economy before the 1940s. 

People might learn from Sombart that everything was fine before the first world war. People might learn from Mandel that everything was fine before the second world war. In this way we as a society would come to misunderstand our economic troubles, thinking our troubles have no roots in the past and no prior cause. Our economy would become the mess that it has become.

If things were not "fine" before the second world war, but we think they were, we are sure to misunderstand the problems of the post-WWII period. If we overlook just the changes, economic changes of prior times, we are sure to misunderstand the economic problems of our time. The cycle of civilization provides a context to help us understand our economy.

Don't these people think about what they are saying?

The news anchor says Princess Diana's children walked behind her coffin "after her death".

The ratio of Real GDP to Federal Debt

When economists want to compare the GDP of different years, they take out the changes that are due to inflation so they can see the real improvement in the economy's performance. (I know: some people say GDP is not a good measure of the economy's performance. Set that topic aside for some other day.)

When they remove the inflation from (or "deflate") GDP, they get what they call "Real GDP". (I don't like to see the word "real" used that way, but what can you do? I'm just trying to go with the flow and get to the  point!)

You have to be careful when you use Real GDP in a calculation. For example, it is not good arithmetic to add normal (inflating) numbers to deflated numbers, because that's apples and oranges.

It is not good arithmetic, either, to multiply or divide an inflating number by a deflated one, because combining the two types of numbers this way skews the result. For example, if we divide the quantity of money by Real GDP, the result is skewed upward by the inflation we leave in the money number. Shown on a graph, the apples-and-oranges result will appear strikingly similar to the path of inflation. That was the bad arithmetic Milton Friedman used for the "money relative to output" graphs in his books Money Mischief and Free to Choose. The artificial similarity shown in his graphs made them most convincing. But it was not good arithmetic.

Setting such concerns aside, today I am going to combine inflating and deflated numbers. I want to divide Real GDP by the Federal Debt. Real GDP is deflated; the Federal Debt is not. Dividing by an inflating number will skew the result downward. But before we get to that...

Everybody looks at Debt-to-GDP using numbers that are not adjusted to remove the inflation. That's fine, I have no problem with it. I am only pointing out that the ratio is often used and often discussed.

Some people look at federal debt relative to GDP. Others use nonfinancial debt (which includes business and consumer debt along with federal, state and local government debt) relative to GDP. They differ, but both have their uses.

Today I will use just the federal debt relative to GDP -- but I will turn the ratio upside down and look at GDP relative to the federal debt. And I will use the deflated version of GDP, Real GDP, as noted above. And thus we come to the part where I am doing bad arithmetic.

But is it bad arithmetic? I'm not sure. And even if it is bad, sometimes you can get away with it when it is for a good reason, as with Friedman. Let me tell you what I have in mind. I'm thinking of Real GDP as a measure of the economy's performance. That is what it's used for. That's what people object to when they object to GDP, saying It doesn't measure happiness.

But anyway, just for today, let's not call it "Real GDP". For today, let's call it "Economic Performance".

This is the logic that tells me the arithmetic may be acceptable: I want to look at economic performance relative to the federal debt: How well does the economy do, as the federal debt grows in size?  

The answer: Not well at all:

Graph #1: Economic Performance relative to the Federal Debt

The ratio peaks in 1941 and falls to 1946. After 1946, the ratio rises to a peak in 1966 (shown by the first blue dot). But that was soon after WWII, when "federal debt relative to GDP" was falling.

Graph #1 shows a gradual decline from 1966 to 1973 (the second blue dot), and then rapid decline to the early 1990s. There is slight increase in the latter 1990s, and then the decline resumes.

I never did find a statement from Minsky where he says the "golden age" ended in 1966 -- Steve Keen mentions "what Minsky described as the 'robust financial society' that underpinned the Golden Age that ended in 1966" -- but you can see it on the graph: the rising economic performance changes to falling economic performance at the 1966 peak.

The end of the golden age is more commonly dated at 1973. You can see this on the graph, too, as economic performance falls rapidly after 1973. In the immortal words of Scott Sumner:

I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

Sumner confirms the 1973 date. He also sees "America's amazing success since 1980". But then, he wasn't looking at Graph #1.

I'm tempted to say the ratio is unfair, not because Graph #1 combines deflated with inflating numbers, but because GDP starts off every year at zero, while debt starts off every year where it left off at the end of the year before. That sort of accounting would skew any graph showing a debt-to-GDP (or GDP-to-debt) ratio. The only way to avoid that skewing would be to have debt completely paid off, every year, so that debt also starts off every year at zero. But that would be a terribly unworkable constraint to impose on the economy.

We need better economic performance, but rapid increase in the federal debt has clearly not delivered. With the ratio rising in the 1950s and early '60s, and running then about 10 times as high as it has been in recent years, it is obvious that the increase of federal debt since 1974 has been extremely ineffective in boosting economic performance. And increasing the federal debt even faster would drive the Economic Performance ratio down even more!

Thus I say it cannot be that the solution to our economic troubles is to increase the federal debt even more rapidly than we have done and "accept whatever deficit may result." That cannot be the solution. It will not work. It has not worked. It can not work.

Consider the trend of federal debt growth during the years 1946 to 1974, the red line on the graph below:

Graph #2: Gross Federal Debt in Billions, and the 1946-1974 Trend

By the late '70s the federal debt was growing faster than the post-war trend. It has since raced ahead. Had it stayed on trend, by the year 2019 the federal debt would have been less than $2000 billion. But it didn't stay on trend, as the blue line shows, and by 2019 the federal debt was more than $22000 billion.

