The Two-edged Sword of Capitalist Globalisation1

Peter NolanUniversity of Cambridge

CELP 2017

1 The main arguments in this article are taken from my book Crossroads: The End of Wild Capitalism, Marshall Cavendish, London, 2009. The arguments and data have been up-dated to take account of subsequent events and material published since then.

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Introduction

China has the longest continuous tradition of applying the dialectical method to social analysis. The School of Yin and Yang emerged in the third century BC and the dialectical method of analysis has remained central to Chinese philosophy ever since.2 Capitalist development is inherently dialectical. Arguably the two most profound analyses of capitalism’s contradictory character are those of Adam Smith3 and Karl Marx.4 For each of them the ‘two-edged sword’ is the essence of capitalism. Since its earliest appearance in the ancient world capitalist competition has produced not only immense benefits, but also profound problems.5 In the recent era of capitalist globalisation, the benefits have reached new heights, but the dangers have reached new depths, which threaten the very existence of the human species. For Smith, the balance between the dynamic power of the ‘invisible hand’ of market competition and the ethically-guided ‘visible hand’ of government regulation were the counterbalanced themes of his two books the Wealth of Nations and the Theory of Moral Sentiments. For Marx, the necessity to regulate the contradictions of capitalism in the interests of the whole human species is the essence of communism, which grows logically out of the character of capitalism itself. For him, the development of communism was an evolutionary process, in which capitalist development itself created the conditions for communism, under which the mass of the population incrementally establish collective control over the political-economic system in their common interest.6 In the developed countries from the mid-nineteenth centre onwards political rights for the mass of the population expanded steadily and regulation at a national level made halting but significant progress, including the eventual establishment of a welfare state in most of these countries (Nolan, 2016).

The recent era of capitalist development has witnessed a radical expansion of the international character of capitalism alongside explosive industrial concentration at a global level. Global regulation in the interest of the whole species is a ‘choice of no choice’ (mei you xuan ze de xuan ze) if we are to ensure a sustainable future for the species. However, global regulation is still in its infancy.7 The necessary global regulation of ‘wild capitalism’ in order to resolve its profound contradictions presents complex challenges. Although global markets have been established for a wide array of activities,8 people live mainly in separate countries, with their own identity and interests. The relationship between around 1 billion citizens of the high-income countries (the ‘West’) and around 6 billion citizens (rising to around 8-9 billion later this century) of the

2 Zou Yan (305-240 BC) is usually regarded as the founder of the Yin-Yang School of philosophy.3 In The Theory of Moral Sentiments and The Wealth of Nations.4 Most famously in the Communist Manifesto and Das Kapital, but throughout the whole body of his writings from beginning to end.5 For an analysis of capitalism in the Ancient world around the Mediterranean see Braudel, 2002.6 The most systematic analysis of this, the most fundamental aspect of Marx’s analytical framework, can be found in Avineri, 1968.7 Although Marx offered enthusiastic public support for the revolutions of 1848 and 1871 he emphasised that the communist revolution was a long-term evolutionary process, quite different from a utopian socialist ‘putsch’ in which there is a ‘direct attempt of the proletariat to attain its own ends, made in times of universal excitement’. Indeed, Marx was concerned that violent, premature and opportunistic seizures of power would have a ‘necessarily reactionary character’, which ‘inculcated universal asceticism and social levelling in its crudest form’ (Marx and Engels, 1848: 89). In 1893 Engels reflected on the defeat of the Paris Commune in 1871: ‘[N]either the economic progress not the intellectual development of the mass of French workers had as yet reached the stage which would have made a social reconstruction possible’ (Engels, Introduction to the Italian edition of the Communist manifesto, 1893).8

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low and middle-income countries will be central to the possibility for achieving the cooperation that is necessary in order to regulate ‘wild capitalism’. China is fast becoming a central part of the global political economy and it will have a central role to play in the long, evolutionary search for global regulation in the interests of the mass of the planet’s inhabitants.

Capitalist rationality.

Since ancient times in both East and West the exercise of individual freedom has been inseparable from the expansion of the market, driven by the search for profit. This force, namely capitalism, has stimulated human creativity and aggression in ways that have produced immense benefits. In the era of globalisation since the 1970s capitalism has broadened its scope and these benefits have become even greater. Human beings were liberated to an even greater degree that hitherto from the tyranny of nature, from control by others over their lives, from poverty, and from war.

Market competition and innovation before the Industrial Revolution.Through his famous metaphor of the ‘invisible hand’ Adam Smith provided a vivid characterisation of the rationality of the competitive market economy. The essence of the market mechanism is a ‘non-zero sum game’ in which the participants mutually benefit through specialisation and exchange. In Smith’s view, the invisible hand of marketplace competition between profit-seeking firms not only stimulates efficiency through gains from specialisation and exchange, but also stimulates technical progress through competition among specialist capital goods makers:

‘The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity and judgement with which it is any where directed, or applied, seems to have been the effect of the division of labour…The division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has no such extensive utility; the propensity to truck, barter and exchange one thing for another’ (Smith, 1776, vol. 1: 7 and 17).

During the 500 years or so before Adam Smith published the Wealth of Nations, this mechanism had stimulated the immense technical progress of the European Scientific Revolution:

The pleasures of wealth and greatness…strike the imagination as something grand and beautiful and noble, of which the attainment is well worth the toil and anxiety which we are so apt to bestow upon it. And it is well that nature imposes upon us in this manner. It is this deception which arouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has

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been obliged to redouble her natural fertility, and to maintain a greater number of inhabitants (Smith, 1761, 183-4).

Although Smith was adamant about the dynamic power of the ‘invisible hand’ of market competition to stimulate innovation and technical progress, he was equally explicit about the necessary role of the ‘visible hand’ of government to act in the overall interests of society where markets failed:

The third and last duty of the government [apart from establishing peace and maintaining law and order] is that of erecting and maintaining those public institutions and those public works which, though they may be in the highest degree advantageous to a great society are, however, of such a nature, that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain. The performance of this duty requires too very different degrees of expence in the different periods of society’ (Smith, 1776, vol. 2: 244).

Smith’s formulation leaves open the door for greater or lesser state intervention depending on the particular circumstances that confront a given country or region in a particular epoch.

China’s long history of innovation and technical progress from the Han Dynasty up until the early nineteenth century was a consequence of a positive, symbiotic relationship between the ‘invisible hand’ of market competition and the ‘visible hand’ of the state. The concept of a meritocratic bureaucracy developed emerged under the Han Dynasty. and developed its classic form under the Tang. Exams for entry to the bureaucracy focussed on the Confucian classics and Chinese history. Civil servants were subject to regular exams for promotion, demotion or dismissal. The examination system not only helped to produce a professionally capable bureaucracy more than one thousand years before such a system emerged in the West, it also contributed strongly to Chinese unity. It established a common educational system for the ruling class. The system emphasised pragmatism and solving practical problems in order to ensure the well-being of the mass of the population. Government officials were expected not only to be expert in writing but also have a deep knowledge of history, etiquette, astronomy, human affairs, political institutions, government and contemporary affairs.9 Because it was a system that had ethics at its core it was widely accepted as legitimate by the mass of the population.10 The Chinese bureaucracy at both the central and the local level performed crucial functions in order to ensure that the market economy prospered. These included maintaining peace across the vast unified territory, which allowed the economy to benefit from specialisation and exchange; constructing and maintaining both locally and nationally a vast infrastructure of water control; ensuring effective famine avoidance and famine 9 The Song Dynasty statesman Wang Anshi (1021-1086) summarised these requirements in his essay ‘Selecting Talent’.10 In China the concept of benevolence, which was central to both Confucius and Mencius’ thinking, is fundamental to the understanding of human nature. This was in its turn the foundation of the training for government officials. In 1694, Huang Liuhong wrote a manual on the education of local magistrates: ‘Mencius said: all men have a mind which cannot bear to see the suffering of others. The ancient kings had this commiserating mind, and, likewise, as a matter of course, they had a commiserating government (bu renren zhixin, bu renren zhi zheng). This is in essence what this book is all about. In the administration of local government nothing is more important than this principle’ (Huang Liuhong, 1694).

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relief; supporting the compilation of encyclopaedias and textbooks to spread best-practice knowledge across the country; administering a legal system that protected property rights for producers and traders; and closely monitoring and taking action to ensure commodity prices were kept stable, especially the price of grain.

