Global Systemic Cycles and the Current Transition: An Interdisciplinary Reflection About Global Growth, Economic Cycles, and Great Power Competition

“If deep movements are in your favor, you are a master of politics or business, notwithstanding your intellectual abilities: you will be served, pushed forward - beyond your merits, beyond even your reflections. The big difficulty is to know exactly where you stand.”

Fernand Braudel

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Abstract

This paper is a reflection about deep historical cycles driving the global environment, analyzed through a transversal approach[1] and as a coherent structure, namely the Global System. Three key theses are resulting from this analysis:

-??????There is a cycle of the Global System, which consists in the necessary renewal of its 4 pillars: institutions, the international trade system, the regime of accumulation, and connective infrastructure.

-??????Global growth is a function of the hierarchy of the Global System. The weakening of the international hierarchy leads to disorder and unproductivity.

-??????The US possesses all the necessary fundamentals and capabilities to stay at least on top of the international hierarchy, even though it needs to change its mode of governance.

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Introduction

Does the economy have more influence on the course of history than politics? The fallacy of the “end of history” is the product of this flawed assumption. In reality, these have always been inextricable fields of activity, the two sides of the same coin: wealth is the fuel of power and power is the fuel of wealth. Nevertheless, the second proposition seems to be less well-known than the former and the purpose of this paper is to provide some insight into this matter.

Thinking that we are in a transition phase and looking for huge upheavals ahead is fashionable at the moment, and rightfully so. It seems true that we are at the end of a cycle, if not several. Economists sometimes speak about “secular cycles” without entering into many details, and not much actual work has been done on this topic. However, some are trying to go further. Ray Dalio for instance, is predicting a Chinese world order based on an analysis very similar to that of the World-System school of thought in international sociology. The only problem with this approach is that the world-system analysts predicted the rise of Japan as the next hegemon in the 90s, like exactly everyone else. It does not mean that this approach should be overlooked, and Dalio’s interest in cycles is one argument among many for exploring again the almost forgotten world-system analysis. The World-System theory is partly derived from the dependency theory, which was based on certain (not necessarily wrong) Marxist assumptions, but Marxists themselves never paid much attention to it - probably because it was based on historical facts. More importantly, it was developed on the basis of Fernand Braudel’s work, firstly by Immanuel Wallerstein, then mainly by Andre Gunder Frank and Giovanni Arrighi. The theory consists of three main ideas:

-??????the World-System structure, theorized by Emmanuel Wallerstein in the 1970s, which assumes that there is a politico-economic chain of command linking the core of the world economy - where high value-added activities are concentrated - to a semi-periphery and a periphery. In this view, the core of the world-economy[2] is the place where capitalism is the most developed. Although this theory has been largely forgotten, its basic notions are now widely in use among international relations experts (starting with the value chain), however disregarding their global historical framework and the two following cycles defined by the theory.

-??????Short systemic cycles of accumulation: successive ~110 years cycles that occurred during the last 4 centuries, each being driven by a capitalist hegemon replacing a former one or re-succeeding itself due to its conquests and the update that it brought to the capitalist system. The first capitalist hegemon was the Netherlands (1580-1688), then it was the UK during two cycles (1688-1792; 1792-1914) and finally the US (1914-?)[3]. Thus, the centre of capitalism and global power logically shifted along both successful politics and opportunities to generate larger profits. These are the cycles Ray Dalio reflected on lately under the “Big Cycle” denomination.

-??????Long systemic cycles of accumulation, as theorized by Andre Gunder Frank and Barry Gills, are more ancient cycles that preceded the shorter cycles we just mentioned. However, it is unsure whether those cycles ever ended. They were based primarily on the development of a system of regional hegemonies/empires that sustained an international system of trade, until a disruption of the international chain of command ended the cycle (for instance the 14th-century cataclysms[4] that wrecked global trade routes, plunging the whole system into a turmoil, as did the global anarchy of the 17th century). Such a disruption generally happened because the system couldn’t grow further and reached the limits of what it could produce. The stalling productivity of the system prompted a negative feedback loop: the elites attempted to make profits in a more aggressive manner, the imperial institutions decayed because of their decreased usefulness, and decentralization of global power happened due to the elites’ weakened sense of belonging to their state.

