Growing Chaos and Economic Crisis: About the Report of Sergey Glazyev

Any crisis always exacerbates the debate of the main strategists about the issue of choosing the right path, which determines the composition and nature of the necessary practical measures. The current one, although caused by the coronavirus epidemic, has not been an exception because of the scale of its impact on the economy.

The Financial University under the Government of the Russian Federation published a report written by Sergey Glazyev with a big title: “On the root causes of the growing chaos and measures to overcome the economic crisis”. It clearly demonstrates one of the main causes of the current crisis, namely, the loss of integrity in understanding the meanings and interrelationships of key global processes.

In a highly simplistic way, this can be described as a classic childhood riddle: the wind is blowing because the trees are swaying, or they are swaying because the wind is blowing.

An error in the perception of the priority of the relationships between factors eventually leads to incorrect conclusions, which ultimately naturally result in an error in the conclusions.

The most obvious examples of such an error are the following points in the introductory part of the report.

According to Glazyev, World War II was purposefully provoked by British intelligence agencies with the aim of the mutual destruction of Russia and Germany. In reality, however, it was an inevitable continuation of World War I, which did not resolve the key contradictions that arose in Europe as early as the mid-19th century.

Emerging from German lands in 1871, the German Empire was fatally late to the division of the free colonies. Because of this, in its development, it relied on the faster pace of industrial development and the export model of the economy, since the capacity of the domestic market did not provide sufficient sales.

Faced with a massive expansion of German goods into France and Britain’s only major market at the time, their governments took advantage of a typical familiar tool: protective duties. This put Berlin before the prospect of a deep economic crisis, fraught with the collapse of a barely united state (the idea of which was proposed by the same British to Bismarck – as a battering ram against Russia – rising after 1861. They gave him Jewish money for this, but in such a way that he wasn’t aware of it).

The only way to stop the economic crisis in Berlin at that time was through war. The Kaiser and the German General Staff believed that it was possible to achieve the rapid defeat of the Franco-British coalition with the occupation of a large part (ideally all) of French territory, with the complete defeat of the British fleet at sea and thus the interception of British maritime communications. This was subsequently intended to be exchanged for some of the French and British colonial possessions.

The Germans failed to achieve what they wanted. However, Germany’s defeat did not lead to the destruction of its statehood, thus leaving unresolved the main problem of its existence – the lack of external space sufficient for stable economic growth. And the shameless plunder, under the pretext of reparations, committed by the winners only strengthened the German elite in their inability to ensure national security without a clear military victory over its main neighbours.

British and French behind-the-scenes intrigues were of the nature of simply curbing the rise of a new threat to themselves and, if possible, redirecting it to the opposite side. And nothing more than that.

This clearly shows that war as a result of the world-changing technological revolution is not a postulate at all. It is not caused by a revolution in technology itself, but by a change in resource balance. And it comes to direct war only when its initiator clearly sees for itself economic sources that, when captured, will provide the winner with additional income known to exceed the costs of waging the war. The only exception to this rule is when the war is purely defensive.

Well, and most importantly, although in the report the fallacy of liberal definitions of political and economic processes is called erroneous, the author himself, however, substantiates his own calculations.

For example, in terms of mentioning the change of technological patterns, both in themselves and with an indication of their alleged change every 50 years. It is clear that nothing like this happened in the 1970s and 1980s (i.e. minus 50 years from the date of the report). Replacing light bulbs with microchips only led to a reduction in size and an increase in the productivity of electronic equipment, but did not create fundamentally new technological opportunities, as was the case with the massive introduction of steam engines into the economy at the end of the 18th century and electricity at the end of the 19th century.

To this day we continue to squeeze the last grains of additional efficiency from technologies that were actually discovered and brought to mass use at the end of the last century or the beginning of the last century. Ilon Musk’s electric car is not a modern invention at all. The first active electric vehicle was created by the Hungarian Ányos Jedlik in 1828.

So there is indeed a crisis today, but it is caused not by some “Kondratiev waves”, but by a synergistic combination of four fundamental factors.

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Firstly, the principled conflict between the classical (as Marx described it) model of capitalism and its current level of actual development. The analysis of the classic concerned only the initial stage of the process, in which only small economic entities participated relative to the size of the economy as a whole, without affecting the consequences of their further enlargement noted by him.

For example, in the 1920s more than a dozen independent aircraft manufacturers actively competed in the United States. Now there are only three super-monsters left in the industry: Boeing, Northrop-Grumman, and Lockheed-Martin. A similar pattern is observed in Europe. In world civil aviation, the key fight is between Boeing and Airbus. There is simply no one else equal to them.

The classic Marxist mechanism of capitalism no longer works, because the major players have reached a level of controlled resources and overall influence comparable to the state as an institution. This allows them to use state resources for their own purposes, including the privatisation of profits and nationalisation of losses.

Secondly, the fundamental desire for permanent expansion embedded in the classical model of capitalism was possible in the days of Marx and Lenin, but it completely exhausted the space for continued growth.

