Review of Harry
Shutt's The trouble with capitalism: an
inquiry into the causes of global economic failure, Zed Books 1998.
-- G. Chris Rodrigo
The historical backdrop
Harry Shutt's objective in this book is to expose the grim realities of the
evolution of the global capitalist system over the last half century and
thereby dispel 'the illusions which lie behind the neo-laissez-faire prospectus,' as stated in the introduction. The
objective of this book review is to ascertain whether his analysis captures
essential aspects of the economic reality and the extent to which it does that.
Given the rather large scope of the subject, it is unreasonable to expect a
full, comprehensive coverage of this complex subject in a volume of 238 pages.
The task undertaken here is to identify the strengths of his analysis, flag
arguments not well grounded in contemporary economic research and also indicate
important issues ignored or mis-diagnosed. The reviewer subscribes to
Shutt's broad claim that the reality of globalization falls far short of the
rose-tinted rhetoric of the apostles of globalism.
The book starts with a brief review of the emergence of the modern
capitalist order in Western Europe, the USA and Japan in the late 19th
and early 20th century period. This is followed by an account of the
worldwide depression of the 1930, the events leading up to the second world war
and the post-1945 world order under US hegemony. He briefly traces the
political and economic institutions set up, nationally and globally, to rebuild
a and stabilize the international capitalist system in the wake of the
cataclysmic events of the preceding years. Shutt describes and explains the
reasons for the particular institutions and policies adopted and how they laid
the foundations for the long post-war boom. Key features of the new order were
the international financial system based on the dollar-gold exchange standard,
a commitment to trade liberalization in the long run and political stability
for the capitalist nations underwritten by American hegemony.
Shutt shows how post-depression and post-war reforms led to a strong, proactive
role for the state as ultimate guarantor of economic stability and social
security. Crises, instabilities, such as those that beset advanced countries in
the previous period, would henceforth be managed by the new Keynesian
stabilization policies. The new technologies launched from 1900-45 were linked
to rapidly growing mass markets after 1945, which generated a near two decade
upswing in productivity which supported rapidly rising incomes that served to
further stabilize the new high-productivity, high-consumption economy. Many
then believed that the capitalist system had permanently stabilized itself
through new, superior institutional and technological innovations and the use
of Keynesian demand management policies to prevent or curb slumps.
However, in the 1970s, instabilities re-emerged and growth slowed down
throughout the world capitalist system. Keynesian policies also ceased to work
as demand stimulation merely led to high inflation appearing alongside sluggish
economic growth, the phenomenon of 'stagflation.' Other symptoms of the
breakdown of post-war stability were the collapse of the Bretton Woods fixed
exchange rate system and the oil-price hikes. Apart from the first two
chapters, Shutt's book is primarily an analysis of the unravelling of this
post-war system of regulated capitalism. In particular, he examines the
theoretical and political responses to these events and how these have forged the
neo-liberal consensus that has dominated establishment thinking from 1979/80.
The neo-liberal reaction (from 1979/80)
Keynesian policies gave way to monetarism, market liberalization and the
privatization of public enterprises in the UK and US. However, monetary
targeting was quickly abandoned and inflation brought under control only by
raising interest rates and precipitating the deep 1980-2 recession which did
considerable damage to the real economy. Shutt's argument is corroborated by
the famous economist Paul Krugman (1994; ch. 1), but Shutt brings out the
inconsistencies in the neo-liberal ideology more clearly. Unfortunately, Shutt
persists in using the term 'neoclassical' when he likely means 'neo-liberal,'
making a distinction between 'neoclassical' and 'Keynesian.' In the US, the
term 'neoclassical' is commonly applied to mainstream economic thinking which
includes the Keynesian-neoclassical synthesis and even more recent schools of
macroeconomics (see Weintraub at http://www.econlib.org/library/Enc/NeoclassicalEconomics.html#further).
The 1980-82 recession and the elevated interest rates also gave rise to a chain
of debt defaults in Latin America, starting with the Mexican debt crisis of
1982, which ushered in the famous 'lost decade' of the 1980s for many
developing countries, a point taken up later in the book.
