Future Uncertain: Going Underground and Into the Shadows
It is hard to think in futuristic terms, and not sound, well, conspiratorial, dramatic or having smoked too much majat. This has never stopped mainstream economists from predicting all kinds of shit, though. We can find some solace – confidence is a better word – in the fact that speculations of space flight, landing someone on the surface of the moon, heart transplants or hip replacements were, at one time or another, the stuff of imagination – or majat dreams. (We may, yet, find out, someday, whether androids dream of electric sheep) The social world is, however, infinitely more difficult to ‘predict’. This part of the essay is submitted, therefore, as purely speculative. I will make two basic points, that cornerstone aspects of late capitalist practices could move ‘underground’ (or stay above ground while non-capitalist or contra-capitalist enterprises move into the shadows) and that there is evidence to suggest that capitalists, especially large corporations, may have lost confidence of a capitalist future. So….
Axiomatically stated, most capitalists would prefer it if they were allowed to operate in an environment that has little to no regulations. At the base of this preference is a solid belief in the ‘free market’ – although there is no place or time where ‘markets’ have been completely free. It is an ‘impossible utopia’. Karl Polanyi, the political economist I have come appreciate more and more over the past three decades, referred to free markets as a ‘stark utopia’. This notwithstanding, free marketers and market fundamentalists would do all in their power to avoid what they consider to be unnecessary regulations, taxation and state oversight. We speak, therefore, of a ‘black economy’ (Sometimes also referred to as a parallel economy, shadow economy, or underground economy) which the Business Dictionary describes in the following manner:
Usually untraceable, and hence untaxable, business dealings that are not reflected in a country’s gross domestic product (GDP) computations. An integral part of most third-world and many first-world economies, it is a cash based system in which records are kept in secret account books (called number two accounts). Though it employs illegal (and even criminal) methods it is a survival practice in repressive tax regimens or where legitimate expression of entrepreneurial activity is made unnecessarily difficult by a maze of regulations. Black economy and black money go hand in hand.
For now, it seems, there is little ‘illegal’ about the function of shadow or black economies. The investor’s encyclopaedia makes a clearer statement on this:
For instance, a construction worker who is paid under the table will neither have taxes withheld, nor will the employer pay taxes on his earnings. The construction work is legal; it is the nonpayment of taxes that classifies the event as part of the black economy. The illegal-weapons trade is an example of black-economy activity that is illegal. Black markets are those goods and services that form the black (or underground) economy. Typically, black markets arise when a government restricts economic activity for particular goods and services, either by making the transaction illegal or by taxing the item so much that it becomes cost-prohibitive. A black market may arise to make illegal goods and services available or to make expensive items available for less money (such as pirated software).
The most aggressive legal strain of this tax avoidance may well be the way(s) in which banking, or institutional money lending has slipped into the shadows of the formal economy. Enter Shadow Banking, formally described as credit intermediation involving entities and activities (fully or partially) outside the regular banking system. In this sense, shadow banking refers to unregulated activities by regulated institutions. It involves the legitimate movement of money within countries or around the globe, and avoiding regulation by the state. Intermediaries facilitate the creation of credit, like hedge funds, unlisted derivatives and other vehicles, instruments or activities (like credit default swops) across the global financial system, and its members are not subject to regulatory oversight. This system avoids regulation by not accepting traditional bank deposits.
There has been a steady increase in shadow banking since the onset of the current global crisis risks. (See chart, courtesy of the Financial Stability Board) Reform of shadow banking has been a core part of the Group of 20’s agenda to overhaul the global financial system since the Pittsburgh Summit of 2009.
In Pittsburgh, G20 leaders established the Financial Stability Board, (FSB) as a means to deliver a transparent, resilient, sustainable source of market-based financing for real economies. More specific objectives were: to establish common policy standards and arrangements for co-operation, to help to avoid fragmentation of the global financial system, and to build a mature framework for monitoring and addressing financial stability risks arising from shadow banking.
What this regulation appears to do, is bring shadow banking from the underground, as it were. According Mike Carney, Governor of the Bank of England, the objective of oversight and regulation of shadow banking is to strengthened the practice so that authorities can be alerted to the excessive growth of leverage and liquidity risks. System-wide oversight is being established and a global monitoring exercise is under way, in order ‘to keep pace with the constant innovation and arbitrage that has been a hallmark of shadow banking’.
‘The goal is to replace a shadow banking system prone to excess and collapse with one that contributes to strong, sustainable balanced growth of the world economy. While much has already been achieved, because the G20 has been alert to these risks since the crisis, the job is not yet complete. As the G20 completes work on the core of the financial system, reforms to shadow banking must, and will, progress. Now is the time to take shadow banking out of the shadows and to create sustainable market-based finance.’ (Read the text of Carney’s speech, here)
In short, then, shadow banking is accepted as a norm, but efforts must be increased to bring it out of the shadows. This, we see, is an example of capitalists who ‘fight’ one another over how best to preserve and promote the system. Shadow banking, and shadow or black economies, may be fairly clear signs of capitalism slipping ‘underground’. There are at least two reasons for this – besides greed and accumulation. One has been discussed (to avoid taxation) and the other is a growing lack of confidence in the future
There are at least two prominent signs that capitalists may be losing confidence in the future. One is that many large corporations are (reportedly) sitting on vast reserves of cash, with Apple being the most developed example, and not investing in the future. Related to this, they are, also, not investing in the youth, arguably the workers and consumers of the future. Let us firm up some links between theory and practice. Capitalism, in theory, is self-sustaining and reproductive system. Capitalists invest time and money in shoring up the system, and ensuring its own future. This means they have to, in the least, spend money on new ventures, innovation, research and development, and in the next generation of consumers and producers. Evidence shows that neither one of these is happening.
In Part III the decline of the US, as the engine for liberal growth, innovation and entrepreneurship was explained, based on a report by The Economist.
In terms of employment creation, the gains that have been made in the global political economy since 2008, has generally failed to lead to an improvement in global labour markets. This is especially critical among the youth of the world.
The statistic shows the global youth unemployment rate from 2008 to 2012 with a forecast up to 2018. The global youth unemployment rate was at 12.4 percent in 2012. Source: http://www.statista.com/statistics/269636/global-youth-unemployment-rate/
There is an estimated 75 million young people in the developing world who are unemployed, and hundreds of millions who are underemployed, making it one of the most pressing problems of the early 21st century. A single passage from a World Bank report, sums up the issue:
‘Every year, 20 million young people enter the labor force in Africa and Asia alone. In the Middle East and North Africa, 80 percent of young workers work in the informal sector. One in four young people cannot find work for more than US$1.25 a day. Yet global growth and poverty reduction over the next 15 years will be driven by today’s youth.’
To the extent, then, that capitalism has to invest in its own future, and ‘today’s youth’ will be driven by this cohort, capitalists do not seem to have much faith in the future of the system that has rewarded them so well. Between this insecurity or lack of confidence, and shifting its machinations underground, as the increase in shadow banking may suggest, capitalists may well be trying to get out of the system while they’re ahead.
- All five parts of this post will be updated from time to time.
- NOTE: THERE IS A LOT MORE DATA ON THE LAST TWO ISSUES THAT I WILL ADD WHEN I HAVE MORE TIME. Most of these issues have been raised elsewhere and the data is readily available, anyway.