The traditional Chinese economy developed a high level of urbanisation, far ahead of Europe until the early modern era. In the eighteenth century in China’s most economically advanced areas, such as the Yangtse Delta, around two-fifths of the population lived in towns. Cities were not only production and trading centres, but also possessed a sophisticated and enlightened culture, based on high levels of literacy by pre-modern standards. Long-term advances in agriculture permitted China’s population to expand from 50-60 million in the eighth century AD to 430 million in 1850. High densities of population and relative shortage of arable land help explain why, from early in its development, private property in land was the main form of land ownership. In the Tang Dynasty private land ownership and tenancy, with legally binding contracts, were already pervasive.11 Perceptive European travellers, from Marco Polo in the thirteenth century to the Jesuits in the eighteenth century, considered that the internal trade of China was much greater than that of the whole of Europe. In addition, there was a flourishing trade across the South China Sea to Southeast Asia and beyond, exporting sophisticated Chinese products, including porcelain, textiles, and ironware, in return for primary commodities. The vibrant market economy nurtured by state action produced sustained long-term technical progress. Over the long-term from the Tang through to the early nineteenth century, innovation, which was driven mainly by inter-firm competition, proceeded incrementally. These embraced advances in ship-building (including the stern-post rudder and watertight compartments), navigation (including the mariner’s compass), inland transport (including canal lock-gates), metallurgy (including the use of water powered double-acting piston bellows in blast furnaces), porcelain (including advances in kiln technology in order to reduce fuel consumption), paper and printing (including the development of movable type), textiles (including both machinery and fabrics), weaponry (including the application of gunpowder and the production of tubular iron weapons), mining (including ventilation shafts and the use of explosives), and deep drilling technology (for brine and natural gas). In the early-eighteenth century China may have produced around one-third of global manufacturing output compared with less than one-quarter in Europe.12

For around 1500 years prior to the eighteenth century China was by far the most important centre of world technological progress. Mainly by means of transfer through international trade the innovations that originated in China played a central role in Europe’s economic catch up with the Far East after the Renaissance. Many of the most important European innovations of this era originated in China, finding their way to

11 During the Song Dynasty ‘not only was a signed contract necessary for renting a plot of land, even borrowing a draft ox required a contract’.12 Comparing the level of GDP in China and Europe before the mid-eighteenth century is fraught with difficulties. A large range of products produced in China either were not produced in Europe at all, or were produced in small quantities. These included porcelain, lacquer ware, tea, silk, cotton textiles, and natural gas from deep wells. The size of Chinese ships was much greater than that of European ships. There is no satisfactory estimate of the relative size of the iron and steel industries, of diverse industries, including building materials, furniture, medicines, manufactured food and beverages, leather ware, paper, printing and publishing, or the service sector. The most widely used estimates comparing GDP in China and Europe before 1800 are those made by Angus Maddison (Maddison, 2010). However, they are wildly speculative and do not form the basis for serious statistical comparison.

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Europe by means of the Silk Road across Central Asia and the South China Sea. China’s long history of unity, stability and intelligent state action over most of the period since 221 BC produced the remarkable long-term evolution of technologies that contributed fundamentally to Europe’s belated technological progress, embedded within a radically different political and cultural setting. This was the case even for the quintessential instrument of the Industrial Revolution the steam engine, the basic elements of which had their ‘pre-natal’ origins in China: ‘No single man was the “father of the steam engine”; no single civilisation either’.13

Market competition and innovation since the Industrial Revolution.Economists have tended to polarise around their view of the inherent tendencies of competitive markets in relation to industrial concentration. The main body of ‘mainstream’ economists believe that inter-firm competition is analogous to Alfred Marshall’s famous ‘trees in the forest’, with large firms constantly being out-competed by small, nimble new entrants (Marshall, 1920: 315-6). It was widely thought that this process had become even more powerful in the epoch of modern information technology, which had made the world of industrial competition ‘flat’, with unprecedented opportunities for small and medium-sized firms to out-compete large firms. An alternative, non-mainstream view has argued that the inherent tendency of capitalism is towards industrial concentration due to the opportunities for large firms to benefit from economies of scale and scope. These views all to some degree derive from Marx’s analysis, which identifies the ‘law of concentration of capital’ as the basic logic of capitalist industrial competition. The acceleration of innovation and technical progress in the recent era of capitalist globalisation brought to a new highpoint the process analysed by Marx and Engels in the Communist Manifesto:

‘The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all the preceding generations together. Subjection of Nature’s forces to man, machinery, application to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground – what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?’ (Marx and Engels, 1848: 48).

After 1800 the British Industrial Revolution transformed the world. For 200 years since then global innovation has been comprehensively dominated by firms from the high-income countries. As large capitalist firms emerged at the end of the nineteenth century, a new coordination mechanism came into being, namely the so-called ‘visible hand’ of planning within the large modern corporation. Giant capitalist firms combined internal planning with ‘invisible hand’ of fierce inter-firm competition.

The era of capitalist globalisation since the 1980s provided an opportunity to test the predictive qualities of the contrasting analytical approaches. During this period the brakes on the operation of market forces, which existed for much of the twentieth

13 ‘That the reciprocating steam-engine in its definitive form, attained about 1800 AD, consisted essentially of two structural patterns [the double-acting piston bellows and the conversion of rotary to rectilinear motion] which had been working widely and effectively in China about 1200 AD can be conclusively demonstrated; that these patterns passed into it by a long chain of direct genetic connections is overwhelmingly probable, however conscious or semi-conscious may have been the indebtedness of engineers of succeeding generations. No single man was the “father of the steam engine”; no single civilisation either’ (Needham, 1970: 202).

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century, were removed. It witnessed the most explosive episode of mergers and acquisitions in the history of capitalism. In each industrial sector, a small group of widely-recognised companies came to occupy the ‘commanding heights’ of their respective sectors, accounting for one-half or more of the total global market. This was the visible part of the ‘iceberg’ of industrial concentration. However, the pressure from these leading systems integrator firms cascaded down across the supply chain, forcing intense consolidation of their supplier firms, which in turn exercised severe pressure upon their own supply chain. Consequently, in the invisible part of the iceberg of industrial concentration, ‘below the water level’, there also emerged a high degree of industrial concentration at a global level. After the 1980s the nature of the large firm changed radically. The extent of the division of labour widened dramatically. The boundaries of the firm shifted, with a greatly increased array of inputs of goods and services procured from specialist suppliers. Simultaneously, the boundaries became ‘blurred’, with functions of control and coordination exercised by the core systems integrators extending across the boundaries of the legally defined firm. Giant oligopolistic systems integrators continued to compete intensely with each other. During more than three decades of globalisation firms from the high-income enhanced their dominant position in global innovation and global markets for high technology products, alongside the collapse of innovation in the former Soviet bloc.

The high degree of industrial concentration in terms of global market share that emerged in the era of globalisation was accompanied by an equally high degree of concentration in innovation and technical progress. The main body of innovation and technical progress occurs within global firms. Between 1981 and 2008 within the OECD the share of the corporate sector in total R&D funding increased from 52 per cent to 65 per cent and the share of government funding fell from 48 per cent to 35 per cent (Royal Society, 2011: 32). In 2015 the European Commission published data on the top 2500 companies (G2500) across the world, in terms of their R&D expenditure (EU, 2015). In 2014/15 the G2500 companies spent a total of US$734 billion on research and development and they account for over nine-tenths of the global total of corporate investment in research and development. R&D spending by the G2500 companies is highly concentrated. The top 50 companies account for 40 per cent of the total R&D spending of the G2500, the top 100 companies account for 53 per cent and the top 500 companies account for 82 per cent. In other words, a group of around 500 companies is the core of global innovation in the early twenty first century.

During the recent era of globalisation, innovation and technical progress has been driven forward by ferocious oligopolistic competition between giant ‘systems integrators firms’, and by equally ferocious oligopolistic competition between the leading firms in their supply chains. In the production of high technology, branded goods and services for the global middle class, the recent era of globalisation has witnessed high-speed industrial consolidation. In manufacturing industries as diverse as commercial aircraft, patented pharmaceuticals, sophisticated medical equipment, combined cycle gas power stations, electric power transmission, telecommunications equipment, high-speed elevators, automobiles, trucks, high-speed trains, MTR systems, HVAC,14 soft drinks, and beer, a handful of firms command the lion’s share of the global market. An equally dramatic process of industrial consolidation has taken place across the supply chain of giant global manufacturing firms, but this process is much less analysed and poorly understood.15 Industrial consolidation has swept through the value chain of world manufacturing. In

14 Heating, ventilation and cooling systems for buildings.15 For a detailed analysis see Nolan, Zhang and Liu, 2007.

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each sector, a small number of highly focussed global first and second tier suppliers dominate each segment or group of closely related segments of the supply chain. They compete ferociously with each other in order to be the customers of choice for global systems integrator firms. A small number of firms stand at the centre of the revolutionary progress in information technology that has transformed almost every complex product and connected them to each other. The era of globalisation has witnessed an unprecedented technological progress, driven primarily by ferocious oligopolistic competition between a relatively small number of global firms. Service sector firms that meet the needs of the global firms and their suppliers have also consolidated at high speed. In industries such as consultancy, media and marketing, law, audit, and financial information, a handful firms have emerged to command global markets within each sector.