Shutt goes on to describe how other aspects of the neo-liberal agenda were
pushed through by the Thatcher and Reagan administrations. These were then
taken up widely abroad starting with the nominally socialist governments of
Australia and New Zealand. Again he points out the practical and conceptual
inconsistencies in the policies followed and the great difficulties encountered
in scaling back the role of the state. The Thatcher government was able to
reduce fiscal deficits on account of North Sea oil. Not having a similar
windfall, the Reagan administration presided over massive increases in budget
deficits as its supply-side tax reduction policies failed to stimulate growth
sufficient to offset the tax reductions and increases in defence spending.
While fiscal orthodoxy and monetary restraint figured strongly in the
neo-liberal rhetoric, Shutt shows that it was more about institutional reform,
trade and financial liberalization, privatization and deregulation. While these
policies failed to roll back the state, the broader market-promoting reform
agenda gathered momentum and has now spread widely across the world as official
policy if not actual practice. Shutt, however, fails to identify adequately the
cogency and coherence of the political-intellectual current that supplied the
underlying rationale for this fundamentalist, neo-Austrian alternative to
Keynes, developed by Friedrich von Hayek. While the Thatcher and Reagan
administrations had already been won over to the neo-Austrian agenda by 1980,
China's increasing turn to markets and the collapse of 'Socialism' in the
Soviet Union and East Europe by 1990 strengthened and widened its appeal. By
century's end, a sea-change in economic policy has been carried through by
pressures exerted over various channels. The story of that revolution in
ideology is related with some neo-Austrian bias by Yergin and Stanislaw (1998).
What Shutt does well is to highlight the practical and theoretical contradictions
arising out of the above policies, problems blithely ignored in neo-Austrian
market triumphalism. He shows that despite rhetoric about shrinking the state,
corporations and conservative governments turn to the state to resolve these
contradictions. A prominent example is the Savings and Loan crisis in the USA
which has its roots in earlier financial liberalization; the bankrupt financial
institutions were bailed out by the Federal government. In fact the role
of government in the economy has grown steadily from the 1930s to the present
directly in response to various market failures which have been identified and
addressed by governmental action and new regulatory institutions.
Financial liberalization and rising
instability
An important outcome of the Reagan-Thatcher reforms well described in the
book is deregulation of financial markets and its consequences. With safety
constraints removed, such as separation between commercial and investment
banking, banks have undertaken much riskier behavior in the drive for higher
profits, including highly speculative investments in property development. The
Savings and Loan debacle in the USA, described above, is one example. Another
was the activities of corporate raiders. Many companies have also been induced
to take on excessive debt which undermines financial stability. Overall, Shutt
points out that a new speculative climate has been created in which the
viability of major companies and the livelihood of millions of workers have
been mortgaged to give free rein to speculative orgies bordering on financial
piracy. Though not so apparent at the time the book was published (1998) these
warnings have been amply borne out by recent scams at Enron and other major
companies.
Another consequences is the enormous expansion of speculative foreign exchange
transactions, which destabilize entire countries. A particular problem is the
short-selling of wobbly currencies by hedge funds which try to make very large
profits from forced devaluation of target currencies. Shutt also notes the
proliferation of offshore financial centers which facilitate money laundering,
organized crime and large-scale corruption. Caught up with the imperative of
maintaining laissez faire conditions for international financial transactions,
the G7 countries often wring their hands about these abuses but fail to take
any concrete action.
Implications of technological change
One of the most important issues raised by Shutt is the effect of
technological change on demand for labor and capital. He observes that from
around the early 1980s a great deal of investment in the services as well as in
manufacturing, has been directed at cutting cost - that is raising labor
productivity - without expanding capacity very much. As a result the real demand
for capital and labor to support any particular expansion of output, has fallen
from the norm for earlier periods in all industrial countries. This has
led to 'jobless growth' and contributed to a glut of financial capital. These
are well known consequences of the revolution in information technology that
has been sweeping through the world.
The new technologies associated with computers, communication and the Internet,
identified as the 'information technologies,' are radically changing the
organization of business, the demand structure for skills, business information
patterns and productivity in service and manufacturing operations. Managerial
hierarchies are being flattened and personnel previously engaged in the
processing of business information are drastically cut in numbers since now
much of this work is done by computers running resource planning software.
While the demand for personnel skilled in computer-related operations has
risen, the demand for run-of-the-mill managerial, clerical and even
manufacturing jobs has fallen. We see countries such as Germany and the USA
seeking software engineers in India and Russia, while aggregate unemployment
rises. This is because displaced workers cannot be absorbed in the new jobs
being created since they do not have the training or even the aptitude for it.
