The Breaking Point

by James Dale Davidson

  19 http://www.telegraph.co.uk/finance/economics/11875529/We-musnt-ban-cash-or-inflate-the-pound.html.

  20 http://www.telegraph.co.uk/finance/economics/11875529/We-musnt-ban-cash-or-inflate-the-pound.html.

  21 http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging.

  22 http://www.kitco.com/ind/Taylor/2014-07-21-Monetary-Velocity-John-Exter-s-Inverse-Pyramid.html.

  Chapter Twenty-One

  The Next Stage of Capitalist Development

  In antiquity the freedom of the cities was swept away by a bureaucratically organized world empire within which there was no longer a place for political capitalism . . . [In] contrast with antiquity [in the modern era the cities] came under the guise of competing national states in a condition of perpetual struggle for power in peace or war. The competitive struggle created the largest opportunities for modern Western capitalism. The separate states had to compete for mobile capital, which dictated to them the conditions under which it would assist them to power . . . Hence it is the closed national state which afforded to capitalism its chance for development—and as long as the national state does not give place to a world empire capitalism will also endure.

  —Max Weber, General Economic History

  If your eyes are open, and you don’t spend all your time in a tattoo parlor, by now you have experienced many premonitions of the Breaking Point. If you read the fine print, four-inch articles in the financial press, you may know that even the former chief economist of the Bank for International Settlements, William White, has warned, “This looks like to me like 2007 all over again, but even worse.” As reported in 2013 by Zero Hedge, White stated that all the previous imbalances still existed, while total public and private debt levels were 30 percent higher, as a share of GDP in the advanced economies, than they were in ’07. He also pointed out an entirely new problem: the emerging market bubbles ending in a bust-boom cycle.1

  The repeated failure of monetary methods to generate more than an illusion of growth reflects the faltering efficacy of the nation-state. Big government is ill suited for today’s megapolitical realities. The fact that inadequate remedies to previous crises have set the stage for even greater crisis to come underscores the thesis of John Micklethwait and Adrian Wooldridge in The Fourth Revolution: The Global Race to Reinvent the State. They argue that pervasive malfunction calls for nothing less than deep restructuring of the state system.2

  You don’t need to become a connoisseur of quantitative easing, or translate the European Central Bank’s lies about the quality of Italian government collateral, to know that a crisis awaits. The history of the past 500 years says so. So do the last few decades, as well as the most perceptive literature on the dynamics of collapse. Joseph Tainter tells us in The Collapse of Complex Societies that “once a complex society enters the stage of declining marginal returns, collapse becomes a mathematical likelihood, requiring little more than sufficient passage of time to make probable an insurmountable calamity.”3 In a previous chapter, I sketched out a rough outline of the cycles of hegemony over the past five centuries. With evidence now pointing to a terminal crisis that will bring the US imperium to a close, an important question for investors arises: What comes next?

  A first step toward answering that question is a step back. In order to see what may come next, you have to realize that much of your current view of the world is imagined, if not imaginary.

  What do I mean? A vivid example was provided by the Apollo astronauts, one of whom, looking back to earth, was amazed by the fact that he couldn’t see any boundaries between countries.4 What the astronauts saw was not a mosaic of nation-states of varying colors spanning the globe but a striking blue marble in the black void of space.

  This view was famously captured in NASA photo 22727 taken by the Apollo 17 crew traveling toward the moon on December 7, 1972, directly conflicted with the “taken for granted state-centric Ptolemaic model or image of world space most modern people carry around in their heads.”5

  Straddling the Boundary between Myth and Reality

  The astonishment of an astronaut that he could not discern national borders from space shows how deeply imprinted the notion of the nation-state has become in the metageography of the modern world.

  As geographer Peter J. Taylor explains, “Metageography is the collective geographical imagination of a society, the spatial framework through which people order their knowledge of the world. It provides the geographical structures that constitute unexamined discourses pervading all social interpretation.”

