Chapter 18. Capital Destroying Capital
This is a chapter from the book, Economic Democracy; The Political Struggle for the 21st Century. Visit that link for more information about the book.
Factories moving offshore for low-paid labor develop little regional buying power in the undeveloped world, while the loss of those factories in the developed world reduces that regions buying power. The profits from lower cost production sold on the high-priced markets of the imperial centers go into corporate coffers to be distributed to owners of stock, corporate managers, and stock traders. Those increased profits create higher capitalized values which—so long as there is broad ownership of stocks and an increase in taking in each others wash, cooking each other hamburgers, or giving each other heart transplants (service industries) so as to maintain the circulation of money—becomes new money and offsets the loss of buying power of labor.a
As subtly-monopolized capital shuts down factories in the developed world and builds new industrial capacity in low-wage areas to produce products for high-paid workers in the developed world, and assuming the service industries do not expand enough to maintain a distribution balance, the wealth of both the low-wage and high-wage regions is claimed by intermediaries and there is eventually insufficient market to fully absorb production. By expanding productive capacity without expanding equal buying power, capital destroys capital. (It is unrealistic to assume that this will be the first time in history those rising stock and real estate values that have been providing the consumer buying power will not go down and collapse the imperial center’s buying power.)
In 1987, “world overcapacity was estimated to be 15-to-20% in automobile production, 20% in steel, 25% in semiconductors, and over 20% in petrochemicals.”1 Japan’s industrial capacity has operated at 65.5% for 12 years and today, 2005, the entire industrialized world is producing at two-thirds capacity.2 With such overcapacity in the developed world, and with the buying power—thus the only consumer market—being in the developed world, large sectors of the developing world cannot capitalize. The world’s powerless cannot obtain their share of industrial capital and high-paying jobs that create buying power, profits, and capitalized values. Michael Moffit quotes Stanley J. Mihelick, executive vice president for production at Goodyear:
Until we get real wage levels down much closer to those of Brazil’s and Korea’s, we cannot pass along productivity gains to wages and still be competitive.” With factory wages in Mexico and Korea averaging about $3 an hour, compared with U.S. wages of $14 or so, it looks as if we have a long way to go before U.S. wages will even be in the ball park with the competition. That the decline of U.S. industry is the natural and logical outcome of the evolution of the multinational corporate economy over the past twenty-five years has been a bitter pill to swallow and it will become increasingly distasteful as time goes on. One consequence will be a nasty decline in the standard of living in the United States…. [W]e have the outlines of a true vicious circle: the world economy is dependent on growth in the U.S. economy but the U.S. domestic economy is [now] skewed more towards consumption than production and investment, and this consumption is in turn sustained by borrowing—at home and abroad…. The deal with surplus countries essentially has been as follows: you can run a big trade surplus with us provided that you put the money back into our capital markets.3
The excessive accumulation of capital by stateless corporate imperialists and the denial of capital to the world’s powerless are two sides of the same coin. There is too little buying power among the dispossessed to purchase all the production of industrial capital. When there is already a surplus, capital building more industry without developing more consumer buying power will destroy other capital:
So long as global productive capacity exceeds global demand by such extravagant margins, somebody somewhere in the world has to keep closing factories, old and new…. South Korea will be losing jobs to cheap labor in Thailand and even China may someday lose factories to Bangladesh.4
In 1988, China offered to launch satellites at one-quarter the price charged by the United States. Under competition from such low-wage cartel-structured industries, even the huge U.S. industries that once dominated the satellite launching market could not survive. That threat to Western industry was eliminated by negotiation and Americans and Europeans still dominate the satellite launching industry (exposing the fictions of free trade and proving that China can be negotiated with rationally).
Currently one-third of the automobiles and 95% of the home electronics sold in the United States are imported, and 30% of all products purchased by the American people are manufactured overseas. In comparison, before the financial meltdown on the periphery of empire, the relatively small populations of Hong Kong, Singapore, South Korea, and Taiwan “account[ed] for 10% of the world’s manufactured exports; the U.S. share [was] twelve percent.”5
If Korea, China, Malaysia, Thailand and other low-wage countries continue their economic development based on industrial cartels and protected home markets while selling to the developed Western markets under the fiction of free trade, industries in America, Europe, and Japan will be destroyed. The one who “distributes” (not necessarily produces) the cheapest and best product captures the market. Cheaper, however, normally means lower-paid labor, lax rules on pollution, and tax avoidance—not less labor expended or a better factory.
