Much of this article is based on The Long Twentieth Century by Giovanni Arrighi. The title of this book is quite misleading for it is not a history of the American century at all. It is, in fact, an analysis of the dynamics of world Capitalist system as it emerged in the early Modern period right up till today. That book itself is based on Braudel’s Civilization and Capitalism.
The real home of Capitalism
In his magnum opus, Civilization and Capitalism, Fernand Braudel introduced an analytical classification. In his framework, the lowest and largest stratum of the economy is the layer of material life, the soil into which capitalism thrusts itself but which it can never really penetrate. “Above it, comes the favoured terrain of the market economy, with its many horizontal communications between the different markets: here a degree of automatic coordination usually links supply, demand and prices. Above this layer, comes the zone of the anti-market, where the great predators roam and the law of the jungle operates. This–today as in the past, before and after the industrial revolution–is the real home of capitalism.”
There are connections here to Lenin’s conception of monopoly capitalism & Hobson’s conception of finance capitalism.The point being the obvious one. Namely, that the standard textbook market economics, competitive price theory, the invisible hand applies at the level of the market economy, but something quite different is going on the floor above. At this great height, we have the creation and preservation of market power–mergers & acquisitions, the “rationalization” of dynamic sectors of the economy. This is the home of transnational corporate behemoths, those great vertically integrated entities whose internalization of “transaction costs” is nothing but the elimination of the market. It is here that the capitalist meets the politician to negotiate the “protection costs” and we see the fusion of political and capital power in the military-industrial complex. Also, it is at this level that we find control over long distance trade & commerce, merchant banking/insurance, and shipping which has been at the heart of the world economy. Finally, it is here that we find high finance–investment banking, private equity, buyout firms, hedge funds and financiers.
The fundamental dichotomy is not just market/anti-market, competitive/oligopolistic. There is a functional difference. There is an unlimited flexibility, capacity for adaptation, an independence from locality, an agnosticism towards material details, and a cosmopolitanism in its ready redeployment. Capital acts as an operator on the economic system. In the process of doing so capital creates, shapes, exploits and harnesses the material expansions at the root of the major capitalist periods of accumulation–the long centuries we label the Genoese, Dutch, British and American hegemonies.
A key feature that is missing in Arrighi but is singular in Braudel’s framework is the specificity of location of this real home of capital.
“Conspicuous at the top of the pyramid is a handful of privileged people. Everything invariably falls into the lap of this tiny elite: power, wealth, a large share of surplus production. . . Is there not in short, whatever the society and whatever the period, an insidious law giving power to the few, an irritating law it must be said, since the reasons for it are not obvious. And yet this a stubborn fact, taunting us at every turn. We cannot argue with it: all evidence agrees.”
In particular, there is a vanishingly small minority of individuals who own this capital as personal financial assets. There is no doubt as to whether the Dutch or the Venetian hegemonies were oligarchies. Under the facade of enlightened imperium so was Britain. And as has become increasingly obvious, so is the United States in a functional sense at least. But we will not need the full power of the assumption of oligarchy. All we need to keep in mind is that capital in the sense of Braudel is owned and controlled by a tiny elite.
The Long Centuries
I found this book after reading a review of it in the Los Angeles Review of Books by Joshua Clover. It is titled Autumn of the Empire. In his words,
“The four “long centuries” have been led by the Genoese, the Dutch, the British, and the United States. Each of these long centuries has itself been divided into three phases, choreographically consistent: a merchant phase based on trade, followed by a phase of industrial expansion, and finally a period of financialization, in which economic vitality moves to the banking sector. It is a febrile vitality indeed, burning hot and fading away; the shift to finance is always, in Braudel’s lovely phrase, “a sign of autumn.” And when the finance era runs its course, so does the empire.”
You know someone is a Marxist when he uses the word “crisis” multiple times in the same paragraph. Arrighi, following Braudel, sees the switch to finance and speculation as a “signal crisis”, a sign that autumn has begun. All the major trade expansions of the capitalist world-economy have announced their maturity by reaching the stage of financial expansion. What follows sooner or later is the “terminal crisis” which leads to the onset of systemic chaos and perhaps revolutionary upheaval before the “world-economy”–the organic economic system with a distinguished core/periphery structure and specific trade linkages–gets reorganized in a new hegemony centered at the metropolitan heart of the new core.
