How Capitalism Encourages Global Inequality

The new regime in Kenya rode to power under the populist umbrella of economic empowerment of the ordinary folks - popularly known as the "bottom-up" economic model. The "bottom-up" economic model is inspired by a neoliberal economic thinking hinged on a capitalist policy regime.

The period of the last quarter-century, when neoliberalism has prevailed, has seen the emergence of a new form of capitalism. This new form, as Richard Peet has written in the Geography of Power, comes from the intersection of three main tendencies. First, economic power has been deflected upwards, from the individual corporation to the capital that finances all corporations. That is, corporations compete for the investment attention of accumulated capital by offering not so much high dividends as a rapid rise in the price of the corporation's stock.

Second, economic power has expanded outwards, from its original, capitalist bases in the advanced industrial countries, on to a global playing field, where trillions (thousands of billions) of dollars range with ease and speed in search of high returns. Clearly, this global playground for capital is still lined by political boundaries. But increasingly, within the established investment space, countries are adjudicated merely as risk/benefit ratios and, by being included that way in the profit calculus, reduced in significance.

Third we find capital, government and governance merging into a single political-economic formation. Within this institutional complex, elites move with ease and grace from investment banks to the upper echelons of government and governance bureaucracies. We might call the form of capitalism resulting from the interaction of abstraction upwards, expansion outwards and fusion inwards global finance capital, meaning that finance is the leading fraction of capital, that finance normally operates on a global scale, including through global governance.

The term 'finance capital' comes originally from Rudolf Hilferding an Austrian Marxist theoretician. Hilferding, Peet, captures, was talking about the increasing concentration and centralization of capital in large corporations, cartels, trusts and banks, together with a change in the structure of the capitalist economy towards the export of capital from the industrial countries in search of higher rates of profit elsewhere.

Flows of investment capital served to integrate the nascent global economy operating predominantly under the control of the City of London. The term has been revived more recently to refer to a broadly similar globalization taking place in the late twentieth and early twenty-first centuries. This new version of finance capitalism is centered on the deployment of large accumulations of wealth by specialized institutions, such as investment banks and risk assessment firms, primarily located in New York, but also in London, Frankfurt, Tokyo, Hong Kong and Singapore, that have connections with governments and governance institutions.

The Fordist/Keynesian system, articulating mass production, mass consumption and mass marketing, proved to be the most successful social, cultural and economic system of the twentieth century. US-based corporations, skilled in Fordist techniques of production and persuasion, and wealthy beyond their competitors, led the second globalization in the late twentieth century. As a result of the Fordist connection between increasing productivity and rising mass incomes, one-third of global GNP is earned in the USA alone - the annual GNP amounts to $11,000 billion in a global GNP of about $34,500 billion (World Bank 2004a:256-7).

This fundamentally Fordist productive-consumptive power base intensifies, however, to become more exaggeratedly powerful with the move from industrial capital to finance capital.

Even moving from money to credit increases the importance of the USA - so US credit card holders generate 51 per cent of worldwide purchases of goods and services (Nilson Report 2003)

Financial power accumulates disproportionately in the leading Fordist industrial capitalist countries, especially the USA, but also the United Kingdom, Germany and Japan.

Furthermore, this financial power is centered in a few 'global cities'. Control is centered in the few cities that move from being company and corporate headquarters into being capital markets', financial organizational centers for the national and international economies.

Global cities are characterized by international financial institutions, law firms, corporate headquarters and stock exchanges (the New York Stock Exchange, NASDAQ, Bourse de Paris, Tokyo Stock Exchange, London Stock Exchange) that lubricate the world economy through finance. These cities also have advanced

communications infrastructures on which modern transnational corporations rely. And they have influential media outlets with international reach. The globalization of the late twentieth century saw increased concentration of capital at the top of this global hierarchy, especially in New York, London, Tokyo and Frankfurt, with one city, New York, consistently presiding over the rest (Poon 2003). The dominance of New York comes from the amount of capital the city controls and the technological sophistication with which money can be moved from Wall Street to anywhere in the world. Essentially, this kind of global power is exercised by controlling access to the biggest capital accumulations in the world and directing flows of capital in various forms - as equity purchases, bonds and direct investment - to places and users that are approved by Wall Street banks and investment firms. Capital markets are filled with financial experts making money from the uncertainties that arise in the normal operation of capitalism - which, after all, is a system whose overall rationality' emerges from the collision of millions of self-interested actions motivated only by profit.

Uncertainty is partly overcome by collecting and applying financial and technical information that is combined with subjective judgments based on practical experience. The result is financial expertise. Financial cities are ideally centers of intellectual and experiential power. They are, in the words of Peet, like big money-egos written into space. The annual passage, through a global city like New York, of documents controlling billions of dollars in commercial and financial assets leaves, as its institutional residue, a system of thousands of specialized companies filled with connections, knowledge and expertise. "The combination of expertise, concentrated in specialized institutions, with real physical control over substantial capital investment, is the basis of the political economic power exercised by global centers of financial power.

This power takes many forms. One of these powers is the influence of capital markets on the making of global development policy by government and governance institutions," Peet argues.

The most important actors in international capital markets, according to experts, are corporations directly investing in foreign countries and 'professional' or 'institutional' investors, financial institutions that invest the savings of wealthy individuals, pension and mutual funds, and invest for non-financial companies, such as insurance companies, in the forms of bonds, equities and loans.

