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Musings Report 2021-7 2-13-21 The Core Contradiction and Crisis--and the Solution
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The Core Contradiction and Crisis--and the Solution
This is long but worth the effort, I think, as it puts the core systemic crisis in the perspective of what we can learn from previous civilizations that arose and fell.
All socio-economic systems exist to perform one function: distribute resources, capital and agency (control of one's life, ability to move up the social mobility ladder, a say in governance and a stake in the system).
Resources are self-explanatory: food, energy and water (what I call the FEW resources due to their periodic scarcity) as well as minerals, metals, pottery, building materials and other tangibles of civilization, mostly drawn from "natural capital," i.e. the planet's reserves of resources.
Capital includes both tangible assets--money, credit, military equipment, infrastructure such as roadways and ports, etc.-- and the intangible assets of military training/prowess, structures of governance, human skills and knowledge, the social capital of cooperation and commerce, etc.
Resources are required by all humans while capital is related to the complexity and scale of the civilization. Hunter-gatherer groups have a great deal of intangible capital embedded in their knowledge of their environs, but urban civilizations require multiple levels of capital to create, collect, store and distribute the immense physical resources required by densely populated urban centers.
Humans require a minimum of resources or they weaken and die.
In hunter-gatherer cultures, resources are dispersed and so the distribution of resources and capital within the group tend to be egalitarian: if one person managed to grab most of the resources, the benefits would be short-lived: the food would rot before the "winner" could consume it all, and in taking most of the resources, the rest of the group would weaken and die, leaving the "wealthy" individual alone and vulnerable, as the cooperative strengths and shared capital of the group are now gone.
In agricultural-based cultures, the surpluses generated by intensively tended crops are large enough to support urban populations who don't actually invest their time and energy in growing food.
These surpluses tend not to be distributed in an egalitarian fashion, as a socio-political-economic structure must arise to manage the collection, storage and distribution of the surplus, and those with the power within this structure will naturally distribute more of the surplus to themselves and those who support their hold on power.
The Pareto Distribution (the 80/20 rule) arose from Pareto's study of land ownership in Italy. He found that roughly 20% of households owned about 80% of the land, and that this distribution was also true of the top 20%: a minority of the top 20% owned a majority of the land owned by the top 20%.
This ratio can be found in nature as well as in human societies. While it's not a "law of nature," it is an observation that shows up in many distributions.
As noted above, the distribution of resources is constrained by the threshold of human survival: if the top 20% hold virtually all the resources, the bottom 80% die off and there's no one left to do all the dirty work of growing the food, etc.
The distribution of capital has no equivalent constraint: the top 10% in the U.S. own almost 90% of all productive capital: stocks, bonds, businesses, rental properties, etc.
This extremely asymmetric distribution of capital has dire systemic consequences, which we'll explore in a moment, but these consequences are not as readily apparent as starving peasants.
The asymmetric distribution of political power and capital (to monarchies, imperial households and narrow elites) in ancient civilizations tended to optimize the distribution of the bare minimum of food, etc. to the commoners doing much of the labor: in many civilizations, this included slaves and landless peasants who were near-slaves because their ability to escape their situation was very limited.
To maximize their own share of the resources, elites calibrated the lower class's share to the bare minimum: less for us meant more for them. Since slaves and peasants had so little beyond bare necessities, their role as profitable consumers and taxpayers was limited. There really wasn't much downside to minimizing the resources they received; as long as they got enough to keep working the fields and generating surpluses for the elites, the elites had little motivation to increase their share of resources.
Individual households could of course treat their slaves and servants better. Well-off Roman households often allowed their slaves to buy their freedom (via side businesses the household allowed them to pursue) or gave them their freedom as a well-regarded gesture of generosity. Freed slaves occasionally went on to become wealthy themselves, and were proud enough of their rise from slavery to have it chiseled into their burial headstones.
But this social mobility was generally limited to urban areas. Slaves/peasants working in remote colonial fields were too valuable as laborers to let them escape, with the exception of volunteering for military duty--one of the few ladders of social mobility available to the bottom class of landless laborers.
The distribution of capital and power correlated to the distribution of resources. In Republican Rome, land-owning farmers held both capital and a limited but consequential voice in governance, and so they received a meaningful share of the resources (much of which they grew themselves).
In the Republic era, the wealthy Patrician class held about 30 times the wealth of an independent free farmer.
As the distribution of capital and power became increasingly asymmetric in the Imperial era, by the last days of the Western Empire Elite households held as much as 10,000 times the wealth of the remaining small landholders, most of whom had been squeezed into the landless peasantry or urban masses by soaring taxes and the expropriations of the Elite.