On American decline
“For Arrighi, our own seasonal shift happened—no surprise—right around 1973. Along with industrial decline, we note the oil crisis, the finality of defeat in Vietnam, the end of the Bretton Woods agreements, the birth of the derivatives markets. All of this offered a “signal crisis” for American empire, a sign that autumn had begun. And the present collapse is, in turn, the “terminal crisis.” It is characterized not only by financial collapse, but more ominously by the decreasing ability to rally the globe toward the empire’s ends, and the corresponding need to pursue strategic goals via brute military force. The geopolitics of the last decade, with its tragic rehearsals of Vietnam, the farcical hollowness of the “coalition of the willing,” and the wrongfooted bumbling in the face of the Arab uprisings, testifies to little else. Our long century is no longer.” [Clover, LA review of books]
The fear is that there is a shift in the center of gravity from the Atlantic to the Pacific. That a new cycle of capitalist accumulation has begun. Just as we can observe the center shift from Genoa to Amsterdam to London to New York, we will see the center of gravity shift from New York to Hong Kong.
To evaluate these recurring questions of American decline we need to follow the possessor of money into his real home.
A digression on plutocracy
Coming back to the $200 trillion of global financial assets, we can immediately see that not all of this is capital in the sense of Braudel. Much of it is sovereign. Most is owned by institutional investors and passive investors. In either case, it is deployed by professional portfolio managers, mostly passively. It thereby serves functionally as leverage to capital of the “great predators”, amplifying their capital power. In any event, the allocation and deployment of this capital follows the same logic. Hedge fund manager John Paulson deploys a few of his own billions and tens of billions of other investors. The professional managers of an investment bank deploy the wealth of their investors into profitable opportunities as they arise. They may not be themselves ultra rich but in their structural role they are plutocrats. More often than not though, they will themselves join the ranks of the plutocrats if they are successful. Its a matter of a few years of 8-figure-bonuses.
A quintessential “great predator” in the sense of Braudel is Stephen Schwarzman who not only manages his own $6 billion, but $150 billion of assets under management of the Blackstone group which he founded and runs. Another archetype is Carl Icahn who is worth $12.5 billion. If he so much as hints at a potential takeover bid of a company the stock price climbs up a notch. Perhaps even more central are the top bankers like Jamie Dimon who is responsible for more than $2 trillion of JP Morgan’s assets. Another is Bill Gross, the boss of Pimco, the trillion dollar gorilla of the bond market. Or any of the other plutocrats who show up routinely on the Dealbook. In this fairly straight forward sense, a hundred trillion dollars of capital–in the sense of Braudel–is an enhancement of the wealth and capital power of these plutocrats. Let me illustrate this with a hypothetical example.
Picture Carl Icahn threatening to take over GM in a hostile takeover bid unless it shuts down its manufacturing plant in Detroit which employs twenty thousand people and opens one in China to make use of the lower unit cost of labor and increase profitability to the right level. Picture Icahn shaking hands with a Chinese communist party insider, guaranteeing a “stable” labor and environmental regulatory environment for the new plant. Detroit enters into irredeemable collapse–the action affects not just the auto workers who perhaps enter the ranks of the long term unemployed. The evaporation of the purchasing power wipes out a sizeable section of the local economy. Neighbourhoods fall into disarray and turn into inner third worlds where the superfluous population is left to prey on itself.
This is the role of capital in the sense of Braudel, acting on the economic system–forging, allocating, fixing, and shaping its topology–with enormous repercussions for the rest of us who merely live here. Simply put: the players in the drama are the select few, the rest of us are merely spectators. It is in this functional sense that we live in an oligarchy.
A thick description of the actual system is a book length project. However, for our purposes we could make a crude approximation in another way. By mapping the size, density and distribution of the financial elite, we may gain an insight into the structure of capitalism in the American century. This is not as easy as it sounds. As a first pass one could look at where the mildly affluent and above are located. This is the distribution of people earning more than $200 a day:
This certainly gives us some idea of the global distribution. But one does not have any capital to deploy if one is earning just $200-a-day, the cutoff is too low. Let’s look at the distribution of financial income at the top.
