September 22, 1999
October 13, 1999
On the Road in Georgia
R. L. Norman Jr.
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Post script
November 1, 2002
These notes are somewhat out of date and are somewhat duplicative of other long articles on the site, but have some unique paragraphs in terms of trying to get a strong theoretical grasp of what is (was) happening within the Web-based economy. These notes have not be well edited, but whatever their shortcomings, I would argue that the theory and the facts as I saw them in fall of 1999, were considerably ahead of most business thinking about the Web at that time. Due to political problems with City University of New York, I have not been able to obtain academic employment in sociology and have not been able to get any of the papers on this site published even in left wing publications. It seems that my former mentors in CUNY’s Sociology Department have blacklisted me. I bring this up not to complain, but simply to explain why none of this writing had received much notice prior to the creation of this Web site and the collapse of the Web economy. While Georgia State University gave me an informal engagement in 1999; only Bertell Ollman from New York University Department of Politics, has given me a New York City formal academic podium from which to speak.
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Ways of Viewing the Current Crisis
Marx’s View of the Falling
Rate of Profit
Long Waves of ‘Creative
Destruction’ and the Internet: Alan Greenspan’s Model?
The Web: The Last Long Wave
as the New Falling Rate Crisis
Politics of the Transition:
A New Social Cohesion or a Diversity-Based Collapse
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The current economic situation on
the Internet is historically unprecedented. The shift from labor and capital to
knowledge as the dominant component in production has never occurred before;
although there have been three perhaps four transitions of types of labor-based factory production since Adam Smith;
cotton in 1790, railroads and steel in 1840, and automobiles and electricity in
1890. Described as ‘long waves’ by Russian economist Nikolai Kondratieff
between 1915 and 1920, these transitions kept large amounts of people in the
production process, at least for a time. Each long wave had a twenty year
upswing, followed by a twenty year downturn. These dates and times are only
approximations. Intense investment, construction and rapid demand for labor
typified the upswings, while decreased investment, greater labor efficiency,
less construction and less demand for labor typified the downswings.
There are five; perhaps six basic models for seeing
the economic changes resulting from the Web:
1.
Rapid
but steady growth [conventional monetarists, Friedman]
2.
A
new long wave based upon a new innovation [some
Trotskyites; Greenspan]
3.
Stagnation
[Keynesians]
4.
Input-Output
System [Leontief’s followers]
5.
Technical-rationality [Weberians]
6.
Falling
rate of profit crisis [some
orthodox Marxists]
Interpreting the Web economic model probably
requires a new composite theory, which draws logical elements and explanations
from all existing political economies and discards the rest, onto ‘the ash heap
of history’. First off, the conservativism of Austrian economist Friedrich von
Hayek should be abandoned immediately, as it is now possible to construct a
nation-wide information system. It should be recalled that von Hayek’s primary
criticism of socialism was the inability of that system to generate enough
information to permit ration decision making. As the corporate data warehouses
grow ever larger and as more and more data becomes commodified and easily
available over the Web, von Hayek becomes less and less relevant. The last view
will be covered first because it has received so little thought in the U.S. and
because it may be crucial in determining part of the problem. Each of the above
models except Max Weber’s idea of ‘technical-rationality’ will be considered,
although all will not have separate headings and unfortunately, there is
overlap between them.
In conventional Marxism, a state of permanent
imbalance or contradiction exists between the total productive capacity of the
modern economy and the ability of the society to readily consume all that is
produced. The imbalance is seen as resulting from the tendency of investment in
production efficiency to exceed total buying capacity. In orthodox Marxism the
‘organic composition of capital’ rises, in that the ratio of ‘fixed’ to
‘variable’ capital rises too high. Fixed capital is machinery and factory
infrastructure, variable capital is the worker base. Fixed capital is ‘fixed’,
in that payments must be made on the capital borrowed to purchase the
equipment, whether or not the machinery is used. Variable capital is
‘variable’, in that the factory owners have some degree of flexibility in terms
of payment scales and overall employment levels. Surplus value is the
difference between the monetary value of the total societal production and the
portion of that production consumed by the producing classes. Surplus value is
controlled by the investing classes and rises with additional investment up to
a point. Surplus value is approximately the same as profits, but the two terms
were not always seen as identical by Marx. At some future point, Marx believed
that surplus value would rise too high, thereby so undercutting the buying
capacity of the working class, that a drastic crisis would occur from the ‘falling
rate of profit’.
John Maynard Keynes had a similar explanation for the same problem, ‘over-investment’, although there may be a fine technical point between simply building too much production capacity and making that same capacity ‘too efficient’ by investing in additional labor-saving devices and firing workers. Over-investment led to ‘stagnation’; a decrease in effective demand or effective buying capacity as Keynes described matters during the 1930s.
The falling rate of profit theory is important
because only Marx’s theory has an explanation for how the capitalist system
could simply by operating successfully within its own logic, create the
conditions for its own collapse. All other conventional economic theories
require some failure of the operating economy to explain a crisis. Thus crises
are explained as a failure by some part of the economy to have done its job.