Shutt notes accurately that retraining schemes have generally failed to have
any significant impact in bridging this skills gap.
The long-term changes described by Shutt are characteristic of transitions in
the techno-economic paradigm (see Perez 2002) when the core technologies
underlying the economic system undergo a fundamental change, such as from the
age of steam and coal to the internal combustion engine and electricity and now
to the information age. The old sets of skills are devalued and new skills are
required. But since the re-investment in new 'human capital' takes much longer,
an increase in structural unemployment results. Shutt does not identify this
phenomenon in these terms. But he correctly identifies a new feature, i.e.
reduced demand for investment in physical capital with reduced incremental
capital/output ratios. The other feature is that computers and new software
systems are significantly raising productivity in service operations and even
managerial activity which reduces employment and flattens managerial
hierarchies.
These trends are seen not just in Europe, Japan and the United States, but all
over the world. This is one reason why globalization with its intensified drive
for higher productivity in all production and service operations that are
internationally competitive, is so unpopular: unemployment rises along with
productivity. Even in fast growing China where East Asian-style productivity
growth is transforming millions of rural folk into industrial workers on a
scale not seen before in history, there is rising frustration directed against
the Party leadership. In the drive for productivity the social support system
of the 'iron rice bowl' has been removed; the least skilled and least capable
workers are thrown on the scrap heap to roam around its big cities, vainly
looking for work.
The glut of financial capital
A central problem is that capitalism does not smoothly move from the
initial phase of a transition in the techno-economic paradigm (a concept that
is not clearly identified by Shutt) to a later and more mature phase in which
rapid economic growth and increasing education and training lead to rising
employment and even an excess demand for immigration. In the previous
transition, the new technologies that were introduced in the early 20th
century coalesced into a mature phase of high demand for labor only after 1945.
This was preceded by social chaos, systemic breakdown in the worldwide
depression of the 1930 and the second world war, which eventually cleared the
economic and social ground for the new techno-economic paradigm to establish
foundations that were resilient.
Of course, conditions were vastly different at that time: capitalism had been
in political crisis from the First World War itself and the Russian Revolution;
liberation struggles had broken out in most of the colonial world and the
legitimacy of capitalism was threatened by the worldwide rise of interest in
socialism. It is well understood today that capitalism survived the
social-political crisis mainly because working people in Europe, North America
and even in the colonies, saw the need to join with the ruling classes in the
struggle against fascism and also because the barbaric nature of Stalinism
effectively killed any interest in moving towards similar political
experiments. Stalinism remained attractive only in emerging Third World
revolutions where a new class of Jacobinist radical intellectuals seized state
power and created authoritarian political systems which paid lip service to
socialism but recreated medieval-style autocracies.
All that is past now, as global capitalism enters the present crisis. But new
contradictions have arisen and Shutt traces some of these competently. A
central theme in his book is the oversupply of financial capital which from the
mid-to-late 1970s has been finding inadequate opportunities for profitable
investment in the heartlands of industrial capitalism. What this means is that
the supply of new technological innovations within the prevailing
techno-economic paradigm is not adequate to absorb the mass of finance seeking
investment opportunities. Additionally there is the problem of maintaining
adequate returns on existing investments; these returns tend to be driven down
over time by rising competition from new domestic investments and international
sources as trade gets liberalized. Shutt's analysis is particularly useful here
because the systemic problems relating to global finance are rarely raised in mainstream
analyses and even when they are, the true nature of the problems are shrouded
in arcane terminology. Another irritant here is Shutt's failure to distinguish
carefully between financial capital and physical capital.
Shutt also describes other ways in which surplus funds have been used. From the
late seventies there had been a flow of funds to many 'emerging markets'
particularly in Latin America. After the Mexican default of 1982 there was an
abrupt drop in capital flows to Latin America which led to the 'lost
(development) decade' of the 1980s. Capital flows revived again in the
early 1990s until the 1994-5 crisis is Mexico and elsewhere. These flows of
short-term capital were then directed to East Asia where their abrupt
withdrawal in 1997 again led to the Asian crises of 1997-8, just as in Latin
America. These triggered the currency crises in Russia (1998) and Brazil
(1999). The Brazilian crisis contributed to economic collapse in Argentina in
December 2001. Shutt identifies the problems posed by this excess of footloose
funds sloshing around the world economy, but does not adequately analyze the
destabilizing effect of short-term capital flows on vulnerable 'emerging
economies' possibly because at the time this book was being written, the
problem was not well recognized. Today, however, the destabilizing effects of
short-term capital flows are being hotly debated in many international fora
(for details see Economist, 2003).