In making these decisions, corporations and investment professionals assess countries and companies using a range of consultancies and specialized institutions, especially national credit ratings made by agencies like the Economist Intelligence Unit, Business Environment Risk Information, International Country Risk Guide and

Euromoney Institutional Investor. The capital market, acting through institutional investment decision-making,

influences government policy-making via bond interest rates, through decisions on direct investments and by speculative trading in national currencies. Versions of structural dependence theory dealing with international capital markets argue that globalization accompanied by increased market openness and greater capital mobility has increased the power of capital over government policies.

This is particularly the case for the fiscal and monetary policies of governments that are quickly and efficiently punished by reactions from the international bond and currency markets. More broadly, during the transition period of the 1970s, financial markets punished governments that persisted in following Social Democratic Keynesian policies that investors believed led to state deficits that would impede repayment of borrowed funds.

The paradigmatic case was the disciplining of the British Labour Party in 1976. The terminal case was expansion combined with income redistribution, but forced by bond interest rates of 17.4 per cent to reverse course in 1982 and 1983. Since then, developed countries have converged on a neoliberal policy model preferred by the market, consisting of smaller governments, lower deficits, less state provision of social services, lower levels of taxation, less regulation and smaller unions.

Since the middle 1980’s, data shows, international investors have had a high degree of confidence in the policies of what became liberal, rather than social, democracies in the developed world. Financial markets retain a strong influence on government policies but now consider only a limited set of policies in assessing risk premiums, leaving some room for policy manoeuvre and choice (within a basically neoliberal policy regime) in national economic policy decisions. By comparison, in the case of 'emerging markets' (low- or middle-income countries) investors retain a strong and broad influence on governmental policy. As Mosley puts it mildly: "although emerging market governments are not always constrained to follow the dictates of global capital markets, the cost of defying [them] is often high". In summary, private capital markets pressure elected governments to adopt 'pro-investor' economic policies.

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Global Inequality

The huge majority of the world today is very poor. About 85per cent of the world live on less than $30 per day and around 61per cent live on less than $10 per day. If this should change, as Our World in Data's Max Roser believes, it will require very substantial economic growth of the economies that are home to the poorest billions of people in the world. The assets of the 200 richest people are greater in value than the assets of the 2.6 billion poorest people on earth.

"I believe some commentators on global poverty are not clear about the reality that very substantial growth is needed if people in poor countries should have a chance to leave poverty behind. I believe that if we do not express very clearly that economic growth is needed, we are damaging the prospects of the poorest people in the world to leave poverty behind," Roser writes.

A person's income does not measure their well-being, it measures whether goods and services they value remain out of reach or not. Because many of these goods and services matter for their wellbeing, income matters too. Any person's income depends on two factors, the average income in the country they live in and the position that particular person has in that country's income distribution.

As Roser argues, one possibility to reduce poverty is to redistribute income within that country so that the income of the poor rises.

There are a number of ways this can be done: one way is that the government taxes the incomes of richer people and pays it out to the poor. Experts argue that largest poverty reduction that is possible via a reduction in inequality would be achieved by a country that achieves perfect equality so that no one is poorer than anyone else.

Many poorer people rely on subsistence farming and do not have a monetary income. To take this into account and make a fair comparison of their living standards, the statisticians that produce these figures estimate the monetary value of their home production and add it to their income/expenditure.

Majority of people in the world live in countries that are very poor. Even perfect equality in those countries would mean that billions of people around the world would live on extremely low incomes: $15 a day, $10 a day, even less than $5 a day.

According to Roser, when the average of people's income in a country is that low, then the only way the majority of people can possibly leave poverty behind is when that country's economy grows so that average incomes increase. "Another possibility to reduce global poverty is to redistribute between countries.

Money can be transferred from rich people in the rich countries to poorer people in poor countries," he writes.

There are only two ways to increase the incomes of the poor: lower global inequality or economic growth for the poorest billions of the world. If someone is not in favor of economic growth for the poorer billions in the world, they are left with the option to reduce global inequality.

Economic growth in today's rich countries over the last two hundred years is the reason that people in those countries are much less poor than people in the same places in the past or people in poor countries today.

"Economic growth is not enough to get people out of poverty. If the inequality of incomes increases, the poorest can be left behind. Fighting inequality matters too. But without economic growth, there is no chance at all to leave poverty behind," Roser argues.

As inequality researcher Branko Milanovic has observed: The country where a person lives explains two-thirds of the variation of income differences between all people in the world.

"Where a person lives, he writes, is more important for how poor or rich they will be than everything else put together.

Instructively, as Roser brilliantly puts it, understanding how much the size of the economy matters for our own income is important for our own self-understanding and for our judgment of why it is that some people are poor and others are not. A person's knowledge, their skills, and how hard they work all matter for whether they are poor or not - but all these personal factors together matter much less than the factor that is entirely outside a person's control: whether the place they happen to be born into has a large, productive economy or not.

"Both the history of economic growth and the differences across the global income distribution today make this very clear: people are not poor because of who they are, poor people are poor because of the economy they happen to live in," he writes.

One important reason why the people in some places are poor, Roser posits, is because they were exploited by colonial powers that did not allow those economies to grow and instead impoverished them.