Financial market liberalisation and developmentThe liberalisation of international capital movements was followed by a large increase in the stock of foreign direct investment in both developed and developing countries. Between 1990 and 2015 the total stock of outward foreign direct investment increased from $2,254 billion to $25,875 billion (UNCTAD, 2016). Between 1990 and 2015 the stock of Inward Foreign Direct Investment increased from 9.3 per cent of GDP to 37.3 per cent in developed countries and from 11.1 per cent to 28.5 per cent in developing countries (UNCTAD, 2016). Multinational firms wished to benefit from lower costs of production and close proximity to markets, especially meeting the demand of the local middle class for global products. The expansion of multinational firms’ production systems stimulated the expansion of their global supply chains close at hand, in order to minimise costs through ‘just-in-time’ supply. A large share of inputs for global systems integrator firms are produced by local subsidiaries of global firms. Global firms tended increasingly to lower their costs by using global platforms for their products, which encouraged the emergence of common technologies in multinational companies’ operations across the world, irrespective of whether they are in developed or developing countries. The expansion of foreign direct investment has permitted rapid modernisation of important parts of developing economies allowing them to benefit from the ‘advantage of the latecomer’.

Liberalisation of inflows of short-term capital has stimulated expansion of stock market capitalisation. In lower middle income economies, stock market capitalisation rose from 15.5 per cent of GDP in 1990 to 52.4 per cent in 2015, and in upper middle income economies, the increase was from 29.6 per cent to 62.1 per cent (World Bank, 2004 and 2016). The increased role of the stock market helped to improve corporate governance, facilitate mergers and acquisitions, and broaden the sources of capital away from bank lending.

During the era of globalisation international financial firms emerged to constitute the ‘glue’ that holds together the global production system for non-financial firms, including their suppliers and customers. They provide crucial services for the global non-financial customers, including restructuring through IPOs, M&A and divestitures; hedging currency and commodity price risk; debt issuance; organising and participating in syndicated loans; trade finance; payables and receivables; and organising payrolls. Global banks undertake around 95 per cent of all international money movements by global corporations. In addition, wealth management for wealthy global customers has become a lucrative part of global banking. Giant financial firms can offer a ‘one-stop-shop’ of financial services to global non-financial firms, including their employees. Giant financial

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firms benefit from economies of scale in procurement of information technology systems, risk spreading across a wide range of economies, and their attractiveness to high quality human resources in the sector.

The era of capitalist globalisation witnessed a revolutionary transformation of financial firms. An explosive round of mergers and acquisitions resulted in the creation of a small group of super-large global financial firms, such as HSBC, Citigroup, JP Morgan Chase, Goldman Sachs, Wells Fargo, Morgan Stanley and Bank of America. The degree of dominance of a small group of ‘titan’ banks advanced even further during the global financial crisis. In the space of only a few weeks in 2008 J.P. Morgan acquired Bear Stearns and Washington Mutual, Wells Fargo acquired Wachovia, and Bank of America acquired Merrill Lynch, all at ‘fire sale prices’. The share of the top 25 banks in the total assets of top 1000 banks increased from 27 per cent in 1997 to 45 per cent in 2009 (The Banker, July 2009).

In 2015 the top 20 asset managers accounted for 41 per cent of global assets under management by the top 500 firms and the top 50 asset managers accounted for 65 per cent of the total (Willis Towers Watson, 2016). In 2016 the top five financial institutions accounted for 45 per cent of global foreign exchange trading and the top ten accounted for 67 per cent of (Euromoney).16 In 2016 the top ten banks accounted for 48 per cent of global investment banking revenue and the top 20 banks accounted for 62 per cent (Statista.com). In 2014 the top four banks accounted for 81 per cent of total global assets under custody (Forbes). In the view of Henry Kaufman: ‘In a single generation, our financial system has been transformed…into a highly concentrated oligopoly of enormous, diversified, integrated firms. This revolution has gone largely unnoticed’ (Kaufman, 2009: 97).

After the 1980s across large swathes of Latin America and Eastern Europe, international banks undertook extensive acquisitions, and dominated the financial sector. It was widely thought that these economies benefited from high standards of corporate governance imposed by regulators in high-income countries. In 2004 the chief economics commentator of the Financial Times, Martin Wolf, published his influential book, Why Globalisation Works, in which he wrote: ‘Countries with a higher proportion of foreign-owned banks and a smaller proportion of state-owned banks, are less prone to financial crises, perhaps because foreign banks are better regulated, better managed or merely more immune to pressure for imprudent lending’ (Wolf, 2004: 284). The World Bank argued that transition economies that have been ‘more willing to cede majority control of their banks to foreign interests’ have enjoyed higher growth rates (World Bank, 2002: 86). After the 1980s advances in mathematical modelling of financial markets contributed to greatly improved capabilities for risk evaluation in financial institutions. A wide range of new financial products was devised, notably the vast array of derivative products, that distributed risk deeply in the financial system. The IMF believed that as a result of these developments the global financial system had become so ‘thick’ as to be nearly indestructible. The global financial system survived a succession of financial crises in this period, including the Mexican, East Asian, Russian, Long Term Capital Management and Argentinean crises, as well as the shock of 9/11, which appeared to be a vivid testimony to the greatly improved robustness of the global financial system.

Capitalism and the expansion of human freedom

16 They included nine global banks and the XTX Markets, and electronic trading platform.

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Freedom from the tyranny of nature. The era of capitalist globalisation witnessed an unprecedented advance in the liberation of human beings from the tyranny of nature. Far from mankind facing a danger of oil and gas supplies running out, technical progress is so rapid, that at US$ 70 per barrel, oil and gas reserves are ‘to all intents and purposes infinite’, including oil that can be obtained from existing fields through better extraction techniques, from coal (coal liquefaction), from tar sands and from shale, as well as gas from shale and ‘gas in crystals’. Pressure from market forces stimulated a tremendous reduction in the amount of primary energy needed to produce a unit of final product. In 1990 the world produced PPP $ 5.5 (at 2011 prices) of GDP per kilogram (oil equivalent) of primary energy consumed. By 2014 this had increased to PPP $ 7.9, an increase of 44 per cent (World Bank, 2016). Technical progress in a number of related areas created the possibility to stabilise global carbon dioxide emissions at their current levels if suitable regulations can be achieved. These include constructing more nuclear power stations; improved building techniques; wind turbines; re-forestation; carbon capture and storage from fossil fuel-fired power stations; photovoltaic cells; and the replacement of coal-fired power stations with gas.

Transport technologies changed at high speed under the impetus of ferocious oligopolistic competition between giant automobile, truck, train, aeroplane and ship makers. New technologies of vehicle construction, engine design, materials use and integration of new information technologies, led to greatly reduced vehicle weight, fuel consumption, and maintenance, alongside continuous improvement in vehicle reliability and safety. The period of capitalist globalisation witnessed a dramatic decline in the costs of transporting both people and goods, with great positive implications for human welfare. This era witnessed also a revolution in telecommunications driven by oligopolistic competition among giant IT firms. By 2015 in low income countries 60 per cent of the population had mobile cellular subscriptions (World Bank, 2017). In lower middle income countries the proportion was 90 per cent and in upper middle income countries it was 105 per cent. The period saw revolutionary advances in functions and a continuous fall in the real price of telecommunications. These represented tremendously important advances in welfare across the world, including for the mass of people in developing countries.

Freedom from control by others. In the period of capitalist globalisation there was a rapid advance in the level of urbanisation. In 1965 less than a quarter of the population in developing countries lived in urban areas. By 2015 31 per cent of the population in low income countries lived in urban areas (World Bank, 2017). In lower middle income countries the share was 39 per cent and in upper middle income countries it reached 64 per cent. Urbanisation causes large changes in people’s daily lives. Young people in general, and women in particular, have much greater autonomy from their family, especially their parents. The opportunities for employment broaden dramatically compared with those in villages. Urban areas provide greater opportunities for advancing personal skills through formal and informal education. They also provide greater opportunities for groups of people to establish autonomous organisations. Even among the poorest migrants, few people wish to return to live in the countryside.

Freedom from poverty. For people in developing countries the most important developmental goal is freedom from absolute poverty. The population of low and middle-income countries rose from 3.6 billion in 1980 to 6.2 billion in 2015. Despite the huge increase in population, this era witnessed large advances in welfare in developing countries. The proportion of the world’s population living on less than $1.90 (at 2011 PPP dollars) per day fell from 34.8 per cent in 1990 to 10.7 per cent in 2013 (World

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Bank, 2017). In East Asia Pacific in the same period the share fell from 60.2 per cent to 3.5 per cent, and in South Asia the share fell from 44.6 per cent to 15.1 per cent. In low-income countries, average life expectancy at birth rose from 50 years in 1990 to 62 years in 2015 (World Bank, 2017). In the same period in lower middle-income countries life expectancy rose from 60 years to 68 years and in upper middle income countries it increased from 68 to 75 years. This achievement was made possible in part by technical progress in medical equipment and medicines, as well as by advances in food production, including improved seeds and farm equipment, and better functioning food markets, including advances in information technology to spread knowledge more effectively, advances in transport systems to distribute food better and in food processing technologies to reduce waste. Between 1990 and 2015 the UNDP estimates that the ‘human development index’17 in developing countries increased by 30 per cent from 0.514 to 0.668 (UNDP, 2017).