In 45 years, the federal debt increased more than tenfold above what it would have been had it stayed on trend.

That increase pushed the ratio down, as shown on Graph #1. NOTE CAREFULLY: I am not saying that the growth of federal debt "caused" a decline in economic performance and Real GDP growth. By the arithmetic, however, the rapid increase in federal debt forces the Economic Performance ratio down more and more. Call it bad arithmetic, if you like. But it is no coincidence that the rapid decline on Graph #1 begins in the mid-1970s. (H/T Milton Friedman)

Accelerating the growth of federal debt has not boosted Real GDP enough that the Economic Performance ratio suggests healthy or even normal performance. It would be fair to conclude that the under-performance of Real GDP is not due to insufficient increase in the federal debt. 

Some people attribute that under-performance to excessive increase in the federal debt, but my graph shows no evidence of it. My graph does not show that the rising federal debt caused Real GDP to under-perform. It only shows that the rising federal debt failed to prevent that under-performance.

Note, however, that we have been looking at Real GDP in relation to federal debt alone -- and that the federal debt has been the smaller half of debt since 1952. The bigger half is debt other than federal, and most of that is private-sector debt. Our debt. The graph and the ratio and the paragraphs above do not consider private debt. But we have to consider it.

Steve Keen says we need some kind of private-sector-debt forgiveness. That would work like magic, I think, to improve economic performance. But I also think the Federal Reserve has to stop allowing debt to grow more rapidly than the quantity of non-interest-bearing money. It has been Fed policy to allow (and to encourage) the growth of debt at a more rapid rate than the quantity of money, perhaps because they think increasing the quantity of money causes inflation but increasing the quantity of debt does not.

That, however, would be flawed logic on their part.

Four terms and an observation

The nonfinancial sector supplies us with goods and services.
The financial sector supplies us with money.
Debt is money on which we pay interest.
To the creditor, debt is interest-bearing money.

As more and more of our money becomes interest-bearing, those whose income arises from nonfinancial sources are more and more impoverished by financial cost.

What would the minimum wage be if it kept up with the highest quintile of income?

$13.30 as of 2021

based on a start-date of 1984, when the quintile data begins. 

Less of a difference than I expected to see.

Let's see if this one gets me into trouble

As I write this it is mid-October in an even-numbered year. Elections are weeks away. Yesterday, I saw Republican candidates heavily advertising their stand against crime. This morning one Democratic candidate advertised his support for gun control.

The Republican technique is to take a position on an issue: "crime". The Democratic technique is to take a position on one tiny fragment of that issue: "guns". Whose argument is stronger? It should be obvious: Everyone is against crime, but not everyone is against guns. The Republican argument has meat; the Democratic argument has none. Yet the Democrat seems to believe he is making a strong case. Why? Maybe the D thinks tougher gun laws will reduce crime. Maybe they will, I don't know; but gun laws are not the source of crime. This sad and declining economy of ours is the main source of crime.

On the economy, too, Republican arguments have more weight than Democratic arguments. The Republicans say "inflation" and, for better or worse, they don't have to say another word. The Democrats have excuses. 

Hey -- whichever party was in charge would be making excuses about the inflation, no doubt. But some excuses are better than others. Putin's war, the price of oil, the covid pandemic, the cost of the response to the pandemic, these can be strong arguments. Every Republican that got on TV would be using them all, and more, and all of them would be making the same argument -- if they held the reins. Democrats don't even try.

Here's how I see the problem: Republicans make strong economic arguments; Democrats make no economic arguments. Republicans always turn to economic principles when making their case. Among Democrats, both the candidates and the voters seem to avoid economics. As a result of these differences, Republicans are able to make arguments that are overly simplistic or outright wrong, and Democrats are still unable to respond effectively.

Republicans like economic solutions. It doesn't seem to matter to them that their arguments are from the early stages of capitalism when those arguments had some validity. Now, in the late stages, those arguments no longer hold good. Republicans don't care about that. And Democrats have no idea.

Democrats do not opt for economic solutions. They don't choose to fix economic problems by using policy to change the economy. Instead, they provide money to help people cope with those problems. That's how it looks to me.

I don't know what's going on in their minds. But it looks to me as if Democrats have something like "math anxiety" about economics. Dems seem to think that if they go for sound economic argument, they will necessarily come to the same conclusions as the Republicans.

I don't know how they could possibly think this, as it is based on the flawed premise that Republican economics is sound. But the problem is

This little piggy had bad policy

That little piggy had none

All we need, really, is a few tweaks to policy, and to vote for people who understand that the financial sector is more than big enough already.

I admire the effort, but not the approach to problem-solving

There was an ad on TV this morning for OASAS. They pronounced it oasis (because that's just the way things are these days). The catch-phrase that got my attention was "harm reduction strategies".

I looked em up. OASAS is the NYS Office of Addiction Services and Supports. Their mission is to improve people's lives.

There are TONS of similar agencies and groups and even individuals also, working to improve people's lives. And I should say first, that this is admirable work. But it sure would be nice if we didn't need so much of it.

Google turns up almost 9 billion results, for a world of less than 8 billion people:

 

Economic troubles that are widespread and spreading, persistent and growing worse are indications that the cause is macroeconomic in nature. Our world is full of such troubles. We try to solve them by treating them as microeconomic troubles, trying to make the world a better place, one person at a time.

I applaud the effort. But the success would be greater if we would fix things from the macroeconomic end as well.