The automatic increase in production it causes today far exceeds the scale of global consumer capacity. And this is also a confirmation of the validity of Marx-Lenin’s theory of the contradiction between the overproduction of goods and the insufficient purchasing power of the population.

This is more than clearly demonstrated by the current oil market crisis, the aggregate supply of which is about a third higher than total consumption. According to formal logic, the process must stop, but no one understands how the economy should (and can) function without the possibility of further expansion.

Thirdly, in classical capitalism, money is a rigid constant. By flowing into more profitable sectors from less profitable ones, they created capital deficits in the latter, causing them to shrink to below the scale of demand, thus increasing the profitability there. On the other hand, capital constraints quickly lowered the rate of return in high-yield sectors, which automatically created a reverse flow and returned the economic mechanism to a stable state.

Thus, the emerging crises of overproduction did not go beyond certain industries, making it possible to compensate for the loss of resources in other areas of the economy. And companies and money owners, which overplayed too much with erroneous management decisions, lost capital and thus dropped out of the management decision-making process itself.

The transition to the Bretton Woods and then to the Jamaica Currency System has completely eliminated the factor of the fundamental limitation of the money supply (and, more broadly, capital in general), thus opening up the possibility for the only emission center – the US Federal Reserve – to compensate for negative economic distortions with voluntary unlimited monetary issuing.

According to Marx’s classic model, the US mortgage crisis of 2008-2009 should have annihilated at least $2.5 trillion in direct losses and up to $4-6 trillion in total US banking and financial capital, thus reducing the country’s GDP from 14.7 (in 2008) to 10 or even 8.5 trillion in 2009-2010.

Instead, the Fed, through three QE programs, simply printed $4.5 trillion, which “offset” both the losses and continued US GDP growth to $16.1 trillion in 2012.

Faced with economic consequences, the Fed today again launched the printer, announcing plans to print an estimated 2 trillion by the end of this year and probably another 6 trillion over the next two years. And this, by the way, is 37.5% of US GDP in 2019.

The European Union operates “outside of the rules” in a similar way, printing 2.6 trillion euros or 15.2% of the EU’s 2008 total GDP, and also announcing a new QE program “to cope with the pandemic” in the amount of, according to various sources, 0.8 to 1.4 trillion euros.

While markets were far expanding, additional capital injections masked an increase in skewness in the economy. But now the space for expansion has ended, and cheating with the money supply has started to destroy the economic mechanism itself. Endless money does not allow inefficient economies to go bankrupt and stop influencing global processes.

According to classical logic, in order to solve the problem it is necessary to return to money the function of preserving wealth, i.e., not even to limit, but to explicitly prohibit its issuance, but nobody knows how to do this in practice today, which is the main source of the crisis. Everything else is only second and third derivatives, although some of them also look critically significant in meaning.

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In particular, the globalisation of markets, which has led to a process of redistributing the concentration of production in some countries and the marketing of their products in others.

The 20th century was marked by a revolutionary increase in productivity. At its beginning, industry provided employment for more than 42-45% of the workforce. The same number, and in places (for example, in Russia in 1916) it was more, up to 75% worked in agriculture.

Today, 8-11% of industrial employment and 4-6% of agricultural employment is enough to provide the world with manufactured goods and food. At least 40% (!) of produced food is eventually thrown into landfill due to impossibility of consumption during the shelf life of products.

This has created two key challenges. The first is to push excess people out of production and into the service sector, which in essence parasitises the surplus product created by production. But at the same time, these very people form consumer demand, without which production itself loses economic meaning.

As a reference: in Russia, according to official data, there are 78 to 82.2 million people of working age. At the same time, no more than 18 million people or 23% are employed in companies that generate up to 90% of the country’s budget revenue with their tax deductions. In the US, this share is even smaller – 6.2%. In Germany – just over 7%. In China – 25.6%.

The second problem was the redistribution of production from Western industrial centres to China. In general, 50% of world industrial production is concentrated there. Including: 45.1% of shipbuilding, 49.8% of pork production (although due to last year’s swine flu epidemic this figure decreased), 60% of cement production, 63% of footwear production, 80% of solar panel production, 55% of steel smelting, 90.6% of personal computers production and their components, and so on.

The concentration of production automatically also leads to the redistribution of profits from countries that mainly buy products to countries that mainly produce them. This is in addition to the problem of simple competition between new start-ups and already adjusted and already established and cost-optimised giants.

The current crisis has arisen, among other things, because the main consumers, especially Europe and the United States, have nothing to pay for the goods consumed. The US balance-of-payments deficit in trade with China is already close to $1 trillion or 4.6% of GDP in 2019. And that figure continues to increase despite three years of tough trade warfare.

Can all these problems be solved by a world war? No. Let’s say the US somehow will manage to dismantle Russia. It will not help them reduce the negative foreign trade balance with China. Let’s assume that America will be able to win the war with the People’s Republic of China. Even without taking into account the nuclear weapons factor, it will automatically evaporate no less than a half of the capitalisation of the US stock market.

At least because 5 of the 6 largest corporations in the US, forming 4/5ths of its size, are directly tied to Chinese production or trade in Chinese goods, which in America’s total consumption averages from 45% to 62%, and in some niches they exceed 81%.