Freedom from inequality. Between the Industrial Revolution and the 1970s global income inequality increased steadily, due mainly to the increasing gap in average incomes between the developed and the developing countries. The global Gini coefficient of income distribution increased from 50 per cent in 1800 to 66 per cent in the 1980s (Milanovic, 2016: 120). However, during the recent era of capitalist globalisation, GDP growth in developing countries significantly exceeded that in the developed countries. The share of world GDP (at PPP prices) produced by the developed countries declined from 63.7 per cent in 1990 to 41.9 per cent in 2016, while that in developing countries increased from 36.3 per cent to 58.1 per cent in the same period (IMF, 2017). Despite the growth of population in developing countries, output per person grew faster in developing than in developed countries. Between 1990 and 2005 output per person grew by 3.1 per cent per annum in developing countries, compared with 1.8 per cent in the developed countries (UNDP, 2007). This difference in growth of output and income was the main factor causing a decline in the global Gini coefficient of income distribution. Between 1988 and 2011 the global Gini coefficient declined from 72.2 to 67.0, which is the ‘first time since the Industrial Revolution that global inequality has ceased to increase’ (Milanovic, 2016: 119). The greatest gains in income since 1988 have been for the middle sections of the global income distribution, namely those in 40th to the 60th percentile of the distribution, and took place mainly in China, but also in India, Thailand, Vietnam and Indonesia (Milanovic, 2016: 19). The period since 1988 has seen a large increase in the relative importance of the ‘global median class’ with incomes between $PPP 2 and $PPP 16 per person per day (at 2005 PPP dollars). The share of the global population belonging mto this group increased from 23 per cent to 40 per cent in this period (Lakner and Milanovic, 2015: 225).

A global culture. In 1784, Emmanuel Kant wrote his essay entitled ‘Idea for a Universal History with a Cosmopolitan Purpose’, in which he suggested that history embodied a ‘hidden plan of nature’: [S]uch a plan opens up the comforting prospect of a future in which all the germs implanted by nature can be developed fully, and in which man’s destiny can be fulfilled here on earth’ (Kant, 1784: 52-3). He considered that the ‘highest purpose of nature’ was a ‘universal cosmopolitan existence’, and that this would eventually be realised as the ‘matrix within which all the original capacities of the human race may develop’ (Kant, 1784: 51). The international character of capitalism was at the core of Marx’s analysis:

17 The Human Development Index is a composite index measuring three basic dimensions of human development – a long and healthy life, knowledge and a decent standard of living.

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‘The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all nations into civilisation. The cheap prices of its commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, i.e. to become bourgeois themselves. In a word it creates a world after its own image’ (Marx and Engels, 1848: 47).

The inter-connected, cosmopolitan world has advanced dramatically in the recent era of capitalist globalisation. This logical outcome was at the heart of Marx’s view of the progressive character of capitalist globalisation:

‘The need of a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe. It must nestle everywhere, settle everywhere, establish connexions everywhere.,.. The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country… In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations. And as in material so in intellectual production. The intellectual creations of individual nations become common property’ (Marx and Engels, 1848: 46).

In the era of capitalist globalisation, national economic boundaries were broken down on an unprecedented scale. International trade as a proportion of global GDP rose from 38 per cent in 1990 to 59 per cent in 2015 (World Bank, 2004 and 2017). The large corporation became increasingly international in terms of its markets, ownership, management and language of internal communication. Between 1987 and 2008, there were 2, 219 cross-border mergers and acquisitions of over US$ 1 billion (UNCTAD, 2009). In other words, over 2,200 firms that were formerly based in a given country ‘gave up their passports’ for that of another country. It was now frequently the case that ‘national champion’ firms were led by foreigners and more shares owned by foreigners than by institutions from the country in which they had their headquarters. English became the common language of most international firms. Capitalist globalisation helped to create a global culture among the mass of the population. The total number of outbound tourists globally increased from 380 million in 1990 to 1,360 million in 2015 (World Bank, 2004 and 2017). English established itself as the common language of the global mass media. International sports events such as the Olympics and World Cup now united vast swathes of the world’s population. The slogan of the 2008 Olympic Games in Beijing was: ‘One World, One Dream’. It is hard to imagine that such a world could experience a major international conflict.

Capitalist irrationality

Capitalist freedom is a two-edged sword. In the era of capitalist globalisation, its contradictions have intensified. As human beings took to new heights their ability to free themselves from fundamental constraints through the operation of the market mechanism, so they also reached new depths in terms of the uncontrollability of the structures they created. Global capitalism has created uniquely intense threats to the very existence of the human species at the same time that it has liberated humanity

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more than ever before from fundamental constraints. Capitalist globalisation has created a multi-sided, uncontrolled wild monster, bringing to a new highpoint the process analysed by Marx and Engels in 1848:

‘Modern bourgeois society with its relations of production and of exchange, is like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells’ (Marx and Engels, 1848: 49).

As the era of capitalist globalisation advanced, more and more people were drawn to the famous quote that opens Charles Dickens’ A Tale of Two Cities:

‘It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us’ (Dickens, 1859).

The environmentRachel Carson’s book The Silent Spring (1962) warned of the potentially destructive consequences for the natural environment if human beings continued to treat it as a resource to be exploited rather than as a complex living ecology of which they are merely one part: ‘[Can] any civilisation can wage relentless war on life without destroying itself, and without losing the right to be called civilised?... The “control of nature” is a phrase conceived in arrogance, born of the Neanderthal age of biology and philosophy, when it was supposed that nature exists for the convenience of man’ (Carson, 1972: 99 and 257). Her fears have come to fruition. The World Wildlife Fund has constructed a Living Planet Index, which tracks the populations of 3,706 vertebrate species – fish, amphibians, reptiles, birds, and mammals – from all around the world (World Wildlife Fund, 2016). It concludes that between 1970 and 2012 the Index fell by 58 per cent, a global trend which suggests that human beings are degrading natural ecosystems at a rate unprecedented in human history. The principal declines in wildlife populations in the high-income countries had already been completed by 1970. However, between 1970 and 2012 the global populations of marine species declined by 36 per cent, terrestrial species declined by 38 per cent and those freshwater populations declined by 81 per cent. The Harvard ecologist, Edward Wilson has warned that if present trends in species extinction continue, by the end of the present century humanity will live in an ‘Age of Loneliness’.

Across large parts of the developing world, expansion of the capitalist, marker-driven economy has been associated with a long phase of intensification of environmental deterioration. Poor countries find it hard to avoid the transition from ‘poor and clean’ to ‘large and dirty’, before they can advance towards a situation of being ‘rich and clean’. For example, the level of ambient PM 2.5 air pollution is 58 micrograms per cubic metre in lower middle income countries and 42 micrograms in upper middle income economies, compared with 17 micrograms in high income economies (World Bank, 2017). In South Asia the level is 74 micrograms and in Egypt it reaches 105 micrograms, compared with 8.3 micrograms in North America. Market-driven innovation by global firms will play a central role in reducing atmospheric pollution in developing countries, but government regulation18 countries is essential in order to overcome the problem of high levels of urban pollution that arise from lack of the coordination of the market economy.

18 This includes not only government action to regulate atmospheric pollution in developing countries, but also in developed countries, which can stimulate environmentally friendly innovation by global firms, whose products can contribute to a cleaner environment in developing countries.

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Between 1990 and 2013 world consumption of energy increased by 54 per cent (World Bank, 2017). Despite progress in renewable energy sources, in 2013 fossil fuels still accounted for 81 per cent of total energy consumption, with no significant change compared to two decades previously. Global emissions of carbon dioxide increased from 22.4 billion tonnes in 1990 to 35.8 billion tonnes in 2014, an increase of 60 per cent (World Bank, 2017). Within this increase, 92 per cent came from low and middle income economies. Despite the much faster growth rate of carbon dioxide emissions in developing countries, in 2013 the level of emissions per person in lower middle income economies was 1.4 metric tonnes and in upper middle income economies was 6.6 metric tonnes, compared with 11.0 metric tonnes in high income economies. The high-income economies are locked into a pattern of production and consumption that is profligate in the use of fossil fuels. An important component of this is the system of transport of goods and people heavily based on trucks and automobiles. Lower middle income developing countries have less than 50 motor vehicles per 1000 people and upper middle income countries have around 200 motor vehicles per 1000 people, compared with around 550 vehicles in Europe and around 800 in the United States. In 2013 the high-income economies as a whole consumed 4,780 kilograms (oil equivalent) of primary energy per capita and North America consumed 6,981 kilograms per person, compared with 2,181 kilograms in the upper middle-income economies and 640 kilograms in lower middle-income economies (World Bank, 2017). Although carbon emissions in high income economies has stabilised since around 2000, there is a strong positive relationship between GDP growth and carbon emissions in developing countries.In the view of the International Energy Association, ‘a level of per capita income in China and India comparable with that of the industrialised countries would, on today’s model, require a level of energy use beyond the world’s energy resource endowment and the absorptive capacity of the planet’s ecosystem’ (IEA, 2007: 215). In order to contain the increase in temperature to below 2 degrees centigrade will require wide-ranging government policies to support renewable energy, increase energy efficiency, promote alternative fuels and vehicles, change the way that energy is priced, and extend the scope and level of carbon pricing (IEA, 2017).