The elimination of more expensive manufacturers through free trade appears beneficial and, whenever an inefficient or shoddy producer is eliminated, it is. But many of the factories are closed not because of their low quality or inefficiency but because there are too many factories producing for the established market. The well-paid workers of the relatively developed countries are the logical losers as their industries move offshore and low-paid workers of industries rebuilt in the developing world will gain only a small part of what the former workers lost. When industrial capital is diverted to an undeveloped country to produce for a developed country, the advantage of the former’s cheap labor destroys both the established industry and the consumer buying power of the developed country. William Greider explains:
The world’s existing structure of manufacturing facilities, constantly being expanded on cheap labor and new technologies, can now turn out far more goods than the world’s consumers can afford to buy…. The auto industry is an uncomplicated example: Auto factories worldwide have the capacity to produce 45-million cars annually for a market that, in the best years, will buy no more than 35-million cars…. Somebody has to close his auto factory and stop producing.6
Failure to Expand Buying Power to keep Factories running is Economic Insanity
New industrial capital destroying both established equally-productive industrial capital and the social capital built around that industry is economic insanity. Where industries and jobs disappear as capital destroys capital, both home and business values drop. Through neo-mercantilist free trade the developed nations are destroying each other’s industries, while 70% of the world’s population are desperately short of industrial capital. There is currently no mechanism within the market system to build consumer buying power and implant this new technology where it is badly needed while keeping the already producing factories servicing the already established market.
Industries can be built quickly but Markets only Slowly
While industries can be built quickly, under neo-mercantilist free trade policies markets can be developed only slowly. Instead of building market economies and developing consumers among the world’s impoverished giant producers are busy competing with each other for control of current markets and destroying each other’s capital in the process.
This cannibalization of each other’s industries battling over the current developed markets is ultimately self-destructive. The destruction of industrial capital and social capital by wars is well-known. What is little known is that these struggles over limited purchasing power destroy perfectly good industrial capital, collapse the value of social capital (homes and businesses), and forgo the production of even more wealth; capital destroys capital.
Expanding Buying Power in Step with Increased Industrial Capacity
While nations scramble to build industries to sell to consumers in the imperial-centers-of-capital, structural adjustment rules of subtly-monopolized capital deny periphery nations the right to increase their buying power in step with that increased production. The immediate discounting of a nation’s currency on the periphery of empire if it attempted to print money to build industry and generate both buying power and products to purchase within its own economy exposes how control of trading currency monopolizes buying power for imperial-centers-of-capital.
Only by creating buying power in step with, and in balance with, productive capacity will there be a market for the production from that easily-built industrial capacity. As the productive combining of land (natural resources), labor, and capital (industrial technology) are the three requirements for a wealthy society, buying power is logically created by printing money to combine these economic factors and, so long as the money created is in balance with the wealth produced, that new wealth will back that newly printed money as it circulates within the economy. Equal pay for equally-productive work will create buying power in periphery nations and capital will no longer destroy capital.
The Monopoly Hold on Technology and Markets Is Weakening
“It took Britain and the United States 58 and 47 years, respectively, to double their per-capita output, but Japan did it in 33 years, Indonesia in 17, South Korea in 11, China in 10,”7 and, if equal free trade under democratic-cooperative-(superefficient)-capitalism were economic policy instead of unequal free trade under corporate imperialism, the world could be industrialized to a sustainable level even more quickly.
What we are witnessing is the continued weakening hold of the subtle monopolization of technology. Eliminate fully the control of markets through subtle monopolies and the world economy would become so efficient that poverty could be eliminated in 10 years and the world capitalized to a sustainable level in 50 years.
Democratic-Cooperative-(Superefficient)-Capitalism will lower Prices and raise Living Standards
That capital is destroying capital while profits are booming outlines the large overcharges required to pay for the continued cannibalism. The cost of moving factories, the cost of perfectly good factories destroyed, the loss of value of social infrastructure in abandoned communities, and the record profits are all part of the overcharge. So too is military expenditure for protection of this wealth-siphoning system. And those losses could become even greater. With static, or even shrinking, world consumer buying power, even more capital will be destroyed.
We see the dramatic forerunner of this in the long-running economic collapse in Japan, the equally long collapse of the Soviet bloc, the 1997-98 financial meltdowns in Southeast Asia, and the later meltdowns in Latin America. Even with an annual $50-billion trade surplus, the Japanese economy has been stagnant for 12 years. Japan protected her economy by abandoning capitalism’s bankruptcy rules. The continued trade surplus, expansion of savings, and avoidance of drop in living standards, proves the rightness of that decision and the errors of capitalism’s bankruptcy rules.
However, the fiction of those savings while, by capitalism’s rules, Japan is bankrupt will be exposed if the world crisis deepens. All that money is loaned out somewhere. If the equity values backing those loans drop far enough long enough, bankrupt banks will have to close and the money is gone. Those bad bank loans were estimated at $500-billion in 1997, increased to an estimated $1.9-trillion in 1999, and will increase further if property values continue to go down. However, if the Japanese and world economy turns around and those property values rise, the bad loans decline and those savings become valid again. This hope is why Japan refuses to shut down those bankrupt banks. As of 2003-05 those values were rising.
Underpaying for the raw material to feed those industries and the labor to operate them was a crucial element of the imbalance that created this worldwide crisis. The developing world, which furnished the raw material to feed East Asian industries were built in cheap-labor countries to sell to consumers in the well-paid world, and workers in the impoverished world were not paid enough to buy their relative share of production. If a financial/fascist fix cannot be put in place (an imperial center utilizing a powerful military to protect the siphoning of the wealth of a powerless periphery), this threatens to pull down the world economy.
