In the developed world, it is often observed that we are living in an era of ‘late-stage capitalism’. To get a clear picture of what that might mean, it is useful to examine the measures we use to understand economic trends.
The customary assumption is that economic statistics furnish a complete picture of what is happening – industrially, financially and with a country’s standard of living. The metrics are treated as scientific absolutes, the equivalent of unchanging measures in physics. That is wrong.
Economics is not a science; it is more like a specialised language that can sometimes illuminate but just as often deceive.
The conventional measures are often as revealing for what they do not reveal as for what they do. They should be adapted as economies and industry bases change, but they are not.
Take GDP – the most commonly used assessment of a country’s economic state. It is a record of transactions. Economic ‘growth’ (expanding GDP) occurs when the value of total transactions increases. In effect, transactions are viewed as real, and what is actually happening is only secondary.
This bias leads to blindspots, one of which is a failure to understand the difference between efficiency and productivity.
Efficiency is improvements in production, whereby the resources and capital invested at the beginning of the process result in greater output of widgets at the end of the process.
Productivity is thought of as the same, but it is not. It is a monetary measure: how much profit you can make relative to how much capital you put in.
Big improvements in efficiency in an industry can actually result in falling productivity if competing companies in the sector are all able to get efficiency gains, resulting in falling prices and squeezed profit margins.
Economists prefer productivity as a measure, however, because it involves measuring transactions, which is what they specialise in. They have made little or no attempt to track the enormous improvements in efficiency that have come from automation, technological advances, and better management practices.
Consider, for instance, refrigerators. When I was a boy, buying one was a major outlay, a significant event because the transaction was large relative to incomes. After decades of efficiency gains and technological improvements, however, white goods are cheap, which means productivity in the sector has declined: that is, selling a fridge is less profitable.
Such changes are invisible to economists, however, because they only look at the money exchanged, not what the money buys.
Trying to get some picture of these efficiency changes is key to understanding how late-stage capitalism will progress.
Capitalism, to survive, needs ‘growth’. This is often interpreted, especially by environmentalists, as a need to continuously consume resources. It is then argued that, because resources are finite, growth cannot be infinite and capitalism has to fail eventually. That is wrong.
Growth is an increase in transactions, money exchanged, and it is possible to have rising growth with declining consumption of resources. That is what happens, for example, when someone purchases solar panels. There is a transaction, which contributes to growth, yet consumption of fossil fuels falls.
Or consider the biggest area of growth in the last quarter of a century – bank lending. It involves large amounts of money that create ‘growth’ but it consumes very few resources – maybe a little electricity, because it is mainly just data in computers.
So where, in developed economies, will future growth come from? Getting an answer to that will give us some insight into where late-stage capitalism is heading.
It will not come from manufacturing or secondary industries, both because of efficiency gains and ageing populations, which lead to weaker demand.
There are also very few new inventions of the type that created massive demand in the 1950s and 1960s – fridges, televisions, telephones, mass produced cars, cooking ranges, heating and cooling systems.
Much of what has happened since is a sophistication of what was already there. The mobile phone, for example, is just a phone that is movable and does not need a landline. The microwave oven is just a quicker version of an oven.
The conventional measures are often as revealing for what they do not reveal as for what they do. They should be adapted as economies and industry bases change, but they are not.
The food sector is unlikely to contribute to growth. The range and availability have dramatically increased – compare supermarkets now with the much simpler version 50 years ago – and supply chains are global and complex. That means new forms of innovation and economic growth are unlikely to emerge; they have already happened.
Infrastructure in developed economies has, for the most part, already been built and just requires maintenance. The exception is what is required for zero-carbon ambitions, but we will come to that later.
Housing, the need for shelter, has been subject to big financial distortions over the last quarter of a century. If a dollar buys a lot more white goods now than it did four or five decades ago, that dollar buys far less property.
The sector is unlikely to continue to be a central growth engine, however. The financial excesses seem to be drawing to an end, if only because the levels of debt have become so high there is a limit to how much banks and property spruikers can keep making money out of money – what is dubbed ‘financialisation’.
In the energy sector, efficiency improvements have been weak, so it may contribute strongly to ‘growth’ – which is far from good news for the average person. Just turning the lights on may become a big challenge in late-stage capitalism.
For some time, the financial markets have been drooling at the prospect of making money out of the proposed transition to zero carbon. Most assessments of the cost of transitioning are about US$100 trillion, which is about the equivalent of annual global GDP.
Bank of America estimates an extraordinary $275 trillion will be required. If true – and it is just speculation – that would be enough to keep the capitalist ball rolling for decades, and generate adequate ‘growth’.
The other side of the coin, though, is that it will make energy much more expensive, both to consumers and taxpayers.
Worse, the push to zero carbon will almost certainly disappoint. Oil, natural gas and coal still provide 84 per cent of the world’s energy, down just two per cent from 20 years ago, despite the increases in renewable energy. But the extent to which it remains the aim is the degree to which energy costs will soar.
Two other sectors have a potential to generate ‘growth’. One is the health sector, which can have ever rising profitability because of the difficulty of putting a price on death or suffering. There are potentially huge profits to be made from treating illness.
The other is the defence sector, where there are, theoretically, few limits to how much money can go into making weapons and hiring personnel.
So where will late-stage capitalism head? In one sense, it is impossible to say because of the possibility of new inventions. But, in terms of people’s household budgets, it seems likely that the cost of energy and health will take up an ever larger portion of people’s incomes.
The cost of housing will remain very high for younger generations, especially if interest rates continue to rise. But price rises will eventually slow or reverse.
The income required for food and manufactured goods will probably not change greatly.
What will come after late-stage capitalism? It is hard to answer that question because, unlike socialism or communism, ‘capitalism’ is hard to define. When people use the word, they are variously referring to industrialisation, financial materialism, property rights, consumerism or ownership inequities. It is more a loose metaphor than a precise referent.
What is not often appreciated is that it is not an ideology, although ideologies have been attached to it. At base, capitalism is just a simple piece of arithmetic. The equation is that the cost of capital (set by the interest rate) has to be exceeded by the rate of economic growth, otherwise the system starts to stall – that is what we call a recession.
The question that has to be answered is where that necessary growth will come from.
Published 12 June 2024.
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Photo by Mitchell Luo on Unsplash.
