14 Apr 2012
In a time when technologies have drastically reduced the efficient scale of production, capital, instead of adapting itself to this reality, has fled towards the opacity of securitization and large-scale short selling. As long as risk preferences do not change, permitting the reintegration of capital in real production (increasingly of smaller scale), the root cause of the crisis will continue to operate. However, those bundles of capital have a better option in the short term: relying on the capture of the state by macrocorporations or debt… inciting the decomposition and destruction of productive capacities.
The question of the scale of production and the growing inefficiencies linked to it are common and daily topics. The large products and services of scale are seen negatively by society, both because of the social irresponsibility they let management get away with and because of the loss of quality and diversity they impose, which consumers know are unnecessary. As Kevin Carson writes:
The larger the scale of production, the more it must be divorced from demand, which means that the ostensible “economies” of large batch production are offset, and then more than offset, by the increasing costs of finding new ways of making people buy stuff that was produced without regard to preexisting orders.
However, the criticism of large scales we have undertaken at las Indias goes further, pointing out how Starting in the 1990s, new technologies began to have a direct impact in production: the development of small-scale productivity became dramatic. The appearance of the internet and the relaxation of trade barriers joined in the breaking up of the chains of value: the large companies that had grown on the basis of integrating the chains of production, began to externalise segments and processes onto much smaller companies, distributed throughout an increasingly larger geographic sphere. It was the age of delocalization and no-logo. But soon, many of those “small peripherics” began to integrate productive chains by themselves. The center faced competition from the periphery precisely in the high value-added sectors. The phenomenon manifested itself in a sustained increment in international trade and aggregated itself under the form of the emergence of the BRICs (UNCTAD statistics also disaggregation by regions).
From the production organization point of view, what happens is that technological change is drastically reducing the efficient scale size. But this presents a real problem for capital: the closer we are to individualised production, the less necessary capital becomes. It begins to accumulate in a great bundle of financial capital that cannot integrate itself directly onto production. Capital has less grand projects in which to invest and begins to move increasingly faster, more sensitive to changes in opportunities, as we can see in the historical illustration of the international fluctuations of capital:
If we were to describe it graphically, we could say that the mechanism that linked production and capital like sprockets in a bicycle, is changing its proportions. To small changes in productive opportunities, capital responds to great movements of funds… even if these are not necessary because the scale of production no longer requires it. If the experience of the nineties left any doubts, the bubble and later dotcom crisis (first peak in the above graphic) made it evident, and the U.S. mortgage bubble (second peak) made it devastating: those masses of idle capital generate speculative bubbles by themselves… with serious social consequences when they are directed towards markets such as the food futures market.
The necessity of financial innovation to transform the structure of global capital to the new industrial conditions, to the change in the efficient scales of production, then, becomes evident. But, as Juan Urrutia pointed out in 2005, the incentives go in a different direction: securitization and opaque assets that mask the divorce between capital and the productive system and prepare the mechanisms of the present crisis.
But the crisis has not put into question the fundamental mechanisms and problems. The examples of this fill the press pages: just this past Friday a revision in Chinese growth from 8.3% to 8.1% put investment analysts and the specialized press in a state of shock. Could this be considered a bad statistic? Absolutely, but small percentual variations are very significant to that mass of financial capital that moves through the global markets.
After the fall of the Pound in 92, the Thai Bath crisis in 94, its Mexican equivalent and the following «tequila effect», the destabilizing and destructive character of the rapid movements of masses of speculative capital -a novelty back then- became evident. A debate over the Tobin tax began, but the idea of generating «contention dikes» revealed itself as completely inefficient.
The bottom line is that financial capital requires a new wave of innovation that reintegrates it into the productive system. For this to happen it is fundamental that it modifies its risk preferences in order to serve great infrastructure projects in the long term and small-scale projects, which are the ones that sustain innovation, employment, and development.
In this second vector, the experience of microcredit and innovation in the forms of remuneration of capital point to efficient ways of aggregating risks and institutional transformation. And certainly they will suffice as the basis for an endogenous transformation… but it is clear that a spontaneous change will not occur as long as the capture of the state by means of macrocorporations or debt is not put under discussion, and the development of decomposition -with its consequent destruction of productive capacity- is seen simply as collateral damage and not as a direct consequence of this capture.
s-the-origin-of-financial-crisis/”>the origin of the crisis is in the financial inadequacy of financial capital for the new (and ever-smaller) optimal scales of production. These optimal scales are closer and closer to the P2P mode of production.
The “great bubble machine” has it origins in the difficulties the system has making massive amounts of capital profitable in a setting where the efficient scale of production is smaller and smaller, and so a smaller volume of investment is needed.
For example, it’s a known fact in the circles of seed capital and venture capital that what reduces the profitability of these funds is the need to assume greater risks to be able to offer an outlet to larger investment packages. As Jose Ignacio Gorigolzarri commented in an interview with the economic newspaper Cinco Días:
If there’s a lack of entrepreneurs, I don’t think it’s because because there’s no financing (…) I wish there was financial scarcity, not scarcity of novel projects.
And the world of start-ups no is no exception. Ultimately, while the system has focused on them, it has done so as part of a wider movement characterized by a series of financial innovations whose objective was to reduce non-systemic risk levels to find new outlets for capital.
This movement should be considered the engine of hegemonic structural policies since the Eighties, which David Harvey describes in “A Brief History of Neoliberalism“: financialization, opening of markets, and the radicalization and extension of legislation on intellectual property.
They are all policies of pursuit of scale, whose objective is to provide an outlet and meaning to a growing mass of idle capital, and is from this angle (more than ideology or even the distribution of profit) that we should consider neoliberalism as a political-economic movement from 1979 to today.
The big business superstars of the Eighties and Nineties argued clearly about the need to orient economic policies to make larger scales of production possible and necessary, reinforcing and even creating new sources of financialable profits.
The decline of the optimal scale was implicit in the whole argument of the times: the Microsoft of Bill Gates was not General Motors, either in its impact on employment nor its need for capital… and yet, it became the biggest company in the world. Warren Buffet made his fortune chopping up businesses, reselling some parts, and making others produce. David Bowie issued bonds on future profits from his music pointing the way towards the financialization of the new audiovisual industry, and and even of the new genetically modified agriculture, or of medical research. To continue down this path, they needed not only another turn of the screw with legislation on “intellectual property,” but its extension to all other countries to have an impact on the the balance of payments of the central States, and especially of the U.S. This extension was carried out — not coincidentally — in connection with the signing of the the new wave of free-trade treaties, whose ultimate objective was to justify an increase in the capital of the big banks, telecoms and privatized basic-service businesses.
Paradoxically, this last policy, globalization, would open the spigot of what has been called “breaking the value chain.” Its ultimate consequence, fed by the impact of distributed communication, is the rise of a new industrial and technological sector with a wide scope, but a medium or small scale, in the peripheral countries, especially in Asia… which, in turn, would further radicalize the tendency toward small optimal scales in the central countries.
With the perspective of the current crisis, we can understand the set of neoliberal policies that have left their mark on the world since the Eighties as a Big Capital’s conscious reaction to, and an involuntary accelerator of, the reduction of the optimum scale of production, and therefore, to the transition towards a P2P mode of production.