Conversely, restructuring to equal free trade (access to technology and markets and equal pay for equally-productive work) and establishing a just legal structure under democratic-cooperative–(superefficient)-capitalism would eliminate the cost of moving factories, the loss of destroyed industries, and the loss of value of abandoned communities. Those savings could then go towards industrializing the world to a sustainable level, protecting the environment, and reducing poverty.
This wasted industrial capital could just as well produce industrial tools for sale to the developing world. For that matter, why not return a share of this capital, as compensation to those whose wealth has been confiscated through centuries of suppression, slavery, and inequalities of trade? With the tools provided by that initial capital, and their own natural resources and labor, the developing world could build their regional economic infrastructure. Under democratic-cooperative-(superefficient)-capitalism the wealthy world would provide the tools for the impoverished world to build their own social capital (homes, roads, stores, et al.) to a sustainable level in two generations. In trade, the developing world would share their resources with the developed world.
- Forty years ago the United States economy was 30% services and 70% industrial. Today it is 20% industrial and 80% services. We have yet to find out what happens to the world economy when, its primary market, a service economy, collapses into a depression. . Back to text
- Jeff Faux, “The Austerity Trap and the Growth Alternative,” World Policy Journal, (Summer, 1988), p. 375. For a view of how these policies will eventually destroy the imperial centers read Eamon Fingleton, Unsustainable: How Economic Dogma is Destroying American Prosperity (New York: ThunderMouth Press, 2003). Back to text
- Lester Thurow, Building Wealth: The New Rules for Individuals, Companies, and Nations in a Knowledge-Based Economy (New York: HarperCollins, 2000). Back to text
- Michael Moffitt, “Shocks, Deadlocks, and Scorched Earth,” World Policy Journal (Fall, 1987), pp. 560-61, 572-73. Back to text
- William Greider, Who Will Tell the People? (New York: Simon and Schuster, 1992), pp. 378-79, 399-400. Back to text
- David C. Korten, When Corporations Rule the World (West Hartford, CT, Kumarian Press, 1995), p. 128; Steven Schlosstein, Trade War (New York: Congdon & Weed, 1984), Chapter 28; Susan Dentzer, “The Coming Global Boom,” U.S. News & World Report, July 16, 1990, pp. 22-28; Walter Russell Mead, “The Bush Administration and the New World Order,” World Policy Journal, (Summer, 1991), p. 393. Back to text
- Greider, Who Will Tell the People, p. 399. Back to text
- Samuel P. Huntington, The Clash of Civilizations (New York: Simon and Schuster, 1996), p. 103. Back to text
- Full Table of Contents
- Chapter 1. The Secret of Free Enterprise Capital Accumulation
- Chapter 2. The Violent Accumulation of Capital is Rooted in History
- Chapter 3. The Unwitting hand Their Wealth to the Cunning
- Chapter 4. The Historical Struggle for Dominance in World Trade
- Chapter 5. World Wars: Battles over Who Decides the Rules of Unequal Trade
- Chapter 6. Suppressing Freedom of Thought in a Democracy
- Chapter 7. The World Breaking Free frightened the Security Councils of every Western Nation
- Chapter 8. Suppressing the World’s break for Economic Freedom
- Chapter 9. “Frameworks of Orientation”: Creating Enemies for the Masses
- Chapter 10: The Enforcers of Unequal Trades
- Chapter 11. Emerging Corporate Imperialism
- Chapter 12. Impoverishing Labor and eventually Capital
- Chapter 13. Unequal Trades in Agriculture
- Chapter 14. Developing World Loans, Capital Flight, Debt Traps, and Unjust Debt
- Chapter 15. The Economic Multiplier, Accumulating Capital through Capitalizing Values of Externally Produced Wealth
- Chapter 16. Japan’s Post-World War II Defensive, Mercantilist, Economic Warfare Plan
- Chapter 17. Southeast Asian Development, an Accident of History
- Chapter 18. Capital Destroying Capital
- Chapter 19. A New Hope for the World
- Chapter 20. The Earth’s Capacity to Sustain Developed Economies
- Chapter 21. The Political Structure of Sustainable World Development
- Chapter 22. Equal Free Trade as opposed to Unequal Free Trade
- Chapter 23. A Grand Strategy for World Peace and Prosperity
- Chapter 24. Adjusting Residual-Feudal Exclusive Property Rights, as per Henry George, Produces a Modern Land Commons
- Chapter 25. Restructuring Residual-Feudal Exclusive Patent Laws Produces a Modern Technology Commons
- Chapter 26. A Modern Money Commons
- Chapter 27. A Modern Information Commons
- Chapter 28. Wi-Fi Empowering the Powerless
- Conclusion: Guidelines for Sustainable World Development
- Appendix I. Expansion and Contraction of Cultures
- Appendix II: A Practical Approach for Developing Poor Nations and Regions
This is a chapter from the book, Economic Democracy; The Political Struggle for the 21st Century. Visit that link for more information about the book.