The Global Business RevolutionThe era of capitalist globalisation has witnessed dramatic industrial consolidation, driven mainly by explosive merger and acquisition, alongside large-scale divestiture of non-core business.19 Leading global firms have taken advantage of economies of scale and scope in procurement, research and development, finance, branding, and human resource acquisition, in order to enhance their position in global competition within their chosen core business. Their principal customers are the global middle class and other global firms. Alongside this sector there exists a sea of small and medium-sized firms across the developing world, using labour-intensive techniques to produce low quality, low value-added goods and provide low-priced services for poor people and small, low technology businesses. For the world’s poor, consumption is mainly composed of unbranded (or fake

19 The symmetrical and simultaneous processes of merger and acquisition alongside divestiture in pursuit of focus on globally competitive core business has attracted little academic attention. The case of Siemens provides a vivid illustration of this process. Since the early 1990s Siemens has sold the following subsidiaries: Siemens-Fujitsu (PCs), Infineon (semi-conductors), Bosch-Siemens (household electrical goods), Osram (lighting), VDO (auto components), Wincor-Nixdorf (ATMs), Siemens mobile phones, and Nokia-Siemens (telecoms equipment). Alongside these large-scale divestitures it has acquired a wide array of companies in closely related areas in the generation and supply of electricity, and increasingly focussed on the application of digital technologies to the use of electricity, which involves a steadily expanding internal software capability.

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brands), low technology, locally produced goods and services. This is the world of the ‘informal sector’ in which most people live and work. It is the world of Adam Smith and Alfred Marshall, inhabited by a sea of fiercely competitive, anonymous firms. It is a fundamentally different from that in which the global corporation operates. There is painfully little academic study of the political economy of this sector.20

After more than three decades of the Global Business Revolution, business power is concentrated in the hands of firms with their headquarters in the high-income countries. Although the share of global GDP produced by developing countries has greatly increased since the 1980s, the inflow of foreign direct investment means that a large share of modern sector output in developing countries is produced by the subsidiaries of firms with their headquarters in the high income countries. By 2015 firms from developing countries still accounted for only 21 per cent of the total global stock of outward foreign direct investment. In 2015 there were 76 cross-border mergers and acquisitions of over US$3 billion, of which only three were undertaken by firms from developing countries (UNCTAD, 2017). Among the world’s top 100 TNCs (in terms of assets) only five were from developing countries, and none of these was in a high technology sector (UNCTAD, 2017).21 Despite large changes in the nature of the large firm in this period, most of their shareholders and senior managers also are from the high-income countries. In 2015 in the global FT 500, which ranks firms by their market capitalisation, firms from high income economies accounted for 86 per cent of the total market capitalisation, and those from the USA alone accounted for 48 per cent of the total. There were just 73 firms from low and middle income countries. Of these 43 were from China. The market capitalisation of FT 500 firms from India, with a population of 1.3 billion, was less than one-half of that of firms from Switzerland, with a population of 8 million. Most of the firms in the FT 500 from low and middle income countries were from just four sectors - banks and financial services (29), telecoms (5), oil and gas production (7) and construction (5). These are sectors that make use of high technology, but do not themselves generate large amounts of new technology. They are mainly state-owned enterprises and mostly enjoy a high degree of protection from international competition. In a wide array of sectors in high technology, branded goods and global services, there are either no firms at all in the FT 500 from low and middle income countries 22 or only one or two firms.23

In a wide array of sectors firms from developing countries have a negligible global market share. The largest firms from developing countries tend mainly to be diversified conglomerates operating in protected markets. They rarely compete directly with leading global firms, which tend to be focussed on a small range of closely related core businesses, in which they possess leading global technologies and/or brands. The upper reaches of the global value chain in almost every sector are mostly inhabited by firms

20 The most famous study of this sector is entitled the Fortune at the Bottom of the Pyramid (Prahalad, 2004). Unfortunately, the title of the book betrays its lack of understanding of or interest in the reality of business and social life for the people in the bottom fifty per cent of the world income distribution. By contrast, the profound study of the political economy of this sector by Jan Breman (Breman, 1996 and 2013), who has spent a lifetime researching the Indian informal economy, is almost completely ignored by social scientists and business school researchers.21 The five companies were CNOOC (45) (China, oil and gas), Petronas (73) (Malaysia, oil and gas), China Ocean Shipping Company (76) (China, transport), America Movil (95) (Mexico, telecoms), and Vale (98) (Brazil, mining).22 This is the case in the following sectors: aerospace, chemicals, electronics and electrical equipment, healthcare equipment and services, media, oil equipment and services, personal goods, technology hardware and equipment, travel and leisure.23 This is the case in the following sectors: autos and parts, electricity, general industrials, life insurance, pharmaceuticals and biotechnology, software and computer services.

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from developed countries. For example, in the aerospace industry in 2012 among the top 35 global firms in terms of revenue, including both systems integrators and component sub-systems suppliers, there was only one firm from a developing country, Embraer (Brazil) (European Commission, 2013). Its revenue and R&D spending (3.3 billion euros and 86 million euros respectively) were a small fraction of those of Boeing (81.9 billion euros and 2.3 billion euros respectively). In 2015 among the world’s top 40 auto assemblers and auto component companies in terms of revenue there were just two from developing countries, Tata Auto and SAIC (Shanghai Auto Industry Corporation). Tata Auto and SAIC are a small fraction of their giant global rivals in terms both of revenue and R&D spending.24

Research and development is a critical component of long-term competitive capability in the modern sector. Research and development spending is mostly undertaken by firms from high income countries: among the G2500 companies, 91 per cent of total spending is undertaken by firms from high income countries and less than one-tenth by firms from low and middle income countries (European Commission, 2015). We have already seen that just 500 firms account for over four fifths of the total R&D spending by the G2500 companies. Within the top 500 companies just 39 are from low and middle income countries. Moreover, China is by far the most important developing country in the G2500, with 5.9 per cent of total spending. Three small European countries, Switzerland, Sweden and the Netherlands, which have a combined population of just 35 million people, have 8.4 per cent of G2500 R&D spending, exceeding that of China with its population of 1.3 billion people. The information technology hardware and software industry has become crucially important in almost every industrial sector that produces for global customers. The revolution in IT hardware and software has not only transformed the nature of most manufactured goods, but also large swathes of the service sector, including finance, retail, and the mass media, as well as the internal workings of large global firms and their relationship with their value chain. Firms with their headquarters in the USA stand at the centre of the global information technology industry, accounting for 67 per cent of the total spending of G2500 firms on IT hardware and software.

InequalityGlobal inequality. In the past three decades global corporations have reduced radically their attachment to the political economy of the country in which they have their headquarters. For the top 100 transnational corporations the share of international assets, revenues and employment is mostly over 50 per cent, and frequently much more than this (UNCTAD, 2016).25 A distinct global elite emerged, whose members inhabit the upper reaches of global corporations. They constitute a tiny fraction of the world’s population and earn exceptionally high-incomes. They share an international culture based around a common language, English. They read the same newspaper (the Financial Times) and share common values. They stay in the same global luxury hotels. They buy the same globally branded luxury goods. They own residences in several countries. Their children 24 Tata has a small and declining market share in the domestic Indian auto market. It is loss-making within its home market and is mainly reliant on international revenues from its acquisition of Jaguar Land Rover. SAIC is mainly reliant on revenue and technology from its joint ventures with GM and VW. In 2015 the revenue of Tata Motors and SAIC were 27 billion euros and 66 billion euros respectively, and their R&D spending was 1.0 billion euros and 700 million euros respectively. In the same year VW’s revenues were 197 billion euros and its R&D spending was 11.7 billion euros (European Commission, 2016).25 For example, the TNI Index (an unweighted average of the share of foreign assets, revenue and employment in the firm’s total assets, revenue and employment) is 59 per cent for GE (USA) and VW (Germany), 65 per cent for Johnson and Johnson (USA), 66 per cent for Siemens (Germany), 74 per cent for Shell (UK), 77 per cent for Telefonica (Spain), 87 per cent for WP (UK) and 93 per cent for Anheuser Busch Inbev (Belgium) (UNCTAD, 2017).

