Mass Politics and Capitalism

[Beet]

A long one but bear with.

Barry Eichengreen makes an interesting point about the breakdown of the gold standard 1914-1936 in Globalizing Capital:

The pre-WWI gold standard was invincible because there was never any doubt that governments would do everything in their power to maintain it. If there was even a small drainage of money out of a country on the gold standard that threatened the country's gold reserves, central banks would absolutely raise interest rates until gold came rushing back into the country.

As the franchise became widely spread however, governments put central banks under countervailing pressures to stimulate the economy, and this conflicted with the goal of raising interest rates to defend the gold standard. Hence in 1931 the Bank of England refused to raise interest rates high enough and preferred to simply abandon the gold standard.

Hence, democracy, or mass politics, was the root cause of the failure of the pre-WWI gold standard, which after all was a system developed before many countries had universal franchise, and even in those that came close (like the United States), governments felt little pressure to contain depressions.

Since then we have had a weird hybrid system of wedding together some aspects of 19th century capitalism with new institutions of mass politics and new mandates on government, including central banks, in economic policy. The new synthesis started a supercycle around 1943 or 1944. Up until around 2008, 64 years, this system worked well and the West enjoyed a combination of both the mass satisfaction and stability of the welfare state and expansionary policies combined with the dynamism of capitalism. This beneficial combination was critical in 'defeating' the communist alternative.

However, now we are seeing a breakdown of the system, I fear that capitalism as we know it can not support the levels of debt that democracy has asked it to support (which are to be fair by all accounts unlimited). In modern politics, conservatives generally stand on the side of economics while the left stands on the side of politics; in the sense that the former prioritizes and is shrewder in the first, while the latter prioritize and is shrewder in the second. By this I mean not obviously that they practice it better, but that they have superior insights. For example, in the realm of economics, Marxism was totally defeated, but in the realm of politics, it arguably still has validity. So naturally conservatives (and some 'tea partiers') are better positioned to capitalize on that democracy has pushed capitalism beyond the limits of its impressive ability to tolerate debt, and follow the natural conclusion of drastic austerity or liquidation. For the left, acquiescing to such drastic austerity or liquidation and the human suffering that it would entail without a strong countervailing push for the government to provide jobs and welfare is anathema.

And again, the fundamental insight of Keynes, once one gets past liquidity traps and wage stickiness and Say's law and the like, is that when we talk of 'penury' in the modern sense we are talking nonsense. Keynes pointed out what might have been more obvious to him in his privileged position than it was to most, but what was true nonetheless, and still is, which is that the modern world is fundamentally abundant. The Somalis, for example as the poster anvi pointed out, understand true poverty: the lack of physical things. The lack of the ability to make things. So long as America's amount of physical things and ability to make things is not diminished from one year to another, neither does America have to be poorer in one year than the other. Debt, money, accounts, taxes, and all these terms and rules that we think of are human creations and institutions designed for the betterment of human prosperity, and these rules can be violated when they no longer serve that prosperity. For sure there are caveats, such as if foreigners decide to stop shipping their cheap things to America, then America will have to make do without. But there is no physical reason for a worldwide depression, for why factories and people must be idled.

For this reason I think we will go through great convulsions in the years ahead, and it will seem at times that the welfare state is finished. But because the modern world is fundamentally abundant, politics will in the end triumph and deliver to a majority of the masses a form of economic organization that gives us a decent share. How long it will take to get there and what Jobian trials we will have to go through to get there, I cannot say.