Peter Montague: We are essentially living in a new world (Part II)

[Mr. Montague is a journalist and historian holding a Ph.D. degree in American Studies from University of New Mexico (1971).]

Here we continue describing the new world that has evolved during the past 50 years.

In the past 50 years, corporations have grown almost unimaginably influential. Originally invented as a way for entrepreneurs to raise capital from strangers, publicly-traded corporations have proven to be extraordinarily successful and they have grown steadily, year by year. In many cases, growing bigger has become their main purpose.

In the past 50 years -- between 1955 and 2004 -- large corporations came to thoroughly dominate the U.S. economy. In 1955, sales of the Fortune 500 corporations accounted for 1/3 of gross domestic product (GDP). By 2004, sales of the Fortune 500 amounted to 2/3rds of GDP, a major consolidation of wealth and power. [1, pg. 22]

Peter Barnes -- co-founder of the Working Assets Long Distance phone company -- describes some additional changes that have occurred during the past 50 years. In his must-read new book, Capitalism 3.0; A Guide to Reclaiming the Commons, Barnes points out that, 50 years ago capitalism entered a new phase. Up to that time, people had wanted more goods than the economy could supply. After 1950, there was essentially no limit to what corporations could produce. Their new problem was finding buyers.

Others have remarked on this shift as well. In 1967 in The New Industrial State, John Kenneth Galbraith observed that large corporations require stability and so they must control both supply and demand. To control demand, they manufacture wants. In 1950, everyone's basic physical needs could be met, so to promote growth, corporations had to learn to manufacture desire. Physical wants are limited but, properly stimulated, desires can become infinite.

You might ask, given that the economy can now satisfy everyone's physical needs, providing the basics of a good life, why do we need to manufacture desire to stimulate growth? Because growth is what provides return on investment.

The amount of money available for profitable investment expands exponentially year after year. Therefore, it is essential to keep demand (desire) growing apace -- to create new opportunities for investors to earn a decent rate of return year after year. The U.S. spent $263 billion on advertising in 2004, largely to stimulate desire. Despite this, production continues to outpace effective demand.

In his book, The Return of Depression Economics (1999), Princeton economist Paul Krugman pointed out that inadequate demand (the flip side of overproduction) is now a worldwide problem. He wrote,"What does it mean to say that depression economics has returned? Essentially it means that for the first time in two generations [50 years], failures on the demand side of the economy -- insufficient private spending to make use of available productive capacity -- have become the clear and present limitation on prosperity for a large part of the world." (pg. 155) Overcapacity is chronic.

In the U.S., there have been two major responses to declining opportunities for a decent return on investment. One solution has been to invent new ways of manipulating money. As Peter Barnes points out, today"the world is awash with capital, most of it devoted to speculation."

If we take Barne's word"speculation" to mean, loosely, the manipulation of money itself for profit, then speculators have indeed grown more important in the U.S. economy in the last 50 years. Corporate profits of the financial industry in the U.S. in 1959 were 15% of total corporate profits; by 2004 the financial industry's profits represented 36% of total U.S. corporate profits. In round numbers, manipulating money now accounts for 40% of all corporate profits.

The second major response to limited investment opportunities has been"globalization" -- creation of a new set of rules that essentially erase national borders, so that materials and capital are now free to flow to wherever costs are lowest. Now if investors see an opportunity to gain a decent return by, say, manufacturing toothpicks by cutting down Indonesian rain forests, they are free to move their money there instantaneously to take advantage of the opportunity. Within the U.S., this has worked out well for investors but it has not been quite so beneficial for the working class or the middle class. As an editorial writer for the New York Times pointed out in 2002,"Globalization has been good for the United States, but even in this country, the gains go disproportionately to the wealthy and to big business." Globalization has been one of the factors that has consolidated wealth in fewer and fewer hands in recent years.[2]

Globalization also helps explain another important feature of the new world -- the expanding U.S. military. As New York Times columnist Thomas Friedman pointed out in 1998 in an article about the global spread of electronic inventions,"The hidden hand of the global market would never work without the hidden fist. And the hidden fist that keeps the world safe for Silicon Valley's technologies to flourish is called the United States Army, Air Force, Navy and Marine Corps..." The current U.S. military budget of $450 billion -- equal to the military budgets of all other nations combined -- is another aspect of the need to keep growth going, to create opportunities for investors.

As a result of these trends in the past 50 years, 5% of the U.S. population now owns more private wealth than the other 95%.

Naturally, this 5% has gained outsized power to go with its outsized wealth. No one begrudges the fortunate their fortunes (almost all of us think it is better to be rich than not rich), but democracy assumes that everyone has approximately equal standing. Our system of governance is legitimized by the premise, one person, one vote, not one dollar, one vote. Since money talks -- or, in the case of the top 5%, money screams -- we can no longer say we have even the pretense of a democracy. Instead, we have a plutocracy -- rule by wealth -- and one wholly devoted to economic growth.

As economist Herman Daly observed not long ago, we now have a"religious commitment to growth as the central organizing principle of society. Even as growth becomes uneconomic we think we must continue with it because it is the central myth, the social glue that holds our society together."

So even though economic growth is shredding the biosphere, causing more harm than good (which is what Daly means when he says growth has become"uneconomic"), it is heresy to try to imagine a different way of being on the planet.

This is a uniquely modern puzzle -- we have a deep religious commitment to an idea that was once true, but is now false, and which is destroying the future.

[To be continued but not next week.]



[1] Peter Barnes, Capitalism 3.0; A Guide to Reclaiming the Commons (San Francisco: Berrett-Koehler, 2006) pg. 22.

[2] There is nothing wrong with international trade, and it can bring substantial benefits. As the New York Times points out,"China, Chile and other nations show that under the right conditions, globalization can lift the poor out of misery. Hundreds of millions of poor people will never be helped by globalization, but hundreds of millions more could be benefiting now, if the rules had not been rigged to help the rich and follow abstract orthodoxies. Globalization can begin to work for the vast majority of the world's population only if it ceases to be viewed as an end in itself, and instead is treated as a tool in service of development: a way to provide food, health, housing and education to the wretched of the earth."