This is even if we do not count the total losses of the United States itself, which sells up to a quarter of its products to China. In such circumstances, it is ridiculous, to say the least, to talk about the war as a certain logical stage of an abstract “Kondratiev wave”.

Will the American elite, both financial and political, resist? Certainly. Will they opt for some new world war — absolutely unambiguously not. Both because of the lack of a goal achievable by military means that materially makes up for the costs, and because its financial part – TNCs – is already at war with its political part – the American national state, as a public institution.

Transnational corporations do not want to share their income with the American state, they do not want to pay taxes, and in every way possible try to evade social obligations inside the country. For example, the Amazon corporation pays only 6% of corporate tax instead of 42% under law. And during 2017−2018 it officially did not pay a cent in general.

From the above, three simple but unpleasant conclusions follow.

Firstly, we are not at war with the US. Moreover, all past habitual geopolitical opponents of Russia, primarily Washington and London, have today lost their significance as an existential threat.

The problem is created solely because of the destruction of the general global economic mechanism, which we are an integral part of. In particular, because America, which dominates this mechanism, seeks to nest in an isolated autarkic financial and economic cluster because of its unwillingness, and simply inability, to continue to bear the costs associated with hegemony.

But America also does not know how to do this without immediate general economic collapse. Therefore, it tries to solve the problem using old, but today ineffective methods. This further increases the crisis, the consequences of which are reflected in all others.

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We should not forget that up to a third of Russia’s GDP is generated by foreign trade, the destruction and reduction of which is extremely painful for our domestic standard of living

We can only counter this by forming our own autarkic cluster. However, all the leading centers are following the same path today. First and foremost – China. But at the moment it remains unclear how, and at the expense of what, to build this cluster.

Secondly, one of the main elements of the economic mechanism that have lost their adequacy are banks. From a simple wallet for storing money, they have become a key center for absorbing profits and stimulating the process of accelerated consumption of future income through the continued increase in the scale of the credit burden on the economy and citizens.

Accumulating money, banks do not see sense in any of their long-term positive investment, seeking to maximise income here and now with minimal risk for themselves.

A cardinal reform of the basic principles of the entire banking system is required, but even here there is no clear understanding of its final best design. Without this, reform is also impossible.

Thirdly, a number of economists, including Glazyev, are convinced of the need to increase the share of the state in the economy to an absolute.

It is necessary to recognise that there are indeed certain reasons for this. If at the beginning of the last century state orders in developed countries formed from 8 to 12% of GDP, then at the moment their share reached from 47% to 52%. Roughly speaking, a half of economic power of the state is created by the state orders using budget money.

On this basis, it seems that the full transfer of property to the state will solve all the problems of the economy, both in terms of stopping the overproduction crisis, and in terms of improving the efficiency of capital use, and through this, increasing the amount of tax revenue that can pay for the expansion of social benefits to the population. A bit like in the nostalgically remembered USSR.

But these excessively romaticized dreams too strongly ignore the reverse negative side of a completely planned economy that led the USSR to economic collapse.

In addition, they do not take into account the cardinal differences between the current level of labor efficiency and the picture of the mid-20th century, when large-scale industries employed more than 90% of the working population. Today, so many workers and farmers are simply not need by anyone.

It is possible to return to the previous model only by a categorical decrease in labor productivity in general, which, on the contrary, will critically lower the standard of living. At the same time, like in the USSR, creating an insurmountable barrier to the introduction of any new, more efficient production technologies, as they will lead to a rise in unemployment, which will have to be stopped by direct social benefits from the budget.

And in its current form, the complete nationaliation of the economy will require to somehow find somewhere economically feasible tasks for freelancers, the self-employed, all kinds of entrepreneurs, and other small and extra-small entrepreneurs, as well as in one form or another the employees they employ, the total number of which in Russia exceeds a third of the total number of able-bodied population

But does approximately a third of the people employed in the Russian economy want to return to the Pullman or the work bench from 9am to 6pm for a meager salary? Or will we forcefully herd them?

Thus, it turns out that, like the absolute elimination of the state from the economy, the absolutisation of its share in it is a harmful extreme. It is necessary to form a hybrid model of a hierarchical model that combines the state’s dominance in large, strategic, and key infrastructure parts of the economy with the private principle of management in the rest. Especially in the small enterprises, individual entrepreneurs, and the segment of self-employed. In particular – in the services sector.

Today it is also necessary to direct all the efforts of society and the state towards the development of such a multi-dimensional economic model. But it is impossible to do this on the basis of the ideas formed within the framework of the dying liberal system of the free market and classical capitalism “according to Marx”.

Any attempts to demand an acceleration of an abstractly idealistic “socialist revolution”, and moreover in the current difficult external and internal conditions, are fraught only with catastrophe.

The former world is dead. Some of its experience, of course, is useful, but the dogmatic absolutisation of all its past “discoveries” is directly harmful. It looks too much like stepping on rakes.

Aleksandr Zapolskis

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