  According to Taylor, metageography “straddles the boundary between myth and reality providing a grounding for both the necessary information and the necessary belief within a society.” Taylor makes the crucial point that metageography carries over from the territorial realm and informs the way we think about society. He argues that the so-called social sciences—economics, sociology, and political science—were invented in the nineteenth century as part of the effort to organize understanding in nationalist terms within the boundaries of nation-states. Just as the idea of nationalist citizenship was invented to help mobilize large armies as the scale of power and warfare rose, so economics, sociology, and political science all united around a collection of statistics, which Taylor better describes as “state-tistics,” to focus attention on developments as defined within the territories of national governments.

  An accompanying metageographic anachronism is the mapping of political, economic, and sociological attitudes along a “left” and “right” axis based on imagined affinities for control of the state. This is a labeling hocus-pocus that confuses the crucial issue of where your own interests lie.

  You see the implication: if your income is defined within territorial boundaries as a derivative of national GDP per capita, then your success is implicitly a function of national economic policy. It is bound up with that of everyone else within the national boundaries—or with the state itself. Equally, if low-skill jobs migrate offshore to Third World countries—another metageographical conceit as there is, of course, only one world—the greater income gap between persons in First World and Third World populations becomes a “foreign aid” or “foreign policy” problem. But if income differentials increase between high-skilled and low-skilled persons within the same territory, this expression of territorial, ethical myopia becomes a “political” issue that implies the need for predatory taxes on the successful to combat income inequality.

  To put it another way, the anachronistic metageography that defines well-being in statist terms distracts attention from the fact that the nation-state charges magnitudes more for its “protection services” than they are worth—magnitudes more than the cost of providing such services and far more than approximations of such services could be secured through alternative sources. You are required through predatory taxation to buy a bundle of protection services that comes tied to monetary confusions and inflationary boom-bust disruptions arising from enshrinement of fiat money through legal tender laws. Then add to those the host of corporatist impositions, FDA regulations, entitlement programs, and other politically inspired antimarket distortions that do not pay their way. What you get in exchange for the taxes you pay is no bargain.

  From Territories to “Spaces of Flows”

  This is why there is scope for entrepreneurs to gain adherents by shaping the provision of protection services more attractively in the Information Age. As the territorial component of the economy recedes, and Manuel Castells’s “spaces of flows” (i.e., networks and cyberspace) become more important, this implies a potentially major shift in the work of the “guardians” who control government.6 As noted by Jane Jacobs in Systems of Survival, their main focus had heretofore been “protecting, acquiring, exploiting, administrating or controlling territories.”7 As more and more of the material supply chain is replaced with digital information, the relative importance of protecting large territories recedes. This opens the possibility for greater
entrepreneurial input in structuring the policy mixes of government without creating monstrous hybrids—those that arise when justice is commercialized and sold to the highest bidder, or when commerce is politicized, as it was in the late Soviet Union.

  Lee Kwan Yew: Going beyond Redistributive Mass Democracy

  Here I think of a signal example of a deft political entrepreneur that I mentioned earlier: the late Lee Kwan Yew. He shaped Singapore from a colonial backwater into one of the world’s leading economies, richer on a per capita basis than the United States. Lee made Singapore a city-state and attracted investment at a large scale by making it one of the world’s most attractive places for doing business.8

  The unbundling of Singapore’s attractions as a domicile for doing business from the crushing costs of maintaining a nation-state was an informing example of institutional entrepreneurship by Lee Kwan Yew. Notwithstanding a reputation as a left-wing lawyer with early backing from the Communist Party of Malaya, Lee did not take Singapore on the well-worn path to redistributive mass democracy.9 In fact, Lee Kwan Yew’s Singapore is probably better understood as a proprietary city-state than a democratic one. His aim was to make Singapore a “first-world oasis in a third-world region”—not to make it a welfare state.

  In this respect, Lee also distinguished himself from most past examples of proprietary governments. As Frederic Lane suggests, more commonly, the “proprietor’s” overriding objective is to enrich himself rather than enhance the well-being of the community. Lee departed from both the examples of “a prince or emperor so absolute that he could be considered the owner of the protection-producing enterprise”10 and the more conventional model of mass redistributive democracy.