These cycles’ lengths may vary considerably, however, which does not make them a reliable forecasting tool. Nevertheless, they have always followed the same pattern. We do not know when the cycle is going to end, but we can find which stage of the cycle we are situated at.

The big question everyone is asking today is towards which political and economic order our global system[5] is evolving. While I have the beginning of an answer to it, I regard providing a reflection framework as a more important objective. Here I will develop an assessment of the respective currentness of the world-system cycles and an analysis of their implications for the evolution of the global system.

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I.??????????????Short Systemic Cycles

Since the Western economy is reaching its structural limits, its cycles may reach their limit too, given that the reasons they developed as they did have disappeared. These reasons were as follows: the industrial revolution, the spread of capitalism and the relatively small size of capitalist hegemons.

A.???The end of the industrial age

There is no “fourth industrial revolution”, which is an absurd concept because digitalization is not industrial. Industrial revolutions were driven by new ways to produce cheaper energy or to use it more efficiently. There are still productivity gains today, but they are absolutely not comparable to those obtained thanks to the steam engine, the internal combustion engine, nuclear fission, etc. These technologies transformed our world in a dramatic manner and propelled economic activity in a way that IT will never achieve.

B.???The stalling spread of global capitalism

There is no larger capitalist country than the US since the Chinese system is hardly a capitalistic one, which doesn’t make it an obvious successor to the US. The Chinese “free market for unfree people”[6] lacks the necessary liberal foundations that would allow it to be accepted as a global hegemon and project its soft power efficiently. Furthermore, it is terribly inefficient. If there is an “update of capitalism” somewhere, it is rather the US-led “digital capitalism” / “information capitalism”, which does not immensely increase productivity but reshapes economies as well as generates enormous profits for those who control it.?

C.???The incomparable strength of the US to its predecessors

European powers formed a very peculiar eco-system of countries, which were structurally unable to sustain their domination over longer periods of time. Western hegemonies occurred as temporary disequilibria due to the European nations’ short-lived technological edge and the chaotic fragmentation of the European world-economy. It is impossible to compare the US to this. For instance, the Netherlands - due to its economic advance - could almost be considered a “hegemon” despite its GDP being 6 times smaller than that of France or Italy from 1410 to 1800 (graph below).

The fact that the Netherland and the UK (at least during the 18th century) could lead European trade and dominate Europe with such an unremarkable level of economic activity - measured quantitatively - is proof that GDP size is not as important a factor as it seems to many analysts of great-power competition. The US is then in a much stronger position than previous capitalist hegemons in terms of quantitatively measured economic activity. More importantly, like all its predecessors it prevails overwhelmingly when it comes to the quality of its economy - that is to say its position in the global value chain. The most striking part of this economic power lies in the control over the electronic chip business and the new kind of capitalism its tech companies are spreading over the world. It is a fact that the world-economy is more fragmented today than it was after the fall of the USSR, but the US cannot be compared to its predecessors. Its sovereignty still is undisputed and will not be disputed for a long time.?

The end of the industrial age, the stalling spread of global capitalism, and the incomparable strength of the US to its predecessors have changed the global system from a very fast-changing environment with short cycles into a more stable place. Short hegemonic cycles should then be regarded as a unique event in the history of mankind and no forecast should be based on them without questioning the currentness of their causes.

II.????????????The Long Systemic Cycle

We are now dealing with long-term exhaustion of global growth (at first sight because of demographic saturation, natural resources scarcity/depletion and the absence of a game-changing energy generation technology), which results in growing global instability and regionalization. However, this exhaustion of global growth is rooted in a more profound factor: the system itself has become unable to allocate resources and exploit them in an efficient and sustainable manner. Could we solve the global growth problem by reorganizing the world in a completely different manner? This is the question that history will answer for us one day. Before it does, let’s assess the solidity of the system as it exists currently, through what I have identified as its 4 most important pillars: institutions, the international trade system, the regime of accumulation, and connective infrastructure.