An important distinguishing feature of Shutt's analysis is the linking of the
wave of privatization to the need to find adequate investment opportunities for
excess financial capital. There are other reasons as well, such as the need to
plug gaps in public finance. He shows that privatization has been sold to the
public as necessary to raise productivity in the privatized sectors, but
questions this justification. He notes that rising public sector debt deriving
from declining tax revenues and rising fiscal deficits brought about by
neo-liberal policies, have also served as another investment opportunity for
footloose finance seeking adequate returns. Other investment opportunities have
been created by allowing private investment to fund public infrastructure and
move into services such as postal, prison and garbage collection services,
hitherto confined to the public sector. In the US, companies can now buy back
stock, thereby raising the stock price to the advantage of top executives who
are compensated partly with stock options.
There are some problems with this utilitarian justification of the neo-liberal
programme started by the Thatcher and Reagan administrations. It is commonly
known today is that this missionary free-market zeal was inspired by
neo-Austrian thinking transmitted to Thatcher via Keith Joseph. Shutt's story needs
to be supplemented by the saga of ideological evolution told by Yergin and
Stanislaw (1998) which has been briefly stated above. This reviewer believes
that history is made as much by ideological waves as much as by perceived
material interest. Otherwise it is hard to explain the short-sightedness of
capitalist ideologues and Stalinists, whose gross misperceptions eventually
undermine their own long-term interests. Ideas are certainly influenced by the
concrete material conditions in which they arise, but they cannot be explained
comprehensively by these conditions in a deterministic way. Thus ideological
currents owe as much to the peculiar ideas of their founders as much as the
material challenges they confronted. Shutt unfortunately largely ignores the
ideological dimension as noted earlier; thus his explanations remain
incomplete.
Transitional economies and the Third
World
Shutt also analyses the recent evolution of the former planned economies
into more 'emerging markets' and the 'emerging' or more often 'submerging'
markets of the Third World. He does identify many weaknesses of the Soviet
System and other planned economies. These include use of administratively
determined priorities and quantitative targets rather than signals emanating
from the market, poor cost accounting and control, unwieldy organizational
hierarchies and distortion of information flows, corruption, suppression of
criticism and other bureaucratic ills. He also points to crumbling public
infrastructure, capital stock that has not been renewed for decades, increasing
fiscal anarchy in public enterprises and the rise of organized crime, as major
causes - and symptoms - of social breakdown. Rising defence expenditure was the
crucial burden that broke the camels back and this derived largely from
competition with the US in global power politics. Yet for this reviewer at
least, he misses the most crucial issue leading to Soviet decline, the
inability of that society to generate endogenous technological innovation
unlike the more successful capitalist societies. This major lacuna in Shutt's
conception of economics is discussed elsewhere in this review.
Shutt discusses the different modes of transition to market economies exhibited
by Russia, China and Eastern Europe. He shows how 'shock therapy'
liberalization in Russia, inspired by illusions about market forces being able
to instantly spring into action and operate as in mature capitalist nations,
led to a disastrous collapse of production from which the country is still
recovering. In the meantime, mismanaged privatization has led to oligarchic
control over industrial companies and set back the process of democratization.
The lesson is that market forces operate best within a strong institutional
structure which takes decades to build up, a point that appears to have been
unknown to the various Western gurus that guided shock therapy strategies.
Additionally, Russia has generated an extraordinary amount of lawlessness,
including organized crime, which will be very hard to shake off now on account
of the political and economic power amassed. He also shows that the transition
worked better in Poland and the Czech Republic because policies there were
quite different. He points out that China, the best performer of all, has
totally ignored shock therapy ideas and gradually liberalized markets,
concentrating on promoting FDI and exports without dismantling the
administrative structures of the bureaucratic state. China was of course helped
a great deal by the proximate East Asian examples from the early 1980 and by
the readiness of the Chinese Diaspora to bring productive investment to its
coastal regions.
