by Marc Chandler
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My new book, Political Economy of Tomorrow has just been published, and it is available on Amazon. The book is not so much of a sequel to my first book, Making Sense of the Dollar. There is very little about the foreign exchange market in the new book. However, it is not wholly new cloth either. There is a journalist-cum-presidential adviser at the turn of the 20th century, Charles Conant, that I introduce in the first book. He plays a modest role in a couple of the chapters, but in the new book, his views play a central role.
What fascinates me most about Conant is that he laid out the basis of the US grand strategy for the next 80 years. Yes, the original America First movement and the rejection of the League of Nations after WWI, was a setback for the strategy, but it ultimately prevailed.
The strategy grew out of Conant’s understanding of modern capitalism. That understanding was rooted in the analysis that arose from the middle of the 19th century that the market economy’s biggest challenge grew out of its success not its shortcomings. The success was in producing more wealth than it knew what to do with or was able to absorb in ideologically acceptable ways. The surplus savings that some modern policymakers, like Bernanke, see as a special outcome of the underdevelopment of Asia and OPEC’s capital markets, demographic conditions, Conant and his generation say as a central and generalized feature of modern capitalism.
The main political and economic challenge were what to do with the surplus. Conant suggested a multi-prong strategy that included expanding social spending, creating new wants and needs, infrastructure spending, and exporting the savings abroad. Conant was not primarily interested in portfolio investment but direct investment. He thought building infrastructure abroad would boost those countries’ ability to absorb US exports.
Conant anticipated Keynes by at least a quarter of a century. Conant’s views are codified in the Open Door Notes, penned by John Hay the Secretary of State in the early 1900s, and get institutionalized on a global scale after WWII. The IMF, the World Bank and GATT (and its successor WTO) can be understood as the globalization of the Open Door.
I draw from the work of another economist that has also been largely forgotten: Harold Vatter. A little more than a third of a century before Lawrence Summers resurrects the “secular stagnation” hypothesis, Vatter demonstrated that net new capital investment was declining since after WWI. The net new investment is new investment adjusted for depreciation. It is widely recognized that capital investment is labor saving, but what Vatter emphasized was that it was also capital saving. Technological advances were contained in replacement investment, such as replacing a computer that runs on a 286 chip with a Pentium, at a lower cost.
I retell the story of the post-WWII economic and social history through this basic lens. What I am interested in is the basic social relationships that shape the production and absorption of the surplus. There were two broad attempts. The first is associated with Bretton Woods and the second with Reagan-Thatcher. I suggest that Reagan-Thatcher turns Conant on his head. Rather than the US (and Anglo-American economies) intensifying the surplus production and surplus savings on a global scale, under what I dub the Reagan-Thatcher cash register, the US (and the UK) absorb the world’s surplus savings and production by running large current account deficits and capital account surpluses. In order to absorb the world’s excess savings, the Reagan-Thatcher cash register also involved the creation of a financial superstructure. This is the (financial) plumbing system that Zoltan Pozsar, formerly at the Fed and now at a Swiss bank, maps so eloquently.
On another level, I suggest that after the breakdown of Bretton Woods and the crisis of the 1970s, capital went on an offensive and that offensive is shaped the Reagan-Thatcher cash register. It was a three-prong strategy: liberate capital from the state (financial deregulation), break organized labor (men’s wages had already been decoupled from productivity and inflation), and shift the burden of retirement from the employers to the employees (the move away from defined benefits to defined contributions). And in one of the recurring themes of the book, nothing fails like success. The capital offensive was successful, and it led to the great financial crisis of 2008-2009, just as a parallel move in the 1920s led to the Great Depression.
In the second half of the book, I turn from the forces of production to the social relations more directly. I focus on three fundamental relationships: women and men, employee and employer, and the citizen and the state. What is most interesting is how those relationships are changing to accommodate the surplus capital. The focus is on showing how those relationships are changing, and the significance going forward. Drawing from others’ work, I tease out the relationship between hierarchy and scarcity and between networks and the feminization of work and power.
The framework looks at the growing bifurcation of employees between those who can be creative, flexible, networked, well compensated and celebrate their identities and those who are consigned to repetitive tasks, that lack creativity, no not lead themselves to much flexibility, struggle to make ends meet and cannot find themselves in their work. The disparity of wealth and income will be chief characteristics of the new cash registered that is emerging since the Reagan-Thatcher cash register collapsed under its own weight, just as the Reagan-Thatcher cash register arose from the ruins of the Bretton Woods cash register.
This book is not part of the genre, like Paul Mason’s “Postcapitalism: A Guide to Our Future (2016)” that proclaims the end of capitalism. It does not accept that Uber and Airbnb or other aspects of what has been called the “sharing economy” is the beginning of socialism or a post-capitalist society. To the contrary, there is very little sharing in the “sharing economy,” and it essentially brings productive resources into the market economy (from the non-market economy). Capitalism refers to a society in which power emanates from the ownership and control of productive power. What is evolving is a new phase of capitalism and most likely not its last phase.
At the center of the analysis is a contradiction. It is the contradiction between an economic system that produces incredible wealth and yet the social organization and ideology based on the scarcity that characterized most of human history. The incredible wealth and capital outgrow society’s ability to absorb it in an ideologically acceptable way, like children outgrowing their clothes. Social relationships change to cope with the surplus.
Lastly, woven through the book is an understanding that existence of scarcity was understood as a key to the formation of character. It meant making choices and deferring gratification. The advent of surplus is not simply an issue of the political economy, but also of psychological development. Changes in the outer world change the world within, as child rearing practices change, and men take on greater roles in the non-market economy.
What I have sketched out here is an overview of the Political Economy of Tomorrow. For regular readers of this blog, many of the themes will not be new. Indeed, to the extent that the book is new lies in synthesizing a broad range of others’ work. I pick up the earlier discourse about surplus capital and trace it through our generation. I draw connections between things that are often not linked. My first book was about the global capital markets in general and the foreign exchange market in particular. The (2009) thesis was that the dollar would prove more formidable than many US friends and enemies suspect. The thesis has held up well since the dark days of the Great Financial Crisis. This book has a broader vision and is a more of a broad road map that points to the direction ahead by offering insight of the path we took.
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