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attend the same international private schools and finish their education at the same global elite universities. They attend common international meetings, such as the Davos Economic Forum. They have less and less attachment to the country in which they were born. The share of global income taken by the top one per cent of the world’s population in 2010 was at least 16 per cent, and probably as high as 28 per cent if reasonable assumptions are made about under-reporting of income (Milanovic, 2016: 41). Between 1988 and 2008 the top one per cent are estimated to have had a 65 per cent increase in real income (Milanovic, 2016: 11 and 41). Due to their very large incomes, between 1988 and 2008 the top one per cent took 19 per cent of the total global increase in income while the richest five per cent took 44 per cent of the total increase (Milanovic, 2016: 24-25). The top one per cent of the world income and wealth distribution are ‘overwhelmingly from the rich economies’, with 50 per cent from the USA and the rest ‘almost exclusively from Western Europe, Japan and Oceania’ (Milanovic, 2016: 22).

As we have seen, there has been a significant decline in global income inequality in recent decades, which is mainly due to China’s rapid growth, but increasingly also due to India’s accelerated growth. However, the level of global income inequality is still extremely high. Even though the global Gini coefficient fell from 0.73 in 2000 to 0.67 in 2011, the latter figure is far higher than in most countries: ‘If such extreme inequality existed in smaller communities or in a nation-state, governing authorities would find it too destabilising to leave it alone, or revolutions or riots might break out’ (Milanovic, 2007). The main explanation of the continued large extent of global income inequality remains the ‘citizenship premium’, with around 70 per cent of global inequality attributable to the wide differences in national output and income per person (Milanovic, 2016: 129).26 Although the share of those in the global middle income groups has significantly increased since the 1980s, the average annual income (in 2005 PPP dollars) of the middle income groups in developing countries is only around $PPP 1,000-2,000 per person, compared with $PPP 5,000-10,000 in the high income countries (Milanovic, 2016: 29).

Although the global distribution of income is extremely unequal, the distribution of global wealth is far more so. The share of the top one per cent in global wealth is estimated to have increased from 32 per cent in 2000 to 46 per cent in 2010 (Milanovic, 2016: 41). Credit Suisse estimates that world household wealth increased from around US$120 trillion in 2000 to US$256 trillion in 2016, which is 3.3 times the size of global GDP (Credit Suisse, 2016). It estimates that the top one per cent of the world’s adult population owns 51 per cent of global wealth, the top five per cent owns 78 per cent and the top ten per cent owns 89 per cent, while the bottom 50 per cent owns less than one per cent.27 That the world of capitalist globalisation has produced such a fantastically unequal distribution of accumulated wealth is cause for deep reflection.

Inequality within rich countries. The integration of global markets has had profoundly contradictory results for the citizens of the high-income countries, including the United States. On the one hand, it helped to raise living standards due to the falling real price of imported consumer goods. On the other hand, it helped to increase inequality. The

26 The share of global income inequality attributable to differences in average incomes between countries is estimated to have increased from around 18 per cent in 1800 to a peak of around 78 per cent in 1990, falling to around 68 per cent in 2010 (Milanovic, 2016: 129).27 The bottom half of the world’s adult population own less than US$2,200 per person and the bottom 20 per cent of adults own less than US$159 per person. In 2016 mean adult wealth per person was US$337,078 in North America, US$125,460 in Europe, US$3,835 in India and US$4,261 in Africa (Credit Suisse, 2016). The median wealth per adult in India was US$608, far below the mean.

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liberalisation of capital and product markets after the 1970s opened up a vast world of low-priced labour across the ‘transition’ and ‘developing’ countries: in 2008 the total labour force in the high income economies was 502 million, compared with 2,601 million in the low and middle income economies as a whole, of which 1,227 million were in China and India alone (World Bank, 2010). Global labour markets were integrated mainly through the migration of capital to poor countries and through the export of goods and services from poor to rich countries. This placed severe pressure for international equalisation of wages and conditions of work. At the same time, revolutionary change in information technology led to the replacement of a wide swathe of low-skilled white-collar office jobs, while demand for unskilled jobs in the service sector, such as restaurants, retail and domestic help, surged. Across the high-income countries income inequality increased significantly during the era of globalisation. Between 1970 and 2011 in the USA the Gini coefficient of pre-tax income inequality increased from 0.44 to 0.52 and in Germany it increased from 0.38 to 0.52 (Milanovic, 2016: 108). In the UK between 1969 and 2001/2 the Gini coefficient of pre-tax income increased from 0.33 to 0.53 (Grazeley, 2014: 174). The impact of direct taxation and social transfers greatly reduced the dimension of final income inequality in the high income countries, but the era also saw a trend increase in this dimension of income inequality. The Gini coefficient of income inequality after direct taxes and transfers increased from 0.36 in the mid-1970s to 0.41 in 2011 in the USA, from 0.28 in 1980 to 0.31 in 2011in Germany (Milanovic, 2016: 108) and from 0.25 in 1969 to 0.33 in 2001/2 in the UK (Grazeley, 2014: 174).28

Inequality within developing countries. Developing countries also experienced increased inequality, closely linked with their integration into the global capitalist economy. Within fast-growing low and middle-income countries alongside the expanding indigenous modern capitalist sector was increased investment by multinational firms, which brought the ‘twenty-first century’ to these countries in terms of employment and remuneration, with pay and conditions of work determined mainly by global standards. However, in most developing countries those employed in the modern sector constitute only a small fraction of the non-farm population. In most developing countries a large fraction of the non-agricultural workforce is employed in the ‘informal’ sector, with typically erratic employment opportunities, low or non-existent social welfare provision, conditions of work that are often dangerous and without trade union protection. The share of informal employment in total non-agricultural employment in 2009/10 was estimated to be 33 per cent in China, 42 per cent in Thailand, 68 per cent in Vietnam, 70 per cent in the Philippines, 73 per cent in Indonesia and 84 per cent in India (IMF, 2016). Within India’s informal sector, 79 per cent of workers are ‘poor and vulnerable’ and only 21 per cent are at the ‘middle and high income’ level (Breman, 2013: 96). During the ‘Lewis’ phase of ‘economic development with unlimited supplies of labour’ a fundamental constraint is set to the growth of real wages for urban unskilled labour by the availability of unlimited supplies of under-employed rural labour, which allows a large fraction of profits to be captured by the owners of capital. In fast-growing parts of the developing world, these factors have caused accelerated growth to be accompanied by increased inequality. In Asia between 1990 and 2013 the population-weighted Gini coefficient of income distribution increased from 0.37 to 0.48 (IMF, 2016). China was at the forefront of the increased income inequality in Asia, with an increase in Gini coefficient of income inequality from 0.35 in 1995 to 0.53 in 2010 (Kanbur, 2017). However, since then the Gini coefficient has declined steadily, reaching 0.495 in 2014. The decline is in part due

28 In the 1970s the Gini coefficient of income distribution in Europe after direct taxes and transfers was close to the Gini coefficient of income distribution in socialist China.

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to government policy in relation to minimum wages, infrastructure investment in poor regions, and rural medical insurance schemes. However, an important contribution is the fact that China is already passing through the ‘Lewis turning point’, thereby placing upward pressure on urban real wages rates for unskilled and semi-skilled labour. Most low and middle income countries are still locked into the Lewis phase of development and countries such as Bangladesh, India and Indonesia still have a long way to go before they move out of this phase.

FinanceIn the mid-nineteenth century Marx warned of the dangers posed to the real economy by concentration in the banking industry:

‘Talk about centralisation! The credit system, which has its focus on the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner – and this gang knows nothing about production and has nothing to do with it’(Karl Marx, 1971: 544-545).

After the 1980s the newly-formed giant global banks, which constitute the ‘glue’ that knits the global business system together, relentlessly pressured national financial authorities to loosen controls over the financial sector. The process of ‘regulatory capture’ of policy makers and regulators spread through the West’s financial system (Johnson, 2009). The transition from primarily national to increasingly global financial markets was not accompanied by a strengthening of international regulatory governance. The IMF, which is the institution that is supposed to guide the global financial system, was aptly described as a ‘rudderless ship in a sea of liquidity’. Moreover, the global financial system developed instruments of such great complexity that no one understood how to regulate the whole system, even assuming that the political determination to do so existed. Across the Western world, economists and policy makers were convinced of the inherently self-regulating capacity of the financial system, which required only the moderating influence of monetary policy, mainly through use of the Central Banks’ policy rate of interest, in order to achieve economic system stability. In 2004 Ben Bernanke, Federal Reserve Board Governor, stated: ‘My view is that improvements in monetary policy…have probably been an important source of the Great Moderation…I am not convinced that the decline in macroeconomic volatility of the past two decades was primarily the result of good luck’ (Quoted in Wolf, 2013).