In a separate chapter, Shutt covers the evolution of Third World economies over
the last 50 years or so. Except for East Asia, the general picture is one of
catastrophic decline, particularly after the debt crises of the 1980s. He shows
that the public sector in many countries has failed to meet up to the challenges
of development, the growth of population, environmental decay and the rise of
lawlessness and separatism. Many of the reforms foisted on developing countries
by the World Bank and the IMF have not succeeded in generating economic
dynamism in the private sector in most countries. The flow of finance to
developing nations and the instabilities generated by hasty liberalization of
financial institutions, leading to a series of financial crises in Latin
America and Asia, have been described earlier. Shutt sees the 'Third World
catastrophe' as the broader playing out of the contradictions that beset the
capitalist system worldwide.
While it is hard to quarrel with the broad thrust of his analysis of the Third
World, he is probably somewhat over-pessimistic. Latin American nations have
indeed made some progress in cutting down deficits and getting better control
over macroeconomic management. Though enormous problems remain in Brazil,
Argentina and Mexico, they have learnt some lessons from mistakes of the past.
If one is to judge by recent postings on their web-sites, so also have the IMF
and the World Bank, at long last. They are now less likely to impose disastrous
policies on client states. Furthermore these countries are now much stronger
exporters, so much so that Brazil faces many trade disputes with the USA,
Canada and Europe. Nevertheless, Shutt is right to point to serious weaknesses
in these countries, growing inequality and lawlessness. The recent
privatization wave in most countries, has also generated a great deal of
corruption.
Many Asian countries have made much more progress than Latin America,
particularly the first tier East Asian tigers. This is another blind spot with
Shutt. He argues that South Korea, Taiwan, Hong Kong and Singapore have grown
on the basis of imported capital and technology and by exploiting cheap
domestic labor. Here he completely misses the scope and scale of the East Asian
achievement. Since 1960, labor productivity and wage rates have grown steadily
and very rapidly on the basis of the fastest building up of technological
capability seen in recent times. Hong Kong and Singapore now boast standards of
living higher than Spain, Portugal or Greece and Taiwan and South Korea are
close behind. These four countries are developed countries by any measure and
labor is highly skilled there and no longer so cheap.
Obviously any developing country must grow initially on the basis of adapted
technology, but today, except for Hong Kong, they are fully integrated with the
networks of technology development of the advanced industrial world (see
Rodrigo, 2001 for details). One has only to see the products exported by South
Korea and Taiwan to see the extent of their technological mastery. Finally
these nations have exhibited the highest savings rates in history and are a
large source of capital and FDI for the rest of the world. They also have the
largest foreign currency reserves in the world, next to Japan and China. It is
hard to understand how someone as critically observant as Shutt could be so
profoundly wrong about East Asia. In his eagerness to develop the case for
general capitalist collapse, he dismisses East Asia without any serious
assessment of their achievements.
Technology as a public good: a lacuna in
Shutt's conception
Another major issue on which Shutt is out of touch with contemporary
research on the advance of technology is in his conception of state support for
technology advancement. He see this as another case of private companies
relying on the state to bail them out. That is profoundly false. The advance of
technology is a very complex kind of human activity. At the surface level we
see companies developing commercially exploitable technologies to produce goods
and services for profit. They are after all motivated by profit, not by
philanthropic considerations. Commercially exploitable technologies, however,
arise out of an underlying stratum of generic technologies, also called general
purpose technologies. This stratum in turn develops out of more fundamental
advances in knowledge carried out in universities and research institutions.
Therefore knowledge advance in science and technology takes place at roughly
three distinct but interconnected levels.
The bedrock stratum of knowledge advancement is clearly a public good or even
more a global public good. The development of scientific knowledge is
clearly the responsibility of public, not-for-profit institutions like the
universities and government research labs and programmes. Even if carried out by
private firms, they need to be funded by public investment, since firms cannot
turn these into profit-making activities. The intermediate layer of generic
technologies also has many features of public goods. Even if developed by
individual firms, they generate technological spillovers to other firms within
the nation and also to firms outside. In short the development of generic
technologies is rife with what economists call 'positive externalities' in
which the social returns are much greater than the private returns that can be
secured by the firm initiating the innovation. In the case of a 'negative
externality' such as industrial pollution, the social costs are higher than the
costs borne by the polluting firm; hence society must exact clean-up costs from
the firm. The crucial outcome of this conception is that private firms will
invest insufficient effort in developing generic technologies since they cannot
capture most of the returns.
