Where has capitalism gone wrong? In Too much stuff, Kozo Yamamura upends conventional capitalist wisdom to provide a new approach. Read about his new perspective on capitalism’s “sickness.”
Over the past three decades, the financial and environmental prospects of the UK, US, Japan and Europe, have slowly but surely been moving in a calamitous direction because of ill-conceived “easy money” policies pursued by those in power, from governments and banks through to multinational corporations and the advertising industry.
The result: a self-perpetuating cycle of stagnating economies, social unrest and political upheaval.
The advanced economies of the world are sick and democracy is floundering. Capitalism as we know it has created a climate where extremist, anti-EU political parties are flourishing by tapping into widespread dissatisfaction with the way things are.
They’re right in one sense – the system does need to change, because if it doesn’t, “what becomes the issue will not be the survival of our system, but the survival of our civilizations”.
“The advanced economies are sick, and the environment is getting sicker.”
But the solution to this “despairing reality” doesn’t lie in yet more politically-motivated manipulation of a weak system. What we need is a more egalitarian approach to tax so that greater investment can be made in meeting basic societal needs so that the economy, and its people, can not only survive, but thrive.
The advanced economies are sick, and the environment is getting sicker as a result. In 2014, the Intergovernmental Panel on Climate Change (IPCC) advised that “an environmental catastrophe cannot be averted if a major international effort is not begun immediately” by today’s developed economies – those that have been emitting the most greenhouse gases and polluting the air since they began to industrialize – to lead a global effort to reduce carbon emissions.
Can we get there from here?
While the first decade and a half of the 21st century, and particularly the Great Recession of 2007-8 paints a relentlessly gloomy picture, if we look back to life after the Great Recession of the 1930s, there is cause for optimism – so long as we’re prepared to learn the lessons of history.
But are we capable of demanding and implementing the kind of systemic change required?
And are we, as a society, capable of resisting the allure of the “necessary luxuries” that give the appearance of high living standards but actually only serve to degrade the environment and the economy further with the push-pull effect on the supply chain?
According to the leading economics analyst Kozo Yamamura, author of the ground-breaking new book ‘Too Much Stuff’, a more economically and socially just system would be one that that raises taxes in a fairer, systematic and progressive fashion such that public health, education and the environment might benefit from greater investment.
“…a symbolic display of ostentatious and unattainable wealth…”
Yamamura’s own investigations into why capitalism reached this crisis state started almost a decade ago when a colleague took him to Berlin’s KaDeWe, Europe’s largest department store, a six story 60,000 square metre building that housed such a vast quantity of goods that the sales team could no more tell him a precise number than the majority of Germans could afford.
It was a symbolic display of ostentatious and unattainable wealth, a demonstration of supply side economics where desire was created by the banks and multinationals, and coveted by those who could little afford it. It’s no wonder that Yamamura was prompted to pronounce our economies “sick”.
The pro-investment fallacy
Real, inflation adjusted GDP (Gross Domestic Product, the total amount of all goods and services produced) has averaged only 2.62% in the biggest developed economy, the US, since the 1980s. Following the global financial crisis of 2007-8 it fell even lower, to 1.42%. In Japan, the equivalent rates were 2.61% and 1.09%. While the average growth rate in Europe’s largest economies (Germany, France, the UK, Italy and Spain) was 2.42% after the 1980s, plummeting to minus 0.65% after the global financial crisis.
The political consequences have been stagnant real wages, frequent recessions, rising unemployment and much less investment than is necessary to meet basic societal needs.
“We think we need more than we do in order to have a life worth living.”
And yet, thanks to industrialization, the majority of people enjoy the highest standard of living known in human history, with more luxuries on offer to supplement this new and improved standard: more choice and larger volumes of gourmet foods, toys, cars, clothes electronics “and other frivolous things bought increasingly on a whim for vanity or amusement”.
These are the “necessary luxuries” that characterise modern life in “the new world” where we think we need more than we do in order to have a life worth living. Meanwhile, producers keep producing to meet the growing demand, only the demand isn’t growing at an equal rate because the power to buy lies in the hands of the few.
And so we come to advertising, the means by which firms create demand for their products and services to give consumers what they never knew they wanted. According to the statistics portal Statista, by 2013, total US expenditure on advertising had reached nearly $330 bn, or 2.2% of GDP, which is 2.5 times the amount the US government spent on education.
“As consumers, we are befuddled. We are confronted daily with advertising for necessary luxuries, and peer pressure to buy the latest styles or goods, and shopping has become a favourite pastime. So we drift through malls, visiting store after store selling things we don’t need, purchasing stuff from salespeople whose earnings are barely above the poverty level.”
When the farce of it seems so obvious, how can it be that this form of capitalism has reigned supreme for so long?
Part of the reason for the cavernous divide is the mismatch between reality and the actions and policies of those in charge of the economy. As a result, since the 1980s, we have been duped into living in denial so that we might consume the goods and services that companies are over supplying, and spend the money that the banks are over lending, in the misguided notion that this will revive the economy.
“The central banks’ justification for their ultra-easy monetary policies are no more than wishful thinking or educated guesses that the policies will reinvigorate the economy by increasing investment. This is hardly surprising, because central bankers are economists, and economists don’t have a common, empirically supported macroeconomic theory that explains how fiscal and monetary policies work.”