In fact, financial markets have an inherent propensity towards speculation and asset price bubbles. Keynes famously warned of the dangers of financial speculation: ‘Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done’ (Keynes, 1936: 159). In fact, bubbles in financial markets are ‘so natural that one must conclude that if there is to be debate about…speculative bubbles, the burden of proof is on the sceptics to provide evidence as to why [they] cannot occur’ (Shiller, 2001: 67). The initiating factor in financial bubbles is often the optimism generated by a feeling that the economy has entered a ‘new era’. Monetary expansion is endogenous to the economic system and once the speculation process gets under way powerful positive feedback loops drive markets ever higher (Minsky, 1986). Credit is

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extended on the basis of increased collateral asset prices, which supports still further increase in asset prices, and still further credit expansion. In spite of the efforts of monetary authorities to control the supply of money, it has tended to expand in periods of asset price inflation in order to finance speculation.

No period created a greater sense of a new era than the recent era of capitalist globalisation, which witnessed an unprecedented asset bubble across the West, fuelled by the huge increase in money in its myriad forms. In the high-income economies, the asset prices bubble formed the foundation for an explosive growth of credit, to fund both speculation and current consumption. Between 1995 and 2007 real house prices increased by around 60 per cent in the USA, 70 per cent in Spain and 170 per cent in the UK (Wolf, 2013). Between 1985 and 2007 in the USA private sector debt increased from around 150 per cent of GDP to 300 per cent (Wolf, 2013). Between 2000 and 2007 global debt increased by 7.3 per cent per annum, expanding from US$87 trillion to US$142 trillion. By 2007 total global debt stood at 2.7 times global GDP (McKinsey, 2015). The fastest growth of debt took place in the financial sector itself, increasing at 9.4 per cent per annum between 2000-07 (McKinsey, 2015). In the UK the median leverage of the financial sector rose from 20:1 in 2000 to 50:1 in 2007/8 (Wolf, 2013). The combination of asset price inflation along with the huge rise in gross indebtedness permitted additional spending by households on consumption and residential investment.

Across the Western world governments did not wish to spoil the party by ‘taking away the punchbowl’ and make house-owning voters angry. Nominally independent central banks were instructed to concern themselves only with consumer price inflation and ignore asset price inflation. Asset price inflation was specifically considered by government officials across the Western world to be ‘not the domain of central banks’ (Sender, 2016). The decision to target consumer price inflation was a critically important policy choice. It liberated financial institutions to make money for themselves and their customers from asset price inflation in the secure knowledge that asset price increases were a ‘one way bet’ with the central banks prevented by law in Europe and by policy choice in the United States from intervening to restrain this vast terrain of money-making. The global financial system was now deeply integrated across national boundaries, far more deeply even than the integration of production systems. The massive extent of repackaging and sale of debt meant that it was far more deeply distributed throughout the economy. This enhanced the ability of the financial system to ride out relatively small-scale crises, but it meant that the whole global financial system was far more susceptible to a giant financial crisis should it erupt.

In 2008 the global financial crisis erupted. At the core of the financial crisis was the role in generating instability of an unconstrained credit system in the West (Minsky, 1986). In the course of the week of 6-10 October 2008 the dam burst. The stock market fell by 23 per cent in New York, 21 per cent in London, 25 per cent in Tokyo and 22 per cent in Frankfurt. The emerging markets stock market index fell by 26 per cent. The share price of leading banks plunged. The world’s financial markets faced Armageddon. The Financial Times editorial of Monday 13 October was entitled: ‘The minute before midnight for banks’: ‘The banking system of the western world is suffering the equivalent of cardiac arrest. It is virtually impossible for any institution to finance itself in the markets any longer than overnight. This is a measure of the panic-stricken collapse of confidence that has seized the system…The heart of the world’s financial system has stopped beating. It must be re-started’. In 2009 in the major advanced economies GDP fell by 3.8 per cent and in the Eurozone by 4.5 per cent (IMF, 2017). In the Eurozone by

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early 2009 the overall unemployment rate reached 9.7 per cent and the youth unemployment rate reached 20.9 per cent.

The crisis demolished the ‘market fundamentalist’ view that lightly regulated financial markets based on shareholder-owned banks were self-correcting. In May 2008 the former Managing Director of the IMF, Horst Köhler, delivered a devastating verdict on liberalised global financial markets: ‘The complexity of financial products and the possibility to carry out huge leveraged trades with little capital have allowed the monster to grow… The only good thing about this crisis is that it has made clear to any thinking, responsible person in the sector that international financial markets have developed into a monster that must be put back in its place’ (quoted in the Financial Times, 15 May 2008).

At the global level, in 2010 the high income countries agreed to a small increase in the voting rights of developing countries in the IMF.29 However, the USA’s voting rights were only marginally reduced, which meant that the USA continued to have a veto over major IMF decisions.30 Moreover, the Director General of the IMF continued to be a European.31 The Bank of International Settlement responded to the crisis by establishing the Financial Stability Board, which included not only the high income economies, but also China and India as well as a further six developing economies. The FSB played a key role in implementing the Basle III regulations, which were to be introduced between 2013-2019. These increased the required bank capital in order better to absorb shocks, introduced counter-cyclical capital buffers, and reduced the role of complicated, hard-to-understand financial derivatives on bank balance sheets.

Across the high-income economies the response to the crisis focussed almost exclusively on monetary policy.32 Between the end of 2008 and the end of 2009 the central bank intervention rate in the USA was reduced from 5.2 per cent to 0.2 per cent, in the Eurozone from 4 per cent to one per cent, in the UK from 5.7 per cent to 0.5 per cent and in Japan from 0.5 per cent to 0.1 per cent. The central banks across the high income countries made massive purchases of government bonds (‘quantitative easing’) issued by the treasury departments.33 By 2014 the central banks of the USA, the UK, and Japan held 16, 24 and 22 per cent respectively of government bonds outstanding in their countries and central bank balance sheets reached nearly 60 per cent of GDP in Japan, 25 per cent in the USA and the UK, and 21 per cent in the Eurozone (McKinsey, 2015: 33).

29 The share of developing countries was increased from 40.5 per cent to 44.8 per cent, although the change was not ratified by the US Congress until January 2016. 30 The share of the USA’s voting rights was reduced from 16.72 cent to 16.62 per cent.31 The Frenchman, Dominique Strauss-Kahn, continued as Director General until he resigned in 2011, to be replaced by a Frenchwoman, Christine Lagarde, who was re-appointed for a second five year term in 2016.32 Alternative approaches to the crisis were given short shrift. These would have involved redistribution by means of the fiscal policy route, stimulating consumer demand through income redistribution, financed by increased taxation of income and wealth, alongside state-organised public infrastructure investment, in order to improve the provision of energy-efficient transport, buildings, and electricity supply, and raise educational levels in order to develop the skills needed to compete in the global labour market. Such long-term investments with secure yields would have been an attractive source of investment revenue for pension funds and asset managers. The alternative approach would have helped to cement the fabric of societies that had been undermined by the combined forces of globalisation and technical changes since the 1980s. Refusal to implement this approach reflected a failure of political imagination. In the absence of this approach, since 2007 social cohesion in the high-income countries has been undermined severely, which has helped to stimulate the rise of populist political forces of both the right and the left across the high income countries.33 This essentially meant that one part of the government, the central bank, was buying debt from another part of the government, the national treasury.

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The large volume of central bank purchase of treasury bonds stimulated bond price increases, which pushed down bond yields. In the USA the yield on 10-year Treasury Bills fell from 4 per cent in 2008 to 0.02 per cent in mid-2016 (Financial Times, 2 August 2016). By July 2016 the volume of negative-yielding government bonds had reached a global total of US$ 13 trillion, amounting to around 30 per cent of global government debt (Financial Times, 3 August, 2016). In the fixed-income markets there was a bond-buying frenzy with a ‘voracious investor appetite for sovereign paper’ (Financial Times, 4 June 2016).

The main plank of government policy in response to the GFC was to use monetary policy in order to re-ignite the asset bubbles that were punctured during the global financial crisis and thereby stimulate consumer spending: ‘Monetary policy has reduced interest rates and supported asset prices in order to stimulate spending and avoid an even deeper and more prolonged recession following the financial crisis’ (Bank of England, 2012: 11). The Bank of England was candid about the impact of monetary policy upon wealth inequality: ‘By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5 per of households holding 40 per cent of these assets’ (Bank of England, 2012). The impact on asset prices was broadly in line with the policy-makers expectations. The effect on stock markets was dramatic. US stock market capitalisation had plummeted from US$ 19.9 trillion in 2007 to US$ 11.6 trillion in 2008, with profound effects on the psychology of the US public, not least through its effect upon the prospect for pensions. By 2016 US stock market capitalisation had recovered to over US$ 27.4 trillion, far surpassing the pre-crisis peak. In global cities and in many high-income countries, house prices resumed their upward trend while bond prices rose steeply. The level of global debt continued to increase. Total debt increased by 5.3 per cent per annum between 2007-14. Each of the main components of debt rose substantially, including an increase of US$40 trillion in household debt. However, the fastest rate of increase was in government debt, which increased by 9.3 per annum between 2007-14 (McKinsey, 2015). By the middle of 2014 the ratio of debt to GDP reached 400 per cent in Japan, 280 per cent in France, 252 per cent in the UK, 233 per cent in the USA and 188 per cent in Germany (McKinsey, 2015).