A.???Institutions

Institutions are the real backbone of any society, of any progress. The graph above shows clearly the runaway development of the UK even before the industrial revolution. This revolution was a consequence of the development of the UK and of the good functioning of its society, not a random discovery. To summarize the situation today: we are sawing off the branch we are sitting on. The West faces many internal disorders, two of them could be lethal:

1.????Our nation-states' societies are becoming increasingly similar to authoritarian societies, with the multicultural characteristics of empires. As we see today, the US was a multicultural country only to a certain degree, and the EU (a supranational bureaucracy) is encompassing so many different political sub-systems that it cannot evolve into a democratic federation. The increasing multiculturalism of Western societies – whether resulting from immigration or from the forced fusion of Western populations that do not share the same heritage, will create more difficulties to cooperate between people and more opportunities to force them to cooperate (which is a way to define authoritarianism). The ongoing transformation of the two major Western powerhouses will have rippling effects across the rest of the global system, starting from the very nature of societies, states and economies. This trend is inexorable since its logic pertains to the development of the global system: the cycle of nation-states is finished because larger regional structures are now needed to produce growth. This might have painful implications.?

2.????A relative way nation-states are being alienated is the neoliberal movement that has developed worldwide since the time the US has outcompeted the USSR. The end of the USSR, the beginning of the Liberal World Order and the spread of the globalist ideology have meant, from a business as well as geopolitical viewpoint, a transition from system-building to system-milking. Delocalizations, tax havens, low corporate tax rates, the still ongoing financial globalization, the primacy of economic interests over political ones have all weakened the alliance between capital and the state, which has always been the cornerstone of the development of strong nations.

B.???The International trade system

The main characteristic of the evolution of the international trade system is increasing cutthroat competition, like during the 15th and the 17th centuries, where transformations of the system happened.

1.????The most tangible manifestations of cutthroat competition:

-???????supply-side mercantilism in Germany and China, beg thy neighbour policies

-???????the booking of American companies’ profits in tax havens

-???????ferocious neoliberal fiscal competition through falling corporate income tax rates

2.????The most problematic consequences of cutthroat competition:

-???????the fact that resources are no longer allocated purposefully by the system in order to produce global growth

-???????the increasing inability as well as the reluctance of the US to maintain the Liberal World Order, since it is no longer profitable

-???????The influence of neoliberalism on long-term investment worldwide, which subdues the economy to the monopoly of 5-year business plans. While low interest rates should have propelled long-term investments, what is happening is the exact contrary: they are used for short-term financial leverage.

C.???The regime of accumulation

1.????Western capitalism has been morphing into “rentier capitalism”[7]:

a.?????First of all, it cannot be ignored that income distribution is skewed in favour of the wealthy (especially in the US). The dominant position of companies, the sky-high return on equity requirement, anaemic interest rates (which allow proportionally huge financial leverage) and low corporate tax rates are the main characteristics of this new economic paradigm. This explains the fact that inflation remains stagnant, despite all the public deficit monetization. Wages will not increase if the four conditions above stay in place. On the other hand, hard assets inflation can go on, because these assets are bought by those whose income rises at the fastest pace. This results in the consumer society on which the system was built no longer contributing to its growth the way it used to.

b.????Hard assets inflation, however, can be also called “wealth inflation", which brings into light another aspect of the same problem. In one of his very straightforward and quirky Fash Economics, Patrick Artus[8] pointed out that increasing the money supply results in increased wealth rather than inflation if it pours into the “investment money” stock - as opposed to the “transaction money” stock. “Wealth” too can increase artificially then, as consumer prices would. But it does not make us richer; it only means that wealth valuations are now deeply fictional. This is proportionally resulting in and comparable to consumer goods deflation, notwithstanding nominal prices. This phenomenon is new because until now we knew only exceptional cases of asset prices inflation that we called “bubbles”; it is hard to recall a situation where all hard asset prices and only hard asset prices - from real estate to precious metals - were in a bubble. It is also worth noting that if asset prices rise, GDP rises too. And hard assets inflation is not taken into account into official inflation metrics. Thus, an increasing GDP does not mean that there is an increase in economic activity. I will not elaborate on the artificial growth topic, but I think there is also a question that can be asked: if GDP growth is 2% and the public deficit is 3% (as a % of GPD), what GDP growth would be expected if there is no public deficit??