This concentration of capital and power/agency in the hands of the few undermined the economy in numerous, mutually reinforcing ways.
Complex civilizations require large surpluses to support the managerial/technocratic bureaucracy and the military that defended the state/empire from invasion and expanded its reach for resources when the opportunity arose.
The most basic surplus is food, of course, but surpluses in fuel and metals were also necessary: fuel for heat, cooking, smelting metals, forging tools, baking pottery, etc., and precious metals for coinage/money.
The latter was important because precious metal money (and surpluses to export) enabled trade and commerce, both of which could be taxed. For example, at the height of Western Rome around 150 AD, fully a third of all Imperial tax revenues were derived from trade with the Middle East, Africa and India, trade which flowed through the bottleneck of Egypt where Imperial tax agents collected tariffs, which were intentionally modest to limit the motivation to cheat.
The remote provinces of the Empire with relatively little trade or industry (for example, England) were net drains on the Treasury due to the high costs of maintaining army units there.
But precious metal money and surpluses to export are not all that's needed to generate commerce and trade; the system also needs consumers with sufficient surplus income to buy the imports at prices high enough to generate profits for merchants and taxes for the state.
The system also needs an entrepreneurial class of bankers (to finance the risky trading venture), manufacturers (to build the trading vessels, massed produced jars for shipping wine and olive oil, etc.), traders, wholesalers, warehouses and retailers.
Consumption supports commerce and trade and thus profits and taxes.
Rome was a powerful empire by virtue of its economic vitality, which generated the surpluses, trade, commerce and taxes needed to defend the empire and maintain the complex infrastructure required to run it.
As the Elite concentrated the capital and power into its few hands, a number of fatal dynamics took hold.
Trade dried up as the entrepreneurial class--roughly analogous to a middle class between slaves/peasants with little capital or surplus income to spend on consumption and the super-wealthy, who can only consume so much due to their small numbers--declined.
With fewer small farmers and entrepreneurs generating surpluses, and fewer middle-class consumers able to afford imports, the lucrative trade with distant regions shrank. This reduced Imperial tax revenues by roughly a third, imperiling the lavish spending needed to support the military and the Imperial bureaucracy.
A key dynamic in maintaining a productive middle class that fills all three essential roles--producers of surplus, consumers and taxpayers--is that capital is distributed widely enough that this class receives income from capital, not just from labor.
Consider a trading family (and they were mostly families, not individuals) who borrowed money at interest to fund a risky trading voyage to southern India, delivering wine, wheat and olive oil from the Mediterranean to India and returning with spices, gems and silks.
These scarce luxuries earned enormous profits if the ship didn't sink, and everyone benefited from this use of capital: the bankers, consumers, warehouse owners, merchants, retailers and Imperial tax coffers.
This trade was complex and required capital in all its forms: human capital (skills, experience), social capital (knowledge of trading networks, whom could be trusted, etc.), financial capital (money available to fund the voyage), the ship, captain and sailors, camel caravans to haul the cargo across the desert from the Red Sea to the Nile for transport to Rome, and so on.
Once capital was concentrated in the hands of the Elite, the income from capital that had fueled all this activity and incentivized risk takers decayed.
The vast estates owned by the Elite created some surpluses, but the Elites consumed these or used them to buy even more land. Since they were politically powerful, the landed Elites also evaded taxes, placing crushing tax burdens on the dwindling middle class.
The Elite estates operated less as tax-generating trading/commerce nodes and more as independent fiefdoms optimized to support the regal lifestyles and estates of the super-wealthy. The Imperial coffers dried up as the Elite focused on their own estates, which were in many cases mini-cities devoted to serving one household.
When the Empire faced existential crises--plague, invasion, rebellion--it needed tax revenues and recruits for the army. The Elite hoarded both, evading taxes and keeping its own labor force out of the military draft.
Consider what happens when capital, agency and resources are no longer widely distributed, i.e. they are concentrated in an Elite.
Without access to capital, with minimal resources and few opportunities for agency, those who were once middle class have no stake in the system other than Bread and Circuses, resources and entertainment provided by the state.
There are no incentives to engage in risky trade or commerce, as capital is scarce and taxes are crushing. There is also no incentive to generate surpluses because these are either taxed away or appropriated by the Elite, who live by a second set of rules, i.e. above the law imposed on commoners.
In conclusion: once capital, resources and agency are no longer distributed widely, the economic foundation of the state/empire decays and collapses. Distributing Bread and Circuses--just enough resources to get by, and increasingly perverse entertainments--is no substitute for a middle class with capital, agency and incentives to take risks to generate surpluses and profits.
This is the Core Crisis: the concentration of capital in the hands of the few fatally undermines the economy and society. An economy in which capital (and thus agency and resources) is owned/controlled by an Elite is a fragile, brittle system prone to non-linear collapse.
