Economy Life Cycles

In 1914 UK owned 45% of the world’s foreign direct investment. America’s peaked at 50% in 1967, but is now less than half that, with the UK nowhere. Today China has just 6% but growing fast. America’s manufacturing productivity gains were in decline since 1970s (2.8% pa), well behind Germany (5.4%) and Japan (8.2%). American R&D expenditures in absolute decline. In relative terms the America’s real economy is following UK into absolute decline.

In a forthcoming book – ‘The Road to Co-operation: Escaping the Bottom Line’ – these various economies are identified as on different positions of the economy life cycle: UK and US being post-industrial, Japan and Germany, industrial, and China and India, industrialising. But what does post-industrial mean?

America still has the biggest manufacturing industry, but is losing its position fast. Japan is ahead in terms of manufacturing per head, while China is becoming the workshop of the world. Anglo-American economies differ from the rest in being completely in thrall to neoclassical economics, which denies the distinction between real and speculative markets. This myopia has led to the financial sectors in these countries becoming utterly dominant, not just bigger, but allpowerful in terms of dictating the economic policy of deregulation. That has enabled the financial sectors to continue destroying the real economy through predatory takeovers, and to create massive speculative bubbles which the real economy has to sort out when they burst.

That’s the mess we’re in now. And that’s the mess we’ll be in the next time. Meanwhile the bankers, hedgers and their ilk, carry on their socially ruinous trading, paying themselves obscene bonuses, and telling the governments what they’d like them to do next.

In the UK, the Vickers interim report on what to do about the banks, has just been published. While it’s not clear what the final result will be, the separation of retail banking from the speculative ‘investment’ activity, to which Vince Cable was committed, is simply not on the agenda. The speculative high risk business, which is so profitable, will continue to be under written by the tax payer. And so, therefore, will the bankers obscene bonuses which result from that speculation. Discussions about making banks increase their capital and liquidity ratios will proceed which will have some minor impact, and the big banks may have to dispose of a few additional High Street branches, as a gesture towards increasing competition.

That’s what post-industrial means: the government and the real economy are effectively controlled by an out of control financial sector. That’s what’s happing in UK. And it’s happening in the United States where Goldman Sachs calls all the important shots.

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