Hence if a society wants the optimum development of technological innovation,
the public sector needs to get involved in the development of generic
technologies. Ever since the late 19th century governments in
Germany, Britain, France and the USA have shouldered this responsibility to a
greater or lesser degree. Public-private cooperation in the development of
generic technologies has been most spectacular in the USA during and after the
second world war, under Federal, i.e. central government leadership. Thus was
developed advances in semiconductors, computers, aerospace technologies,
electronic communications, the Internet, biotechnology and many others. There
is another important consequence of state involvement in technological change.
Since the progress of technology is evolutionary, it is rife with
uncertainty, especially at the beginning of a techno-economic paradigm. Even
firms that operate at the leading edge of technology are liable to make
disastrous mistakes as evidenced from a casual reading of business journals.
The guiding hand of the state can greatly reduce the uncertainty associated
with technical change.
Hence state involvement in technology development is a necessary function under
capitalism, not just a class-conspiracy as seen by critics on the left or an
unnecessary interference with market forces as charged by market
fundamentalists on the right. If the private sector is to be induced to
undertake risky investments in innovative generic technologies, it is entirely
appropriate that part of the risk and investment cost be borne by the public
sector, since society will draw much larger benefits than will accrue to the
firm alone. It is hardly an accident that in the USA where public-private
cooperation in the advancement of technology has been developed to a higher
level than elsewhere, we also have the strongest advance of technological
innovation in general. An explicit goal of the European Union project has been
to mobilize public and private productive resources of the aggregate of
nations to match technological innovation in the US. One example of success is
the European aircraft producer Airbus Industrie, which has now achieved
competitive parity with the US giant Boeing, directly as a result of organized
support from European states.
Conclusion: many strengths and some
weaknesses
Shutt concludes his book by emphasizing the crisis of political legitimacy
for the profit system as presently constituted, on account of its manifest
inability to address the growing contradictions of the system as a whole. Thus
rising inequality and technology-related unemployment in advanced and
developing countries is accompanied by more frequent episodes of systemic
macroeconomic instability. Corruption and internationally organized crime are
definitely on the rise, with Russia and other transitional economies contributing
a disproportionately large share. Additionally, there is increasing
international discord over trade, investment and intellectual property rights
issues and about appropriate global collective action to safeguard the
environment and restore shrinking fish stocks caused by overfishing. Developed
nations seem to be facing increasing difficulty in maintaining health care
benefits, adequate education, social security for the unemployed and the aged,
keeping crime under control and so on.
If Shutt were to be update his book today in the light of developments over the
last 5 years or so since his book was published, he would undoubtedly strike
a more pessimistic note. Global problems have got intensified and a few
new ones have been added. He is likely to see the rise of militant Islamic
fundamentalism as a failure of leaders of hegemonic nations to address
historic injustices and resolve contemporary conflicts. Drug related crime and
corruption have got worse as has the exploitation of Eastern European women for
prostitution. Separatist violence has not got better and crime and violence in
Brazil, Mexico, China and elsewhere has risen alarmingly. Following the stock
market collapse in 2000 in the USA, recessionary conditions have appeared
throughout North America and Europe. Japan continues in recession, unable to
fix its major economic and institutional problems and now Germany has slipped
into the same quagmire. Serious problems have arisen about malfeasance by
corporate executives relating to gross manipulation of financial statements for
their personal benefit, an issue that Shutt deals with briefly in his book.
From the perspective of 2003, his 1998 claims seem excessively cautious.
At the very end, Shutt also discusses some of the political issues arising out
of the major storm he sees on the horizon. He goes on to enumerate some
guidelines for a more viable, equitable world order. This is not the place to
critically review the brief framework he has laid out in his last chapter since
he seems to have developed this theme more fully in a later book (Shutt,2002)
which is probably well worth reading. One crucial point is worth highlighting:
Shutt does not appear to suggest that a more sustainable world economic order
would do away with market forces completely. Instead, he sees market forces and
profit incentives being redirected squarely towards serving major social ends.
This approach can be interpreted as an attempt to redirect productive activity
strongly towards the production of crucially important public goods, away from
the present excessive production of private goods for private consumption. At
least that is the interpretation that this reviewer imputes to Shutt in
accordance with his own prejudices.