Now we are talking. If one is making 8-figures-a-year one certainly has capital in the sense of Braudel, so we are talking about at least 11,000 families with a total income of $390b in the U.S. alone. But membership in the imagined oligarchy is a question of wealth not income so we should look at this from a balance sheet point of view.
Ultra high net-worth individuals (Ultra-HNWIs) are defined as people with investible assets in excess of $30m, according to the Capgemini/Merrill Lynch World Wealth Report. Globally, the share of Ultra-HNWIs in financial assets is 36.1% of all financial assets of HNWIs as a whole totalling $42.7 trillion. So the number we are looking for, the capital owned by the approximately one hundred thousand plutocrats on the globe is $15.4 trillion. Per the Credit Suisse Global Wealth Report, which calls someone with investible assets in excess of $50m Ultra-HNWI, there are 81,060 such individuals around the world. At the top of the pyramid are the 2,800 with investible assets in excess of $500m and about 1,011 billionaires. The global distribution of Ultra-HNWIs is as follows:
North America 39,000 or 48%
Europe 22,000 or 27%
Asia-Pacific (excluding China & India) 13,000 or 16%
China 4,000 or 5%
India, Africa & Latin America 3,500 or 4.4%
The dominant feature of the above distribution is that 75% of all Ultra-HNWIs live in North America or Europe with the United States alone accounting for 46% of all Ultra-HNWIs. East Asia is clearly emerging as a rival centre with about 20% of the world’s Ultra-HNWIs. Although, with respect to the framework of analysis its better to classify by oceans or metropolitan sites. Roughly speaking, we have the following distribution:
Indian Ocean 5%
Bending over backward and expecting massive new capital accumulation in East Asia and the BRICs in the coming decades, these numbers will perhaps approach 60%, 30% and 10% respectively around the turn of the century. Something like a hundred billion of Western capital is being deployed every year in the “emerging markets”. So much of that capital accumulation will accrue to the Atlantic. Hence, these numbers are actually overly generous. In other words, according to quite cautious projections, Atlantic capital will remain twice the size of Pacific capital for the rest of this century. This brings us back to the question of American decline.
[Update: At the risk of overkill, I found this Deloitte study on global wealth in the next decade. Here are the key pictures.
On American decline (cont.)
If Braudel is right is his analytical classification of capital and seeing it as an operator acting on the material and market economy, we have the following two implications about the long term dynamics of the American century. There will be a shift in the economic center of gravity to the Pacific and more marginally to the Indian Ocean. We are witnessing a new cycle of material expansion centered around the metropolitan site of Hong Kong. It is powered by the same process of capital deployment and accumulation that we saw in earlier cycles. And it is precisely because the new site of accumulation will not be competitive with the older site, because the dominance of Atlantic capital will continue, that we will not see the end of American hegemony before we are all dead.
There is a widespread notion that the increasing reliance on the use of force by the United States betrays a decline in American hegemony–the persuasive power over and above that which accrues solely from balance of power considerations, i.e., soft power. At least historically, this is far from clear. The behaviour of the imperial metropole at the periphery has always involved the constant threat and the use of force. This is a constant through all the cycles: Venetian/Genoese, Dutch, and British. And peeking outside the frame of capitalist history we will find this to be the case as far back as we choose to look. If such a claim seems reasonable to the reader, I suspect that has to do with her progressivism. Americans would like to think that American primacy is based on something nicer than American military might, but we are concerned with the world as it is, rather than as it ought to be. The failure to distinguish between the normative and the positive is too frequent to not be careful about.
