Is It Really the End of Capitalism?
In April, the Federal Reserve made a stunning announcement, saying that they would start to buy high yield ETFs. Many commentators reacted to Fed’s decision claiming that “capitalism is dead”. This is actually a very interesting debate. Is capitalism on the verge of collapse? And if yes, what will replace it?
In his famous book Sapiens: A Brief History of Humankind, Yuval Noah Harari explains that capitalism is nothing more but an intersubjective framework. Most people will call it “an ideology”, but Harari says that we should regard it as “a religion”. According to him, capitalism, communism, and liberalism, have become the three main religions in the world.
The main postulate of capitalism is the fact that assets should be invested to generate cash flows that will be reinvested, and so on. Credit has played a significant role in capitalism expansion. Indeed, if Alice borrows money from Bob, then she can develop her own business, boosting economic activity and leading to further revenues on a macroeconomic basis. One part of those revenues will be transferred to Bob in the form of interests, and then Bob will be able to lend to other agents. In theory, this virtuous circle should lead to a state of permanent growth benefiting to most participants.
It is important to remind that the spread of capitalism is closely associated with the Scientific Revolution. Important discoveries have led to major technological changes, creating new investment opportunities and thus convincing people about the benefits of capitalism. Conversely, science could not have made such progress without all the funds received from companies, governments, or wealthy individuals.
Where do we stand today? It is hard to imagine capitalism without economic growth or interest rate. So, what happens when interest rates are close to zero, or even negative, and growth potential is so low? With all central bank unconventional measures, our economic model seems to have changed to something different. Today, Bob will not lend money to Alice to receive interests, but because he hopes that someone will repurchase her debt at a premium. The same logic applies for equities. If Bob decides to buy shares of a company, it is not because he expects earnings growth but again because he hopes that another investor will pay a higher price for the shares.
In other words, investment has turned into a pure speculative scheme. Whatever the state of the economy, the only thing that matters now is the fact that asset prices keep on rising. Is that the original promise of capitalism? Not really.
Going forward, some people might say that we are moving toward socialism, as those monetary measures are said to support pensions and are often associated with distributive measures. However, calling the end of capitalism and the rise of neocommunism might be a bit misleading. Capitalism may actually survive after that.
The first reason is the fact that almost every human population on Earth has embraced capitalist ideas. Think about China’s economic development that has mainly be driven by entrepreneurship and capital deployment after Mao’s death. The second reason lies in the fact that current economic situation is not an isolated case in capitalism history.
Bubbles and Capitalism Resilience
Indeed, one striking example in history is the huge speculative bubble in France at the beginning of the 18th century, with a spectacular buying frenzy taking over shares of the Mississippi Company. The impact of the crash that followed was so violent that the Banque de France decided to intervene buying stocks. However, shares continue to drop, and the central bank ended holding securities with a face value of zero. Such a financial disaster fragilized the French monarchy and is one of the key reasons that explain the fall of the regime later on. It is worth noting that after 1789, governments of the new Republic tried to solve the problem printing more and more money. However, things got worse and the French Revolution turned into a political chaos, leading to the rise of Napoleon and a new authoritarian regime.
Despite all those troubles, capitalism survived to the Mississippi Company bubble. It even survived to the Great Depression. So, it seems reasonable to think that capitalism will survive again whatever the Fed or the ECB decide to do next. The debt problem we are facing is quite similar to many other past crises. In Western countries, governments are trying to push down interest rates and to support asset prices. The objective is to help agents to refinance their debts. But such a policy will not last forever and someone will have to support the cost of this mounting debt problem anyway (see There Ain’t No Such Thing as a Free Lunch – Part 1 and There Ain’t No Such Thing as a Free Lunch – Part 2). Nevertheless, capitalism is likely to survive after that. When the bill is paid, the economy might start to grow again, paving the way for a new long-term economic wave.
Of course, capitalism may not last forever. We just ignore know how long it will take before such a dominant ideology evolves, how gradual the shift will be, and what will come after that. The only thing we know today is that sooner or later humankind is likely to face at least two disruptive situations.
First, climate change and species extinction. Will that result in an ecological disaster and a humanitarian crisis afterwards? No one knows for sure, but such a situation has no precedent in the Earth’s history.
Second, the rise of new technologies that could lead to disruptive concepts like real artificial intelligence or human immortality. Once again, there is no precedent for such radical changes.