In one of those coincidences that add some spice to events, the passage of the $700 billion financial bailout package by the US Congress the other day came at the same time as some dyed-in-wool romantics were marking the 160th anniversary of the publication of the Communist Manifesto.
As you know, the slim volume penned by Karl Marx and Friedrich Engels in 1848 is an almost messianic hymn to the end of capitalism and the advent of the Communist utopia. It is, therefore, no surprise that some commentators have tried to see the current problems in the banking sector of the major Western economies as a fulfillment of the Manifesto's predictions.
"Capitalism is dying," announced he French left wing daily Liberation.
"Maybe Marx was right, after all, "noted a British friend who has spent most of his adult life fighting Communism." I plan to go back and read the Manifesto."
Well, reading and re-reading the Communist Manifesto is always great fun. I first read it more than four decades ago when its very possession could land you in jail in Iran under the Shah. I found it poetical from the very first sentence" a specter is haunting Europe etc etc. However, re-reading it the other day so that I am not caught wanting in a dinner-table discussions, I found it as pompous as the worst kind of religious literature.
The kind of capitalism that Marx and Engels foresee in the little volume no longer exists, assuming that it ever did. The world is not divided into an impoverished and increasingly exploited proletariat accounting for more than 99 per cent of the population and the remaining one per cent of bourgeois leeches who suck the blood of humanity. The global economy is not dominated by a handful of giant monopolies, trusts and cartels as Marx called them, who could fix all prices plus working conditions.
Nevertheless, there is no doubt that global capitalism is currently passing through a major crisis. How did this happen? Was it not only last year that British Prime Minister Gordon Brown who had made his reputation as a great economics brain was telling everyone that the era of "boom and bust" was gone for good?
As always when faced with a political puzzle, the best person to consult is Aristotle. The ancient Greek philosopher, known to his Muslim disciples as "The First Teacher", had a natural talent for the catching formula, what the Americans call "the sound bite." Had he been alive today he would have made a smashing career as copywriter in a major advertising agency.
At any rate, in one of his formulae he notes: "Every system is corrupted by exaggerating its basic principle."
Translated into plain language, this means that too much love kills love, too much religion kills religion, too much and, for our present purposes, too much capital kills capitalism.
It was by following that Aristotelian precept that Muslim philosophers, starting with Farabi and Avicenna, developed their theory of measure and moderation according to which phenomena self-annihilate by going to the extreme of their possibilities. It is important to know precisely how far to go and when to stop.
Now let us see how that analysis might help us understand the current crisis.
Let us start with a few figures. Towards the end of the Jimmy Carter presidency in 1979, the Dow Jones index of stock values on Wall Street stood at less than 1000. Earlier this year it was hovering around 14,000, registering a 14-fold growth in just three decades. In 1979, just over five million Americans owned shares. Thirty years later, that number had risen to almost 60 million, including indirect ownership through pension funds. At the same time, the number of those who owned their homes rose from 17 per cent to more than 40 per cent. For the first time in history, a majority of the population, at least in the United States, consisted of capitalists, that is to say people who owned capital.
What made this dramatic democratization of capital possible?
One source of new capital was oil, producing vast sums of cash that the exporters could not invest in their own economies. According to most estimates, over the three decades in question, the oil-rich states pumped in more than a trillion dollars into the Western economies. Next, it was the turn of China to appear on the scene as a source of cheap and abundant capital. China transformed the cheap labor of its people into cash and then deposited that cash in Western banks and government bonds. By 2007, China had joined the top four investors in the US, owning American assets worth $400 billion.
All this meant that the average American no longer needed o save in order to maintain the process of capital formation. All he had to do was to spend someone else's money. The Arabs, the Chinese, the Russians, the Latin Americans and, to some extent even the Europeans, did his saving for him.
Things did not end there. Investment banks and brokerage houses went through a phase of creativity unprecedented in history. They transformed the already existing debts into new sources of credits and then used these to create new, and obviously notional, capital. In other words, what you owed to others, of sold to third persons, could become your capital.
While all this was happening the US Federal Reserve Bank chief Alain Greenspan spoke of "irrational exuberance" but did all it could to further encourage it. Keeping interest rates at all-time historical lows, the FED, and following it other central banks, pushed the democratization of capital to limits that no economy could sustain for long.
Capital lost its import and its mystique, the respect due to it. It became too accessible, the Alice Available of every economic adventurer. Interviewed on TV the other evening, there was this American gentleman from Missouri, or somewhere like that, who was wondering aloud how the banks had agreed to lend him half a million dollars to buy a luxury house.
"How could they lend me that much money?" he asked. "They knew that I had never had two bent dimes to rub against one another."
The answer is that when there is too much capital you cultivate the art of finding borrowers rather than savers. Banks wanted to get rid of all the money that was raining on them; they loved those who borrowed and hated those who saved.
So, the insulted, hurt and manhandled capital is taking its revenge. It is asking to be respected again.
This brings us to Nietzsche who, though never to be compared with Aristotle, was also a master of catchy formulae. Here is what he said: "What does not kill me makes me stronger!"
The current crisis will not kill capitalism- sorry, Karl- but will make it stronger.
*Published in the London-based ASHAR ALAWSAT on October 10, 2008.