The more things change, the more they stay the same
Policies supposedly designed to lift the economy out of the lingering effects of the Great Recession of 2007 and 2008 have only served to make things worse. Japan’s government has gone from “incompetent to delusional”, increasing expenditure on social needs only to feed into the national debt and social imbalances because it has failed to make necessary adjustments in policies and practices elsewhere. While Germany’s pro-investment policies have been the hallmark of the Right since the post-unification of East and West and the 1980s, trampling the early tradition of a social market economy.
The rich are getting richer while the poor remain trapped in poverty, owing to the unequal distribution of wealth in the world’s developed economies, enforced by numerous provisions and loopholes in tax laws that enable them to reduce their payments and increase their profits. Take the US: it has the second highest corporate tax rate in the rich world and yet most American businesses don’t pay it.
The pro-investment policies of Japan, the UK and Europe have created similar chasms in the economy, primarily through Quantitative Easing (QE), a drastic attempt to save a failing economy where central banks buy government and private bonds from banks and other financial institutions using electronic cash. This allows the banks to hold additional funds on top of their legally required reserve, thus allowing them to make more loans. However, such policies only serve to expand the bubble that must eventually burst – as we witnessed during the global financial recession of 2007-8.
“By 2008, the richest one percent held 23.5% of total wealth.”
In the four years after the Great Recession ended in 2008, the top one per cent of Americans, who own nearly half of all stocks, received 95% of the total income gains. In 2012 alone, the top one percent saw their income rise by nearly 20% while the income of the remaining 99% of the population rose by only one percent. This compared to the figures of 1980, when a mere one percent of the US population held 10% of the nation’s wealth. By 2008, the richest one percent held 23.5% of total wealth.
In Japan, according to the Organisation for Economic Co-operation and Development (OECD), 15.7% of people, or about 20m of the total population, were living in poverty in 2009. While in Germany in the same year, the top 10% of earners received on average about eight times as much as the lowest ten per cent. The top 10% essentially controlled a quarter of gross income and possessed around half of the country’s total assets.
In Germany, by 2014, 14% of Germans were living in poverty, defined as persons earning less than 60% of the median income. At the same time, the number of millionaires stood at around 430,000 – the highest number ever.
“If capitalism isn’t working, democracy isn’t working either.”
Given the invidious disparities, it’s no wonder that by 2011, all of the developed economies were beginning to experience social unrest and numerous protest movements, most notably in the shape of the Occupy Movement.
One of the rallying cries adopted by Occupy was that “capitalism isn’t working”. If capitalism isn’t working, democracy isn’t working either, as evidenced by declining voter participation rate in elections and the increasing popularity of extremist far Right and far Left political parties.
Capitalism has to change if it is to survive
Yamamura’s book was almost called ‘Reinvigorating Democratic Capitalism in the New World of Necessary Luxuries’, which indicates his optimism in the face of the bleak reality he conveys. His book is fundamentally the outline for a new approach to capitalism rather than a sounding call for its total demise.
Therein lies his hope that armed with information and critical insight, we might reverse the trend and avoid the impending global political and political calamity. Indeed, the US and the UK managed to recover from the Great Depression of the 1930s via systematic changes in laws, institutions and practices.
In posing a solution, Yamamura challenges predominant conservative and liberal analyses by suggesting a systemic overhaul of taxing regulations, government practices, economic policies and voter participation.
If capitalism and democracy are to be reinvigorated, we essentially need a system that curbs pro-investment policies and instead focuses on raising the standard of living of the majority so that societal, not just economic, needs can be fairly and adequately met.
Inextricably bound to the socio-economic consequences are the environmental implications of an economic system that favours mass production and virtual money.
“An environmental catastrophe cannot be averted if a major international effort is not begun immediately.” That was the broad conclusion of the 2014 report from the Intergovernmental Panel on Climate Change (IPCC), which reiterated the urgent need for today’s developed economies – those that have been emitting the most greenhouse gases and polluting the air since they began to industrialize – to lead a global effort to reduce carbon emissions. That would require a total investment from the developed economies of at least $100b per year, starting in 2020. Another blatant indicator that the current priorities of the capitalist system need changing.
“The solution lies in some uncomfortable truths.”
If economists continue to create policies based on ideas of easy money, we will be doomed. If we’re to avert an impending calamity of modern civilisation, then the solution lies in some uncomfortable truths: principally, the unavoidable need to increase the income tax rates on the wealthy and large corporations, increase tax revenues so as to bolster investment in societal needs and increase the demand necessary to enable the economy to grow, and crucially, change the way political institutions operate.
And when it comes those necessary luxuries, they ought to be taxed too, because are they really necessary, or are they just burning an irreparable hole in the environment as well as our pockets?
This will take political will, of the people just as much as the governments.
If there was ever a time for such dramatic change, it surely has to be now, as we stand on the cusp of future being shaped in the era of Trump and Brexit, when Yamamura’s analysis reveals a damning indictment of a past that is already being repeated.
Find out more about impact, influence and engagement at Policy Press here.
Policy Press newsletter subscribers receive a 35% discount – sign up here.
The views and opinions expressed on this blog site are solely those of the original blogpost authors and other contributors. These views and opinions do not necessarily represent those of the Policy Press and/or any/all contributors to this site.