So far, the only proposed solution to the financial crisis is a return to regulation, public bail-outs and state control. Bail out Wall Street to save Maine Street, the habitual deception since the Yazoo land-fraud of 1795. Deregulation has brought down the barriers between the different financial institutions and led to excessive derivations. Doubtful debts have been bundled up into complex derivatives and spread around the planet, and nobody knows where the rotten apples are (they could be everywhere). Regulation, say its promoters, will put a stop to subprime lending. But putting the blame on bad loans supposes that good loans can increase forever, without going bad at some level or other. Good loans are those that can be and are paid back. Good loans turn bad when there is over-borrowing. So that debt and credit have their limits, as does the growth in the production of wealth that they generate. Were regulations to dictate, “This far and no more”, the credit crunch would be permanent, albeit for different reasons. Nevertheless, state regulation will be much talked about as future administrations and existing governments choose the easy path. Assuring those they rule that these excesses do not condemn the system. However, as the crisis gains momentum, even existing limits to borrowing will not stand up to growing social unrest, and governments will be the first to ignore them. Thereby provoking the inflation that cancels debt, and preparing the ground for a new cycle.
Continuous growth leads inevitably to overborrowing and its consequences. But this fatality is systematic. It is inherent to the private property of the means of production, and to private property in general considered as theft of common property, where the minor thieves are accessories to the major ones. And, as private property is the corner stone of the world’s dominant ideology, there is no chance of it being found at fault. So that cause and effect are denied, are not even considered possible. This is not a conspiracy, it is the mental bind of a dogma proclaiming that private property, the mainstay of democracy, saved humanity from a collectivised totalitarian gulag. This of course is a fairy tale. “Communist” regimes never abolished private property. Like their bourgeois revolutionary predecessors of the 18th and 19th centuries, and like the pigs in George Orwell’s Animal Farm, they simply changed the landlords. So private property is an undebatable subject and, somewhere between the mangy British bulldog of fallen empire and France’s actual pocket pinscher president, a majority of its American adherents would like to see a sleek pitbull couple in the White House. As ever, the response of the threatened proprietor is the guard dog. In times of financial crisis, the middle classes rise up against the super-rich. They burn yesterday’s idols and turn to demagogues who reassure them with the soothing words that bolster their deflated egos and the promise a national revival. Blame the banks and the stock market, the cosmopolitan traders and the off-shore investors, the “fat cats”, blame those who have done what everyone said was the right thing, by increasing private wealth and public poverty world wide.
Establishing common property is surely an impossible task, as the armed force that first installed and still maintains private property would have to be “communised” as well. And naked force seems naturally hierarchical, like an unfortunate heritage of the food chain pyramid. Or, perhaps, the use of violence against our fellow human beings is so unnatural that we need to be goaded on by some illuminated or half-crazed leader to even envisage such an act. Whatever may be, we might as well resign ourselves to a continuation of immense wealth balancing immense poverty, to plethoric guard dogs and to recurrent crises that turn The Dream into a nightmare. Notwithstanding this stoic pessimism, there is no harm in trying to understand why private property is the principal obstacle, not only to equality but to regular steady growth all round.
Private property is the individual ownership of just about everything. This individualisation of property was confronted from the outset with the tricky problem of its transmission. Was the property to remain concentrated by some form of primogeniture, or should it be diluted by being shared among all the descendants, in what proportions and what of gender? And what happens when there is no proper heir? With the transmission of private property came new forms of criminal activity at all levels of society, from extortion and murder to all out war and genocide.
Meanwhile women were in a state of permanent tutelage. And the blame for these dire consequences fell on human nature, or on Satan, or on some psychotic (genetic?) defect. So humanity learned to live with private property and constant bloodshed, accepting them as normal. Kings always tried to conquer their neighbours, fathers and sons always fought, women never grew up and siblings disappeared or died mysteriously. But owners big and small could proudly proclaim, “This is mine”.
Until recent times, private property was essentially land ownership. Commerce waxed and waned according to the safety of land and sea routes. Wars, invasions, or piracy can put a sudden end to trade, whereas land remains, albeit under a different tenure. The two forms of income are also distinct. Land ownership is paid rent. Commercial enterprise brings in a profit. Land rent as such may be low, but it continues down the ages and can rise sharply due to a mineral discovery, to urbanisation or to some other infrastuctural change. Commercial profit can seem excessive, but trading is never without risk. A gamble that must be repeated again and again, endlessly.
Sometimes you win, sometimes you lose. Land rent was usually paid in kind and this obliged the landlord to do business with the trader who seemed to own and control all the money. And, though minting money was a royal prerogative, to a large extent he did. The conflict opposing the owners of land to the owners of money is a long tale of woe, culminating in the 18th century with the opposed arguments of physiocrats and mercantilists. Finally, in the 19th century, they were forced to close ranks when the industrial entrepreneur showed he could accumulate capital in seemingly limitless quantities. Land possession had obvious boundaries. Circulating money could not increase without inflation. But capital growth offered infinite opportunities for both. In the heat and noise of steam and steel, landlords and bankers were coerced into a three-sided agreement on the sharing of this vast new wealth.