Purely strategically, serious questions of American decline focus on naval dominance of the major routes of the world’s oil and commerce. The United States enjoys a strategic advantage from being a continent and an island situated in the middle of the world’s two most important oceans. This offers both the unparalleled security of having the most impregnable moat, and the depth of a giant prosperous continent. Furthermore, this translates into a very specific advantage in balance-of-power terms: no one expects the U.S. to lose control of either the Atlantic or the Indian Ocean, and certainly not the Persian Gulf. This will enable the U.S. to be predominant in the Pacific as well. Pentagon planners have charted out how to maintain “full spectrum dominance” throughout the course of this century. Some of that is surely hubris but no one can argue with projections of American military preponderance for decades to come. The real threats to American primacy are internal. Only a domestic collapse can affect the capacity of the United States to project power in the Pacific and the Indian Oceans.
Hence, China will not attempt to challenge the United States in the Pacific outside its “near abroad”, the issue of contention will for a very long time be over the control of the South China sea. China will know that it is much weaker militarily, it will follow the law of the balance of power: “if a state confronts others with comparable or greater power, it will retreat.” (Here is a crash course in balance-of-power). There will be no contest precisely because of the power asymmetry, the strength of the strong. Hong Kong will emerge as the metropolitan heart of the developed East Asia but will share in the “protection racket” of the United States and continue to absorb Western capital until its absorptive capacity is exhausted as well.
Threats to American primacy
There are perfectly credible threats to American hegemony. The important thing to note is that they are all internal. A purely fiscal collapse whereby the United States loses the ability to bear the “protection costs” is a distinct possibility, although still quite unlikely despite the S&P downgrade. Technological slowdown and/or a loss of preponderance in technical innovation to some other site looks even more unlikely. The dominance of Western scientific and technological centres seems set to grow even further. No one else is even close to investing the kind of money needed for a big push at some other site. Moreover, there are huge network externalities in scientific research and technological innovation which make the American position well nigh impregnable. Although it is not out of the realm of possibility that progress might just slow down because we are close to exhausting all the low hanging fruit so to speak.
The most serious threat in my opinion is social upheaval. The trend that began in 1973–stagnant or declining standard of living for the bottom 90% of the populace and increasing rewards at the top–shows no sign of letting up. In fact, if we take the pill that Arrighi is peddling, then it seems set to accelerate. It might cause unforeseen revolutionary unrest that might jeopardize the structure of the entire oligarchy. As people become more educated and aware, and as they connect with each other better, the ability to organize may take a quantum leap forward. But since the coercive capacity of the State virtually rules out a violent revolution in the West, the real threat will likely be an old one. The threat of democracy. So American hegemony might come to an end if American people manage to effectively demand and implement the end of the project itself.
Of course, as of writing, this threat is remote. But if the Arab Spring has told us anything, it is that it is impossible to anticipate such things.
[Update: Robert Kaplan is a senior fellow at the Center for a New American Security and is on the Pentagon’s Defence Policy Board. He is one of the most influential foreign policy makers in the United States. In the current issue of Foreign Policy, he argues for the centrality of the South China sea in the emerging balance of power between China and the United States.
I just want to make a completely obvious point. Kaplan understands the real dynamics of power in the twenty first century. What he is saying, in effect, is that China ought to be accommodated in the South China sea–it’s “near abroad”. In other words, American primacy in the Persian Gulf, the Indian Ocean, and the rest of the Pacific will continue for the rest of this century. Moreover, he is not alone in this judgement. Virtually the entire school of realists–which basically means the entirety of the foreign policy establishment–is in agreement here. This is well understood among policy makers.
Phil Gramm, who spearheaded the deregulation drive when he was on the senate banking committee–the act that repealed Glass-Steagall bears his name–was an economic advisor to the McCain campaign. He was kicked out after he called America a “nation of whiners” for complaining about the economy in an interview he gave to the Washington Times.
In that interview, he talks about globalization and it’s effects on the world economy. He said that because of the structural changes in the past three decades or so, returns to capital have been going up at the cost of returns to labor. Moreover, that this is great for America since we have all the capital. Of course, he does not talk about distributional issues or the fact that the great majority of Americans don’t have enough financial assets to offset their declining wages. What he means by “our interest” is therefore clear. U.S. “national interests” are the interests of U.S. capital, and the plutocrats who own this place. It’s an old framework, going back all the way to the founding fathers. Namely, those who own the country ought to rule it. [Read the next post on this topic: Braudel and American decline.]