Rentier capitalism, thus, fosters artificial ways of accumulation and weakens the market economy.

2.????Not only is capitalism changing in nature, but it also seems to be at the end of a cycle

a.?????The less growth there is, the lower the interest rates, the more we borrow. Debt is one of the few levers left to produce growth. There is a bubble in sovereign debt, and this should lead at least - someday in a very distant future - to currency debasement if not to a financial crisis of tremendous magnitude, unless a new growth lever is found, which is unlikely. However, this is a well-known and well-discussed topic, on which I shall not dwell.

b.????Because of globalization, there is now a decorrelation between global value chains and political systems, since there is no corresponding global political system of control, only soft global governance - which is not about control - and the American influence is facing the Chinese challenge. This is problematic, given that the development of the capitalist system has always been sustained by the simultaneous development of the state, the alliance between capital and the state has always been indispensable for growth. The Liberal World Order does not work anymore (assuming it ever did). At least it does not suffice to maintain control over international value chains on a global scale.

Western capitalism is disintegrating under its current form. Hints about its future will be described later on in this paper.

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D.??Connective infrastructure

Connective infrastructure is transforming worldwide under the effect of two fundamental revolutions:

1.????However largely finished from a technological perspective, many effects of the information revolution upon the world are still to be awaited. The Covid crisis has recently generated a good instance of the power of this transformation. It has brought a dramatic wave of dematerialization, which has enabled the delocalization of more qualified work, further transforming the international chain of command.

2.????The other, maybe even more profound revolution underway, is the reconstitution of a Cohesive Asian Heartland, which could reshape global trade routes[9]. There was a cohesive Asian heartland for several millenaries, based on a few empires, which formed a coherent trade system. The current maritime trade system results mainly from two historical facts:

-???????the Silk Road was hugely damaged, first by the Plague, then by Mongol destructions, and finally by the collapse of the Mongols themselves. This created an opportunity for Europe to create its own alternative trade routes.

-???????American precious metals and colonial plunders gave Europe a liquidity boost that allowed it to take advantage of the situation at the right time and to solve the international trade problem by multiplying long-haul enterprises, thus also developing capitalism and becoming the centre of the trade system.?

If the Russian economy is connected to Europe and local hegemons are allowed to rise in the Middle East (not even talking about infrastructure as does Mr Michta), then the long-term perspective is that Eurasian trade will be brought back to life and the US will become a faraway island.

The centre of gravity of the world is moving towards Asia, and it is a commonplace statement to say so. However, this shift is based on certain trends that are of organizational nature and for this reason, is not irreversible.

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The decay of Western institutions, the deteriorating state of the trade system, very fast changes in the way the world is connected, and a deep crisis of capitalism are signs that we are at the end of a long systemic cycle. Painfully or not, the system is transforming, mainly because it has to transform.

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III.??????????Our Bankrupt World and the Emergence of a New Global System

A.???An increasingly brutal environment with no room for weakness

The logic of the long systemic cycle should result in growing instability. Indeed, we are for now witnessing a relative decentralization of the system through global capitalism, as increasing fragmentation and instability are in the logic of its development. Capitalism paradoxically tends towards the flattening of the international structure, less inequality between the centre and the periphery, and between states, as capital spreads faster to underdeveloped regions than it develops the already developed ones.

Any further weakening of the US may result in the multiplication of regional powers, which will cause the breakdown of the global system because of the weak growth and the cutthroat competition that the absence of leadership will cause. Like in long pre-capitalist systemic cycles we could assist in the creation of a system of hegemonies, but an accepted hierarchy would need to emerge, which normally takes place at the end of a period of competition?(and pain).

China is not strong enough to become the dominant power, and it is unsure the US is solid enough to stay the dominant power. This is not about virtuously outcompeting the opponent but about cutthroat competition. Global powers will not be able to achieve their goals otherwise than coercively.

Short Systemic Cycles were the cycles of the development of capitalism, but they occurred in a world where energy technology propelled very fast growth. On the contrary, pre-capitalist Long Systemic Cycles took place in a low growth context, with slow technology improvement. Today, the development of capitalism seems to have reached its limits and growth is slowing down, but there is still technological development that cannot be compared to the pre-capitalist period.

