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Writer's pictureFrans Minnaar

The February Revolution Scenario


The struggle between economic ideologies was, for all practical purposes, supposed to be decided in the late 1980s, when Capitalist USA won the Cold War and Communist USSR dissolved and disappeared into economic obscurity. Reagan was a capitalist in purest sense of the world; he reduced the tax burden on wealth Americans, and, in the process, managed to kick his country’s economy into gear.

In Britain Margaret Thatcher demolished the destructive power of the labour unions, creating a capitalist Britain, and secured strong economic growth and increasing wealth for her nation. In the Western-dominated (economic) global order of the Time, they dragged the world with them.

Yet, it was in the nature of the ideologies, the interpretation of capitalism, introduced by these leaders, that the seed for the damage caused later on were to be found. Reaganomics (Reagan economics) and Thatcherism allowed for capitalist greed to take over, almost totally shamelessly. It was fine to be a heartless, basically immoral capitalists, it was even encouraged. In business schools the art of the unyielding corporate giant, focused only on profit, expansion and the plight of the shareholders was romanticised. It was smooth-sailing; not even in countries with strong traditional ties to a socialist order, such as the newly democratized South Africa, did anyone seriously questioned the wisdom of capitalism as the prerequisite for wealth creation – the way to go. Even the Cold War shining examples of democratic socialism, such as France and the Nordic countries, started dismantling their socialist’s regimes. Capitalism has won the day. Hey, even Russia, the almost century-old custodian of communism, turned capitalist.

Then the year 2008 arrived, and the capitalist world crumbled around us. The crux, the core of the capitalist system, namely the financial sector, all but collapsed and needed to be rebuild. It collapses because of unbridled greed, because of a total lack of scruples in the capitalist world. The super-rich already had almost half of everything (economic value in the world) yet they wanted more, by hook-or-crook. When the “hook’- options dried up, they turned to the “crook”-ones.

Governments worldwide had to pump billions-upon-billions of dollars and pounds and Euros into the capitalist system to keep it afloat and prevent an even greater disaster – namely a repeat of the 1930 global depression. It was taxpayers’ money that was used; implying much less available for social support and to spend on the rest, outside the confined of the super-rich, the average and poor. Importantly, it was taxpayers’ money that was used without the taxpayers’ consent; throughout the crisis, and as a result of the handling thereof, public opinion polls remain very low in its support for governments rescue efforts. Worldwide there were bitter resistant to the “rescue-packages” offered to the financial sector to keep it afloat.

Perhaps the corruption of capitalism is best illustrated by referring to a point-in-case from "where it live", from the system that lies at the heart of the capitalist system, namely the stock market.

Post-Second World War capitalism worked (and ultimately beaten communism) because it was focused on broad-scope capacity expansion. Until the 1970s, companies use to re-invest retained earnings in strengthening internal capacity, with specific reference to the hiring of lucrative, scarce skills in order to improve the company’s strategic capacities. However, since then, the rapid computerisation of business, and the introduction of sophisticated operating and administrative systems have led to less and less capital re-investment in institutional systems and processes (Re-investment.onick, Lazonick, 2014).

So what happened to these earnings? According to the author (Lazonick, 2014), retained earnings are increasingly used by senior executives to buy back stock. What happens, is that these managers are being rewarded through stock options, which increasingly constitute the most valuable source of most of their income. They want more-and-more income, which they get from the stock they own in the companies they manage (so they buy more-and-more stock in those companies). In the United States, for instance, during the period 2003 to 2012, companies used $2,4 trillion retained earnings to repurchase their own stock. This is equal to 54% of these companies’ earnings.

As Lazonick put it: “… Most (citizens) are not sharing in the recovery (after the 2008 financial collapse). While the top 2,1% of income recipients – which include most of the highest-ranking corporate executives – reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid.” 

Lazonick draw a distinction between value creation and value extraction, and expresses the opinion that, because to the practice of re-purchasing their own stock, US companies are extraction wealth, rather than to create it by making available wealth to shareholders (only 37 of corporate earnings are eventually distributed to shareholders). Think about it like this: A few CEOs are buying most of the stock in the companies they owe, implying that they channel the bulk of net earnings (profit) to themselves, rather than making it available to other investors.