Thus Anna Schwartz and Milton Friedman seem to believe that the 1930s crisis
was either created or greatly exacerbated by a too-strident Federal Reserve
policy. The idea that a prosperous, successful capitalism could be creating the
seeds of its own demise is basically
foreign to most conventional economic theory. And in truth, if the capitalist
system is drifting into a severe crisis because of the Web, Marx’s precise
definitions of a falling rate crisis may not be met; but Marx at least has a
theory which explains how crisis may result from the system working
successfully, instead of having to deal after the fact with ad hoc explanations.
Both radical and conservative economic theory
utilize parts of Kondratieff’s theory. The author of the classic 1939 book, Business Cycles, Joseph A. Schumpeter revised
and updated Kondratieff using the term ‘creative destruction’, in describing
these cycles of rapid and slow investment. The chairman of the American Federal
Reserve, Alan Greenspan also uses ‘creative destruction’ as a model of economic
explanation. This does not mean that Greenspan, having been the primary
influence in one of the longest and strongest bull markets in history is some
leftist sympathizer; only that economics contains core concepts which seem to
transcend existing political categories.
In fact Kondratieff, a primary developer of the idea
underlying modern business cycles wrote much of his work in the early years of
the newly developing Soviet Union. Part of his theory was from arguments with
Leon Trotsky over the nature of capitalist growth. His long wave theory
suggested that capitalism had a built-in, self-regulating structure for
overcoming economic crises. His theory indicated that the glaring problems
within capitalism could be resolved by structures internal to capital. This approach
was in direct contradiction to Marx and the falling rate theory. Soon after the
market crashed in 1929, he was imprisoned in the Gulag, because had he been
correct, the severe crisis of the 1930s could have been resolved without the
benefit of revolution in Europe and
America. Joseph Stalin would not permit such heresy to survive and Kondratieff
He later died in prison. However, one of Trotsky’s associates, Ernest Mandel,
carried forth a left version of long wave theory throughout the long Cold War.
Kondratieff’s theory of self-regenerating waves of
capitalist growth were based upon lagging investment eventually creating
innovations capable of reemploying the large amount of people squeezed out of
the workforce by the annual increases in efficiency prevalent to capitalist
development. Schumpeter’s interpretation of Kondratieff attempted to further
‘normalize’ this chaotic process of investment. In Alan Greenspan’s model, it
seems possible through monetary policy to almost completely smooth out these
gaps in investment, which lead to collapsing demand for labor and
recessions-depressions.
The crucial error being made by Greenspan, is that
the Kondratieff-Schumpeter long wave theory, upon which his model stands, describes successive profit-deriving,
labor-based innovations being created by private investment. The Internet
is a largely government created inovation, which seems to threaten the ability
of private enterprise to derive profits directly from the Internet. New
Internet businesses rarely generate profits. The price of new stock releases,
IPOs, are based upon almost any other criteria that actually, existing profits.
Worse yet, almost every existing business which goes onto the Internet seems to
be faced with an almost violent wave of competition and declining profits.
Deflation cannot be too far off, irrespective of how well the stock market
behaves.
The proof of this view is easy. Simply look at the
number of businesses which have the possibility of raising their prices as a
result of going onto the Web. What seems most likely during the early 2000s, is
that businesses will attempt to maintain profits by using the Internet to keep
roughly existing production levels, but through fewer workers in the process.
The problem for any single company, is that although
sector-wide sales might hold constant or even slightly increase during the early 2000s, market share and
profits may flunctuate radically depending upon the level and quality of Web
utilization. Thus Merrill Lynch has recently had to adopt the Internet model
created by Charles Schwab. Coincidentally, Merrill has been suggesting to its
14,000 brokers that a 30% decrease in stock commissions is possible over the next
few years. What has not been publicly broached as yet, is the possibility that
Merrill might need to shed 30% of its broker force, in addition to the salary
drop. Its hard times all over.
The above proposed process is very similar to that which occurred during the early 1930s, a process which British economist John Maynard Keynes described as ‘secular stagnation’ or simply ‘stagnation’. Keynes’s solution to the problem of severely weak private investment during the 1930s, was to have the central government direct public investment through the creation of short term public employment, paid for by issuing federal debt. This model gradually evolved into the first American input-output model. The model worked in America only after World War ll started and the debt to GDP percentage began rising from 30 percent in 1940 to about 150 percent in 1945. Former New York University economist Wassily Leontief worked with this input-output model during the war and published books and articles describing how it worked.
Although theoretically, Franklin Roosevelt probably
could have developed a similar economic system and recovery through federal
debt, without going to war; politically it probably would have been impossible
for Roosevelt to have increased the national debt so rapidly without an
external military attack. The country was simply too divided by class for the
wealthy to have permitted the national debt to rise so far or the central government
to become so involved in directing the private economy. At wars end, the
input-output model was soon killed by the rich, but so great had been the
effects of Keynesian debt, that the American economy roared on from 1947 until
the middle 1960s. By then, many had forgotten the tremendous efforts,
sacrifices and 300 thousand dead required to revive American from the
Depression. Moreover the role of federal debt in creating this economic miracle
had also been forgotten and downplayed by mainstream monetarism.