Maintaining private property is the main function of states. Tyrants respect it, and constitutions proclaim its unalienable rights in their opening phrases. But then armed force and private property have always gone hand in hand. From the beginning land owners were conquering soldiers, freemen and nobles alike. In the past, this had greatly disadvantaged the bankers, forever seeking a safe haven. The new alliance offered relative security to all three parties. But government and control of the budget still divides them to this day. Where should the tax money go, to industry, to real estate, or to the banks? And when all three fail together, their divisions lead to some quite violent infighting.
Private property owns the state and the nation’s wealth, but is unable to sustain stable growth, and is constantly booming and busting. Is this also due to human nature, to Satan and psychology (genes?). Do the 7 Deadly Sins get in the way? Greed and avarice, hubris and gambling, speed, alcohol and sex in the city? If these innocuous pastimes can bring down the capitalist cathedral, the edifice must be built on sand. Or is it a basic structural defect (not enough cement or buttresses?) that blows out the walls when the steeple reaches its pinnacle?
Private property, backed by the power of state, takes the nation’s wealth and divides it up between the owners of land, the owners of money and the owners of the means of production. Land concerns a lot of people, and the means of production concern just about everyone, each in its distinct material way. Money, however, is but the accountant intermediary of exchange. A virtuality that explains why bankers lack troops to support them, in a political clash with the two other parties of the property coalition. They will be the first to lose out in the coming turmoil. They will take the blame and be the expiatory offering to the populace. Nationalisation is in the air and on many lips, and inflation is just around the corner. And the cycle will follow its course, increasing its destructiveness each time around.
Wealth results from the combination of labour and the means of production. But that combination can only take place if land and credit are forthcoming. When an element is absent, no wealth is produced. The production of wealth needs the three parties of property, and the rest of society. It is a social enterprise. Increasing wealth means exchanging more value on the market. And if the value exchanged is to increase, the monetary intermediary must grow proportionally. In all logic, and that is how growth cycles start, increased credit goes to the increasing of investments. The means of production must precede production, as investments must precede consumption. This, however, poses several problems. Firstly, as the banker grants credit to the entrepreneur, the property of the enterprise and the profit it implies must be shared. Neither has outright control. Secondly, at the start of a growth cycle, private and public investments grow along with employment and consumer demand. As investment growth and the demand it generates are ahead of consumer supply, they are inflationary. This could be tided over. If investments continue to grow, the consumer demand they create stops being inflationary as soon as increased supply starts to come off the ultimate production chains. But the owners of money cannot accept its loss of value, so banks react by increasing interest rates. Companies stop borrowing and stop increasing investments, so that consumer demand levels off just as supply is increasing. The ensuing recession leads to mass unemployment. The state intervenes with hand-outs provoking more inflation. Prolonged mass unemployment weakens labour unions numerically and financially, and strengthens employers. So that wages stagnate nominally while their buying power is reduced by inflation. This is the first stage of the cycle, fuelled by invested credit. The second stage is fuelled by consumer credit.
Wages have been pushed down by unemployment and inflation. The labour movement has lost all initiative and bargaining power. Whereas the owners of the means of production have concentrated their holdings and paid off their debts. Production is way below full capacity, but productivity has increased considerably. When credit begins to fuel the growth of consumer demand on a massive scale, the increased supply is on hand with very few extra jobs, little or no extra long term investments, stable wages and prices, and consequently ballooning profits. And, contrary to printing paper money, consumer credit creates demand according to an existing supply of goods and services, it can be planned and programmed to reduce stocks to a minimum, and it is not inflationary. So banks are back in business lending “leveraged” money. Companies are expanding world wide with multiple take-overs, joint ventures and acquisitions of privatised public utilities. Even the real estate business is finding its place.
The price of land is variable to the extreme, from nothing to no limit. This reality allows the propagation of the idea that real estate need not be rented to be an investment. That its constant increase in value generates revenue. Now a commercial enterprise does consider land and buildings as a part of its investments. But, along with their constant upkeep and renewal, the cost is passed on to the customers. A company’s dividends, interest payments and rent are generated by its work force, not by its investments. Yet the myth lives on as self-made billionaire promoters join the “beautiful people”. And, if a house is an investment, it can be treated as such by the financial system. And, ipso facto, it becomes an investment that is traded on the market along with bonds, shares and commodities. Like commercial real estate, houses are in fact an expense. But they resemble investments for as long as house prices are rising. And that situation depends on demand remaining greater than supply. Meaning that existing houses must be continuously sold above their previous value, and new ones must be ever more expensive. So the number of newcomers on the property ladder must grow regularly to bring the necessary extra cash needed for a fast expanding market. Leading quite naturally to a borrowing bubble that must finally burst.
But meanwhile, the inflated price of houses has passed on to steel and cement, wood and glass, tiles, copper and PVC, etc. And when the market can no longer expand, when the necessary number of first time buyers cannot be reached (even with subprime loans), credit breaks down on the housing market, on the commodities market, on the consumer market and on the investment market. A once in a life time Minsky moment, and “All the king’s horses and all the king’s men, couldn’t put Humpty together again”. Though they will surely build another bigger one.
When climbers are roped-up on the brink, the first to fall gets the blame when they all come hurtling down. But the responsibility should be shared by all, because the urge to climb is the original cause that makes the drop possible. Imagine a world whiteout climbers, where there is no particular incentive to look down on one’s fellow human beings, where property is not accumulated in the hands of a few, where communities finance investments and own them, where the wealth of nations belongs to all, and where pigs have wings.
KENNETH COUESBOUC can be reached at: email@example.com