The impact on demand and economic growth was far less than was hoped for. The monetary policy measures taken after 2008 failed to return the high-income countries to the growth trajectory prior to the crisis. Instead of investment in buildings, plant and machinery, institutional investors instead sought to invest in stocks, government bonds, corporate bonds and property, while corporates used cheap debt in order to invest heavily in their own shares. The rate of investment in the G7 economies fell from around 25 per cent of GDP in the 1980s to 22 per cent in 2005-7, declining to around 20 per cent in 2011-2015. In the view of Martin Wolf: ‘The world economy is now in a very strange place. We should not forget how strange and disturbing it is. [T]here is no reason to be confident that we will have eliminated the danger of doing this all over again’ (Wolf, 2013).

Conclusion

Capitalist freedom to compete in the pursuit of profit has been at the heart of human progress since the dawn of human civilisation. In the era of capitalist globalisation after the 1970s, the pace of progress reached a new highpoint, with unprecedented advances in

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technology stimulated by the invisible hand of competition, led by that between giant oligopolistic firms battling for leading position on global markets. However, capitalist freedom is a two-edged sword. In the period of capitalist globalisation, these contradictions have reached new depths that present a Darwinian threat to the very survival of the human species. The recent era of capitalist globalisation has confirmed Marx’s view of the progressive historical role of capitalist competition and the inherently international character of capital. It has confirmed also his view of the tendency of capitalist competition to lead to concentration of business power, to radically different outcomes for different social classes, and to threats to economic and social stability arising from the financial system. Like most of his contemporaries Marx regarded the natural world as a resource to be exploited by human ingenuity. He had no conception of the destruction that unrestrained market forces would cause for the environment. Nor could he imagine the persistence under capitalist globalisation of national identity and the nation as the main location for political activity.

If human beings are to resolve the contradictions of capitalist globalisation, it is necessary to establish mechanisms to contain the Frankenstein monster of unconstrained global capitalism. There are numerous policies to contain the contradictions of capitalist globalisation that can be enacted at the level of the nation, including taxation, social welfare, infrastructure building and industrial policy.34 However, it is increasingly the case that resolving the contradictions requires cooperation between nations, which have interests that often diverge. For most human beings, ‘global’ is not their framework of reference or source of identity. For most people, apart from the family and religion, the ‘nation’ is the primary source of identity and the main forum within which they have a political voice. Although the forces of capitalist globalisation are increasingly international, the national interest of citizens and national governments remains a potent force. In addition, the rich countries have many interests in common that often diverge from those of developing countries. Moreover, they have dominated the global economy, culture and military relations since the early nineteenth century, which is a relatively short period in the long sweep of human history. Adjustment to the end of that era is a comprehensive challenge for the citizens and government of the high-income countries.

Modern capitalist globalisation began in the late 1970s. As the ‘wild animal’ of global capitalism became larger and more powerful, it has become ever more important that human beings, who have given birth to and nurtured this wild animal, establish a moral framework to regulate its activity, and thereby prevent the wild animal from devouring its creator, humanity. In order to resolve the contradictions of capitalist globalisation, there is no choice other than to grope towards international cooperation. The capitalist system is the product of the collective exercise of human intelligence. The way in which people choose collectively to exercise that intelligence is governed by their ethics. Ethics are the ‘pole star’ to guide humanity on its journey through history. Adam Smith was brutally realistic about the elemental power of market place competition in the pursuit of ‘wealth and greatness’. However, he considered that human psychology required social cohesion as the foundation of a good society in which all citizens could achieve happiness:

‘All the members of human society stand in need of each other’s assistance…Where the necessary assistance is reciprocally afforded from love, from gratitude,

34 Industrial policy can take many forms, including broad supportive measures to upgrade national productivity, sectoral targeting, support for indigenous industries and targeting national champion firms. The feasibility of industrial policy depends upon a country’s size, natural resource base, location, political traditions and government competence, as well as its international relations.

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from friendship, and esteem, the society flourishes and is happy. All the different members of it are bound together by the agreeable bonds of love and affection, and are, as it were, drawn to one common centre of mutual good offices’ (Smith, 1761: 85).

For Smith, benevolence towards other member of society is the foundation of social stability and harmony:

‘[T]o feel much for others and little for ourselves, to restrain our selfish, and to indulge our benevolent affections, constitutes the perfection of human nature; and can alone among mankind produce that harmony of sentiments and passions in which consists their whole grace and propriety’ (Smith, 1761: 25).

For Smith the ‘good society’ did not stop at the individual’s immediate society or, even, at a country’s borders:

‘The wise and virtuous man is at all times willing that his own private interest should be sacrificed to the public interest of his own particular order or society. He is at all times willing too, that the interest of this order or society should be sacrificed to the greater interest of the state or sovereignty, of which it is only a subordinate part. He should, therefore, be equally willing that all those inferior interests should be sacrificed to the greater interests of the universe, to the greater interests of that great society of all sensible and intelligent beings of which God himself is the immediate administrator and director…[H]e must consider all the misfortunes which may befall himself, his friends, his society, or his country, as necessary for the prosperity of the universe’ (Smith, 1761: 235).

The construction of global regulation of the wild animal of capitalist competition in the common interest of ‘all under heaven’ (tian xia wei gong) requires benevolence across different cultures and countries at different levels of development and with different national interests.

The relationship between the West and China is centrally important in humanity’s attempt to grope a way forward in this extraordinarily dangerous time.35 Many people within each of these cultures believe that there is an unavoidable ‘clash of civilisations’. In fact, there is no fundamental clash. In both the East and the West, in both the medieval and the modern world, private property, extension of the market, and pursuit of profit, have been the central forces stimulating human ingenuity to achieve technical progress. For more than 2000 years, China’s intellectuals and political leaders have wrestled with the conundrum of attempting to ‘civilise’ capitalism and establish a harmonious, stable society. China today is trying to ‘learn from the past in order to serve the present’ (gu wei jin yong). It has the potential to make a rich contribution to resolving the contradictions inherent in capitalist globalisation. Polarisation of discussion into a choice between Western ‘Enlightenment’ values and Oriental ‘Confucian’ values is destructive to progress in regulating in the common interest the capitalist global market to which all nations now inescapably belong.

The challenges that are faced by human beings are the product of people’s own purposive activities, expressed mainly through the economic system. It is within their collective

35 The possibility of a ‘Clash of Civilisations’ and a ‘New Peloponnesian War’, with large-scale conventional, cyber or, even, nuclear war, has become central theme of international relations discussions in recent years.

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power to resolve these contradictions. The very depth of the challenges they now face may shock them into the action necessary to ensure the survival of the species.36 Alongside human beings’ competitive and destructive instincts are their instincts for species survival through cooperation. It may only be the approaching ‘final hour’ which finally forces human beings to grope their way towards the globally cooperative solutions that constitute the essence of communism in the 21st century. The falling of the ‘dusk’, as humanity looks into the abyss, may be the final impulse to produce the cooperative solution that is immanent within the unfolding of global capitalism: ‘The owl of Minerva spreads its wings only with the falling of the dusk’ (Hegel, 1952: 13). Communism is the ‘choice of no choice’ (mei you xuan ze de xuan ze) for the survival of the human species. China has a long history over more than 2,000 years of searching pragmatically for the most suitable way in which regulate the market in the interests of the mass of the population. This rich experience of integrating in a positive-sum fashion the dynamic force of the ‘invisible hand’ of market competition with the pragmatic, non-ideological regulation of the market, can make an invaluable contribution to the establishment of a harmonious, ethically-guided global political economy, which resolves the contradictions of capitalist globalisation in the interests of the whole human species. This is a form of ‘groping for stones to cross the river’ for the whole of humanity, towards a world in which all the world’s inhabitants will live in peace and security, with equal access to the means for self-fulfilment.

36 Darwin insisted upon the term ‘natural selection’ being taken in its ‘large and metaphorical sense, including dependence of one being on another, and including (which is more important) not only the life of the individual, but success of the progeny’. In Darwin’s view it is unique moral qualities of human beings, including above all their need for mutual support and love, that is the key to the survival of the human species (Darwin, 2004).

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