Whatever the possible similarities between the early
2000s and the 1930s, there are two primary differences, the first negative and
the second positive. First, it is not possible to greatly increase public debt
to generate employment, through war or any other means. Beyond any other
consideration, war itself is less and less labor-intensive. The Web is further
driving down the amount of labor required to deal with a given military
situation. If the Internet leads into a new period of stagnation, it is
unlikely that there will be a third Keynesian debt solution, tied into some
version of military spending.
Interestingly, President Ronald Reagan ran the
second Keynesian debt, sending aggregate American debt from just above 150
percent in 1980 to between 250 and 300 percent of GDP in 1988. It should be
recalled that debt never rose much above 30 percent of GDP during the 1930s or
above150 percent of GDP between 1945 and 1980. To directly increase the
American debt from 300 to 400 percent of GDP would not likely be acceptable to
the bond dealers nor to the bond holders.
Two, it may
be possible to use the Internet as a new input-output model, which finally
overcomes the nexus between aggregate employment, aggregate demand and
aggregate consumption. It is at this point in modern capital where the danger
lies, in that even the most intelligent economic thinkers including Greenspan,
still seem to remain stuck within the labor-based model of production and
consumption. From some of Greenspan’s statements, he seems to understand that a
major transition is underway in the global economy- but he seems to be
interpreting the shift as another labor-based transition. My reading of the
situation is different.
The Web seems to be permanently threatening the
relationship between full time employment for the overwhelming majority of
adults in the advanced industrial nations and wage-based consumption. At the
moment this threat remains masked, particularly within the U. S., where
unemployment is reaching historically unprecedented lows. In the building phase
of any long wave, there appears both high stock prices and large-scale
construction, whether of factories, public infrastructure or private housing.
Thus it is not surprising that the building of the infrastructure for the Web
and the retooling of the existing manufacturing, distribution and retail base
would bring high employment. The question is what happens to jobs and aggregate
buying power after most of the existing data bases have been transferred to the
Web and a large percentage of ‘middlemen’ throughout the economy have been
eliminated. Not every unemployed bond salesman or stock broker can establish a
Web site or become a ‘consultant’.
Unfortunately, the current very low level of
unemployment combined with fairly rapid growth and a sky high stock market,
seems to be compelling Alan Greenspan to raise interest rates yet again, beyond
even the level they were prior to the 1996-1998 Asian melt down . His logic is
that at some point in lowering unemployment, labor will be able to push for
wage increases beyond the rate of efficiency, thereby bringing back inflation.
How this possible next increase will effect the global economy is but a guess.
In prior long waves, inflation has been a problem at times and so has
deflation. Today, evidence of global deflation is at least as strong as any
inklings of inflation.
The most important thing at
this point is for Greenspan to keep the market alive until the majority of the
infrastructure necessary for a full input-output model has been created.
Software components of the new input-output model are being developed daily by
private companies now, although their purpose is to sell the software for
profits. [I will cover this software and Y2K issues later.] Hardware sales of
devices like switches is still profitable, but even there, most companies in
that sector are have stock prices which are extremely high.
The time frame in America for laying down most of
this infrasture is about three to five years, which oddly enough is about the
same time frame that I see for Americans to realize that the Internet is not
going to generate endless profits. Thus Greenspan is running a race with
catastrophe. Somewhere between 2003 and 2005, the stock market is going to wake
up and realize that ‘its not in Kansas any more’ and that most Web business are
not going to be very profitable.
At whatever point that realization occurs, the market could take a sharp tumble. Then business will even more rapidly begin to use the Internet to increase efficiency, as will all levels of public government, compelled by dropping tax revenue from a deflating economy. Increasing efficiency is just another term for cutting the work force. Another downward spiral of private investment for cutting labor and decreasing national income will have begun. Stagnation as Keynes described it will have returned, although for probably for a shorter length of time and without the possibility of another Keynesian debt-surge to resolve the crisis. I believe that unlike the 1930s, stagnation will not hold the American economy together long enough for something to revive it.
This time economic stagnation will feed into the first falling rate of profit crisis.
Politics of the Transition: A New
Social Cohesion or a Diversity-Based Collapse
Whenever the market begins to fall drastically, America will have to develop enough cultural cohesion to permit a new input-output model to evolve over the existing Internet infrastructure or face a severe internal collapse. The question of survival will depend upon whether the left is prepared to drop the practice of diversity and separatism and the right is prepared to accept the idea of large-scale federal involvement in the economy. By definition, the internal politics necessary for an input-output model to work requires a high degree of cultural cohesion- almost the exact opposite of prevailing left theory. Moreover, by definition, investment can no longer be driven by profits, in an economy which has fast declining profits. A nation-wide input-output model cannot be constructed by private companies alone, nor can it function under the political regime of diversity. Since the American right has a great deal of political investment in a weakened federal government and the American left seems determined to press diversity politics as far as humanly possible, I see the possibilities of a democratic transition to a successful post-capitalist Web-based input-output model as weak. However, a failure in America could serve as an object lesson to other rapidly closing societies, such as Europe, China and Japan- as to what not to do with the economy and the Web.