B. The Future is American

Since Short Systemic Cycles no longer apply, the US still has the possibility to grow and to create a brand new Global System. Here are several arguments supporting the hypothesis that the US could stay the dominant power or exert even greater influence over the world:

1.????US federal institutions have been weakened for the last 50 years. However, the US is of course a federal republic, which is made of 50 sovereign jurisdictions. This provides room for resistance.

2.????The centre of gravity of global infrastructure is not necessarily shifting towards Eurasia since American strategists are perfectly aware (since Mackinder…) of the necessity to impeach the formation of a cohesive Asian Heartland. It can be noticed that the Iraq and Afghanistan wars have not resulted in the creation of powerful Afghan and Iraqi states able to develop or even manage large infrastructural projects, to say the least.

3.????While the World has become more fragmented, the US share of global GDP has been around 23% for the last 10 years, which is the same as in 1995 and in 1980. There is no decline from this viewpoint, even relative. The Great Convergence is actually more about a transfer of power from Europe to Asia than from the US to any other part of the world.

4.????In a world where growth is no longer generated by increasing production but by digital domination, the US is of course far ahead of its competitors, and its technological monopolies are unfortunately the right tool for it to stay this way.

5.????The buds of a new accumulation regime are appearing in the US, although in a very rough fashion. The evolution of capitalism has consisted in companies becoming able to internalize increasingly greater costs, making the system more efficient[10]. The first to be internalized by the free enterprise were protection costs, then production costs, and the latest were transaction costs (the integration of the whole international supply chain). Automatization and digitalization are now allowing for what could be called “society internalization”: the customer himself becomes partly a worker of the companies from which he buys products, for instance by giving his data for free or by using self-service checkouts. The alliance between capital and the state has been weakened, but the power exerted by capital over society has never been greater, which would make the rebirth of this alliance much stronger than it ever was.

6.????This increasingly multipolar world is unsustainable, and the slowdown of growth will have to be remedied. This is done through international competition. A reset should occur, resulting in a new and more rigid international hierarchy, which will solve the global growth problem. Global growth will slow down until the losers go bust, allowing for a survivor to emerge. This operation will probably require the US to reorganize its alliances and to become more assertive on the global stage, projecting its global power through means not pertaining to the globalist ideology, which has not worked so far, to say the least[11]... Some of the most solid allies of the US include Japan, South Korea, the UK, Australia, New Zealand, Israel, Romania, Ireland and Poland.

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Since there is now a single integrated world-economy, it should be organized by one hegemon, since all the new means of control have now been created to make this occur, which has never been the case until now. Only the US could be in a position to do so. If it does not, the world will be plunged into a situation of perpetual chaos, no global hegemon will emerge from the constant international fight and the global economy will stay unorganized. I do not believe in this scenario; we have always finally figured out new ways to make the Global System work for the last 2500 years, despite helping ourselves with periods of darkness.

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[1] Making use of geopolitics, history, economics and finance

[2] A concept coined by Braudel. World-economy: “an economy that is a world in itself” (the European or the Asian world-economies for instance).

[3] George Modelski, Long Cycles in World Politics.

[4] Overpopulation caused depletion of the soils and famines, the Mongol destructions almost cut the Silk Road, the plague ravaged already exhausted populations and the collapse of the Mongol empire itself plunged the world into anarchy.

[5] I prefer to talk about the ‘global system’ rather than about the ‘world-system’, the word “global” is better adapted to a transversal approach

[6] Andrew Michta, 16/11/2020, China’s Promise: ‘A Free Market for Unfree People’, Politico

[7] As defined by Patrick Artus in his Flash Economics from the 08/06/2021: “It is normal for ‘rentier’ capitalism to lead to a loss of growth”

[8] Patrick Artus, Flash Economics, 24/12/2020: “Asset price bubbles are not only the consequence of expansionary monetary policies, but also the only way to ensure fiscal solvency in the longer term?”

[9] Andrew Michta, 13/09/2020, Can China Turn Europe Against America?, Wall Street Journal

[10] Giovanni Arrighi, The Long 21st Century

[11] Andrew Michta, 08/03/2021, The Chimera of a Globalist Empire, National Review