The term I use to describe this dynamic is decapitalization: as I've explained in this past week's posts, America's middle class has been decapitalized as capital, income and political influence has been transferred to the top 10%, and in terms of political power, to the 0.1%.

This has undermined the economy, a reality that's been masked by lowering interest rates and inflating asset bubbles. But neither of these is a real solution, as debt is not a substitute for capital and income, and since all bubbles pop, the sugar-high of asset bubbles are temporary.
When asset bubbles pop they destroy more than phantom wealth: they dismantle everything that became dependent on bubbles, including enterprises, spending, tax revenues and the "animal spirits" of confidence and trust in the system.
One statistic tells the entire story: the bottom 90% of American households, which by definition includes the entire middle class (the top 10% cannot be a "middle class") receives an insignificant 3% of all income from capital: interest, dividends, profits from enterprises, rental income, etc. The other 97% goes to the top 10%.
This 3% is so insignificant that rounding it down to zero makes no difference. In terms of systemic impact and influence, the bottom 90% has near-zero income-producing capital.
Marx described the contradictions of capitalism in two ways. One is the contradiction described above: capital increases its profits by squeezing wages lower, but this reduction in the purchasing power of wages (and wages' share of the economy) reduces labor's ability to consume the goods and services capital produces at a price that generates a profit.
On a larger scale, Marx saw modern capitalism's mode of production as too contradictory to survive, and so he looked ahead to a socialist mode of production. What Marx did not anticipate is the need to transition to a DeGrowth economy, regardless of the ideological model one might consider ideal.
If you're allergic to Marx, then another way of saying the same thing is: the asymmetry between the decapitalization of labor and the extreme dominance of capital generates systemic risk.
In essence, the social-capitalist system that dominates the global economy is now dependent on three tricks to mask the Core Crisis that no economy can survive a terribly asymmetric distribution of capital, resources and agency:
1. zero interest rates which enables debt to be substituted for income--for a time.
2. Bread and Circuses, the distribution of just enough money/resources to maintain the status quo.
3. Asset bubbles, which create phantom wealth out of thin air that generates the illusion of prosperity.
All of these tricks are temporary fixes that will collapse in a heap, and then the Core Crisis will not longer be avoidable.
The solutions to the crisis are obvious:
1. Capital, resources and agency must once again be distributed widely, which requires enabling the workforce to transform work into capital. Bread and Circuses--Universal Basic Income, stimulus, whatever you wish to call it--is not a substitute for capital, agency and a stake in the system. Bread and Circuses are nothing more than enablers of dependence and powerlessness.
2. The economy must shift from a dependence on the illusion of Endless Expansion of Consumption to a DeGrowth mode of production.
3. The tricks of zero interest, money-printing and asset bubbles must be surrendered in favor of structural adaptations that favor DeGrowth and a broad distribution of capital, resources and agency.
Highlights of the Blog
Podcasts:
Local and Decentralised Economies: The Start Of A New Environmentalism (54 min)
AxisOfEasy Salon #37: The Tension Between Nation State Conformity and Network State Cacophony (51 minutes)
Posts:
Gains Are Unreal, Losses Are Real 2/11/21
What Collapsed the Middle Class? 2/10/21
Debt and the Demise of the Middle Class 2/9/21
Best Thing That Happened To Me This Week
I received so much support from longstanding subscribers and patrons, many who have been readers and correspondents for a decade. I am surprised and humbled by your encouragement.
From Left Field
Geopolitical Alpha: A Framework for Investors (35 min) (via Mark J.)
A YouTuber Shoots to Literary Fame in France, Ruffling Feathers
The Founder (2016) review of a film about Ray Kroc, founder of McDonalds
The tyranny of work: Jobs have become, for so many, a relentless, unsatisfying toil. Why then does the work ethic still hold so much sway?
The Pirate Age: Neoliberalism reverses the relationship between society and economics.
Where Energy Modeling Goes Wrong
The Downside to Life in a Supertall Tower: Leaks, Creaks, Breaks -- where plumbing leaks cause $500,000 in damage...
Narcissists in Space: Review of The Space Barons: Elon Musk, Jeff Bezos, and the Quest to Colonize the Cosmos (New York: PublicAffairs, 2018)
The Coronavirus Is a Master of Mixing Its Genome, Worrying Scientists
What If Herd Immunity Is Out of Reach?
Disease experts warn of surge in deaths from Covid variants as US lags in tracking
The Fragility of Microchips
"Know Thyself, Nothing to Excess, Surety Brings Ruin." (inscribed at the Temple of Apollo at Delphi)
Thanks for reading--
charles
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