To sum up, Shutt does manage to capture many of the essential features of the
world economy in its evolution over the last half century. He does seem to
understand economic issues much, much better than most of the critics of
globalization. Because he understands the economic logic and political exigencies
behind major events such as the formation of the IMF, the World Bank and the
WTO, he rarely needs to conjure up fantastic conspiracy theories, such as are
purveyed in some of the left literature. This book will provide the
reader a sober and plausible account of how the post-War system evolved and its
major problems and shortcomings. There are some serious flaws in his analysis,
particularly his conception of technological change, which have been identified
above. A better understanding of this issue will explain why capitalism has so
far muddled through despite serious contradictions. It is also crucial to
understanding why planned economies were not able to develop the productive
forces beyond a certain level.
The major weakness is the conception of technological innovation and the
central, symbiotic linkage between innovation and capitalist dynamism. Though
Shutt talks about technology from time-to-time and even has a chapter titled
'technological nemesis,' he seems to implicitly believe that innovation is an
exogenous process, i.e. it is something that happens 'outside the system.' This
is a weakness of mainstream economics as well; even most professional
economists have the vaguest notion of the role of technological innovation.
Neoclassical growth theory actually models technological change as if it were
'manna dropping from heaven,' using this exact phrase to explain why this is
treated as an exogenous input. New growth theory, developed since 1986, tries
to endogenize innovative activity. But it has hardly shed any new light on this
problem, as pointed out by experts of technology such as Richard Nelson (1997).
There is a much better understanding of technology now within a small circle of
economists who specialize in the analysis of technology. These include
distinguished economists such as Nelson who are respected across the
profession. As a result more realistic ideas about technological
innovation are diffusing through the profession. Schumpeter is back in fashion,
since he was the first economist to see the central role of innovation and the
entrepreneur, in the progress of capitalism. Actually, Marx was the first major
economist to understand the role of technological innovation in regenerating
the dynamism of capitalist processes. Schumpeter, who was a great admirer of
Marx, acknowledged this. But Marx did not arrive at the more comprehensive
insights of Schumpeter, possibly because the processes of innovation were in
their infancy up to 1870.
A major theme that runs through Shutt's analysis is the implicit presumption
that the global capitalist system is moving inexorably towards a catastrophic
breakdown. While this is a distinct possibility, this reviewer takes that
position that a softer landing may also be within the realms of possibility.
There are many complex, self-regenerating processes within capitalism. For
example crises often lead to reforms that strengthen the system, making it more
resilient. This is what has happened in South Korea and Taiwan after the 1997-8
crisis. As pointed out earlier, capitalist dynamism waxes and wanes
over long periods of time as new technological paradigms replace existing ones.
Currently we are witnessing the spread of information technology replacing and
transforming the older industries at the same time that industrial capitalism
is spreading rapidly into a broader swathe of developing countries,
particularly in Asia and Latin America.
To make sense of these processes, it is necessary to suspend, or at least
relax, some of the mental models of the past, such as the implicit belief that
capitalism has been in 'permanent collapse' from the beginning of the twentieth
century, which is manifestly false. The historical process is more complex than
we can imagine and its prudent to be prepared for a range of possible outcomes.
The transition from the present predicament of capitalism to a superior social
order need not be contingent on a catastrophic collapse, though that outcome
cannot be ruled out by any means. For the present this book provides a pretty
good account of the problems that need to be fixed.
References cited in review
Economist (2003), "A cruel sea of capital, " special
supplement in May 3rd issue.
Krugman, Paul (1994) Peddling prosperity,
Norton.
Nelson, Richard R. (1997), 'How new is new growth theory?', Challenge, 40 (5): 29-58.
Perez, Carlota (2002) Technological
revolutions and financial capital, Edward Elgar.
Rodrigo, G. Chris (2001) Technology,
economic growth and crises in East Asia, Edward Elgar.
Shutt, Harry (2002) A new democracy:
alternatives to a bankrupt world order. Zed Books.
Yergin, Daniel and Joseph Stanislaw (1998) The
commanding heights, Simon and Schuster.
Professor
G. Chris Rodrigo, School of Public Policy, George
Mason University, 3401 Fairfax Drive, Arlington VA 22201, USA.