The phenomenon of “job-less growth” simply boils down to greed - and it has become the new reality of the post-2008 financial collapse. Economic growth did not (and still does not) manifest in more job opportunities been created.

Lazonick (2014) then defines the problem as follows:

“Corporate profitability is not translating into economic prosperity in the United States. Instead of investing profits in innovation and productive capabilities, US executives are spending them on gigantic stock repurchases.” 

In the process, economic growth and job creation slow, because company CEOs retain earning, rather than investing it back into the economy. According to him, these buybacks increase stock prices in the short-term (therefore the strong showing of stock markets) but in the long-term it undermines income equality, job stability and growth. The buybacks mostly serve the interest of executives, much of whose compensation is in the form of stocks. And his suggested solution? Corporations should be banned from repurchasing their shares on the open market. Executives’ excessive stock-pay incentives should be reined in. Workers and taxpayers should be represented on corporate boards. Also, tax laws should be amended to reward value creation, rather than value extraction. It is a valid point. The practice of stock buy-backs boils down to manipulation of the capitalist system to satisfy unchecked greed, and should be prohibited.

Companies’ bosses should realise that there are other people in this world that are worried about their families surviving (let alone adding millions to already existing millions) and that it is more productive and sustainable, over the long-term, to use retained earnings to create jobs than it is to tremble on (and over) the millions of poor and destitute of the world. It represents the worse the capitalist system has to offer, and such practices may cause the eventual downfall of the capitalist system (even if it may only be temporary, until the impossibilities of socialism cause such poverty and heartache that the system self-correct).

The key question should always be: What creates sustainable value (and not what promote the interests of a small, selfish elite)?

Following the collapse of the financial system in 2008, the middle class and poor were disillusioned and angry; not even so much because they felt done-in, but because they had to rescue the rich bastards that look down on them, generally despising them, care very little for them, and at the end of the day simply go on with their lives of privilege and mastery.

The real issues was a lack of accountability, the lack of consequences. This was where the pendulum swung, and the seed of the New Socialism was sowed; especially since the world never really overcome the 2008 financial crisis.

Average and Poor Joe find it increasingly difficult to make a decent living, to find a decent job, to earn a decent salary, to look the World in the eyes with pride – while the rich bastards responsible for the mess just continue on their merry ways – and just getting richer – and-richer. Yet, the scandals not only keep popping up, but it happened increasingly frequently.

The world we live in is extremely unequal. I am quoting the following passage from Wikipedia (International Inequality): “A study by the World Institute for Development Economics Research at United Nations University reports that the richest 1% of adults alone owned 40% of global assets in the year 2000, and that the richest 10% of adults accounted for 85% of the world total.” More particulars in this regard include the following:6% of the world's population owns 52% of the global assets.

-- The richest 2% own more than 51% of the global assets and the richest 10% own 85% of the global assets.50% of the world's population own less than 1% of the global assets.

-- The whole global assets volume is about $125 trillion.1,125 billionaires (US dollars) own $4.4 trillion in assets

-- Over 80% of the world's population lives on less than $10 per day. Over 50% of the world population lives on less than 2 US$/day; over 20% of the world population lives on less than $1.25/day (Wikipedia, Downloaded October 2018)

This cannot be allowed; not if the extend of poverty among the 99% of the world’s population that does not fall in the rich 1% that possess the bulk of global assets are considered. That is why it is indefensible for the United States to maintain a tax regime that reduce taxation for the filthy rich and expect of the average and poorer Americans to pay considerable tax rates. That’s why 44% of the Millennial-generation in the United States favour a socialist system, and that’s why most Brits have a more favourable view of socialism than of capitalism.

The unemployment rate in the United States may be at record lows, but so is inequality. In 2007, the top 20% wealthiest possessed 80% of all financial assets. In 2007 the richest 1% of the American population owned 35% of the country's total wealth, and the next 19% owned 51%. Thus, the top 20% of Americans owned 86% of the country's wealth and the bottom 80% of the population owned 14%. In 2011, financial inequality was greater than inequality in total wealth, with the top 1% of the population owning 43%, the next 19% of Americans owning 50%, and the bottom 80% owning 7% (Wikipedia, Download October 2018).

History has a lesson: Even the power and might brought about by access to money and wealth cannot for ever defeat the pure hunger and desperation of the poor masses – especially not if it is mixed with the resentment of the middle classes. Yes, socialism is a sure road to ruin, to not even mention the worst manifestation thereof, namely communism. Value creation must have a driver, and that driver is the desire for self-improvement and personal wealth; it is not a comfortable truth, and in poverty-stricken societies a despised one, but it is true. Socialism cannot create wealth; the best it can achieve, is to share and consume wealth.

Not even in committed socialists’ societies, such as the Nordic countries and France, has the system of “purist” socialism survived; what has remained of the initial system of socialism, is an expanded welfare state.

The state cannot create wealth, it is simply not design for that; it is designed to exercise power, ensure order and create the conditions, the framework, for society as a plural entity (or entities) to play their diverse roles – including for business to economic create wealth.

Persistent interference of the state in the economy inevitably leads to what government is doing, and that is exercising state powers. In the process, own initiative and creativity are suppressed, enterpreneurship discouraged and business growth made extremely difficult.

The result is always the same: After the initial period (when the fat are drained from the system as part of a grant project aimed at redistribution), economic growth grind to a halt, and then start reversing. Once this process has started (and gained momentum) collapse and poverty is just a few years' around the corner. Not even the best of states; efficient, effective and a shining example for states world-wide, such as the Nordic countries, were ultimately able to replace business as society’s wealth creator. In a country such as South Africa, with a state invested with state capture and systemic inefficiencies, any system where the state became the primary wealth creator, is a recipe for disaster, corruption and utter poverty.

The Russian Revolution was caused by enormous inequalities in the Russian society of the time, and a feeling of hopelessness among ordinary Russians, an inability to escape the cycle of poverty, while the extravagant wealth of the country’s feudal elite was flaunted in their faces day-after-day. In such circumstances, communism, with it promises of equality and wealth-sharing, became the ultimate Utopia, for which they were willing to suffer and die.

It was supposed to bring “equalness” with the hated rich. The result was a century of unspeakable suffering at the hands of a brutal, violent communist regime that practiced an unworkable economic ideology, destroying the wealth-creation potential of an enormously rich country; leading to immense poverty and suffering for the Russian people.

American is approaching its February Revolution; today that country is immensely unequal, one of the most unequal societies in the world. There are large clustered of poor people – and there are dangerous social dynamics attached to this unequal spread of wealth that make the country a melting pot of resentment and disillusionment for a large section of its population. In my youth, slogans such as the “American dream,” and the “land of opportunities” were commonplace. I hardly ever hear it anymore, it has been replaced by racist slurs, huge popular support for socialism (a philosophy traditionally despised in that country) and a detachment from the governing regime. The world is in revolt against the capitalists. In the United States, where capitalism has, until recently, been regarded as non-negotiable, the Millennium-generation now prefer socialism to capitalism (44% to 42%).

(However, it must also be said, under closer scrutiny, they do not really know what the ideologies of “socialism” and “capitalism” mean – they were just hostile to the American economic system and the inequality it has created). Regardless, an increasing number of even informed Americans, including prospective candidates to Congress (especially for the Democratic Party), openly describe themselves as "socialist" and favor a markedly more social corporate dispensation than ever before (well, at least since the Second World War) (although it is probably debatable how "informed" politicians may be, I guess; at the end of the day, they are playing a game of power and popularity, not informed decision-making).

Nevertheless, capitalism is neither blameless of its own demise, and (in its current format) not the answer either. In all honesty, let me, an arch-capitalist, acknowledge that we must carefully consider a new economic ideology; one that will ensure greater fairness, but without destroying our capacity to create a better future for all – and rewards those with the innovation and courage to go the extra mile and take greater chances with above-average insight.


 

Source consulted:

Lazonick, W. (2014). Profit Without Prosperity. Harvard Business Review, September, 47-55.

Wikipedia. (Download October 2018). Wealth inequality in the United States). Retrieved from Wikipedia, the free encyclopedia: https://en.wikipedia.org/wiki/Wealth_inequality_in_the_United_States

Wikipedia. (Downloaded October 2018). International inequality. Retrieved from Wikipedia, the free encyclopedia: https://en.wikipedia.org/wiki/International_inequality

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