  A prime example of Lee’s departure from welfare state orthodoxy is Singapore’s Medisave program. Its key principle is that no health treatments are provided free of charge. Within Medisave, each citizen accumulates funds that are individually tracked to his or her account under a compulsory savings scheme. The vast majority of Singapore citizens have substantial savings in this scheme (more than $50,000). These funds can be pooled within and across an entire extended family. Citizens have the right to choose one of three levels of care. Lee told me, with considerable pride (in a private meeting in his office in 1995), that if citizens wished to avoid depleting their accounts, he had arranged that they could opt for cheaper hospital rooms without air conditioning. If they preferred a higher-class ward or a private hospital, they paid extra for it.

  9.1 Percent Compound per Capita GNP Growth

  Lee was able to design a successful political program under which GNP per capita rose at a compound annual rate of 9.1 percent during his thirty-one years as prime minister. One reason was that Singapore is a city-state of just 277.3 square miles. He was close to voters and could reach them on a retail basis without resorting to redistribution on the nation-state scale. Unlike in a large nation-state where one of the surest ways to compose a consensus is by promising to redistribute income to a hefty fraction of the voters, Lee could leverage his success in facilitating a rapid rise in real income. It increased 200 times over from the time he assumed power in 1958. Per capita income was about $400 a year then; in 2014, based on World Bank calculations, Singapore was the world’s fourth richest jurisdiction, with GDP at per capita purchasing power parity in international dollars of $82,024. That was 150 percent of the US value for the same year ($54,629).

  Note also that unlike the United States, where malpractice of economic measurement routes GDP calculations through the Ministry of Truth, Singapore’s robust growth is confirmed by energy proxies. Bruce Podobnik, author of Global Energy Shifts, reports that data covering coal, oil, and natural gas, along with nuclear, hydro, geothermal, and other alternative energy, show that per capita energy consumption, expressed in kilograms of oil equivalent, rose in Singapore from one-tenth the US level in 1958 to 110 percent of the US level in 1998.11

  Successful Depoliticization of the Economy

  As a quasi-proprietary city-state, Lee’s Singapore was in many ways a unique jurisdiction in that it actually seemed to cater to its customers rather than try to maximize tribute. Singapore’s success arose from policy aimed at facilitating well-functioning markets rather than subordinating them to democratic control. Singapore achieved real growth without relying on the monetary methods of simulating illusions of prosperity through inflation, public debt, and private debt, as practiced in the United States and other “advanced” economies. Lee provided a high-caliber jurisdiction that appealed to international investors by securing the rule of law and rooting out corruption. Singapore is ranked each year among the world’s least corrupt jurisdictions.

  With more corruption-free, proprietary city-states, some would no doubt offer first class infrastructure, while adopting a more tolerant attitude toward chewing gum. (As you may know, Lee Kwan Yew famously outlawed chewing gum in Singapore.) It will be interesting to see what policy configurations are offered as the scale of governance falls and policy entrepreneurs begin to supplant electorates in determining the economic offerings available for protection and other government services.

  The Spatiotemporal Fix

  David Harvey offers an interesting twist on James Scott’s observation that movement is the enemy of the state. In Seeing like a State, Scott sets out to understand why states tend to treat “people who move around” so badly.12 Among those he cites who “have always been a thorn in the side of states” are nomads, hunter-gatherers, gypsies, pastoralists, slash-and-burn farmers, vagrants, homeless people, itinerants, and others whose preferred lifestyles tend to involve what Castells called “spaces of flows,” more than “spaces of places.”

  Movement undermines the exercise of power. For a state to exercise power over a large population, it seeks to make life “legible,” simplifying and standardizing local practices so the people are more readily controllable by political power. This becomes more challenging, even impossible, where caravans of gypsies are crisscrossing the country and hunter-gatherer bands roam the woods. The same would also have held true for “donkey caravaneers” like the Hebrew Patriarchs to whom God promised land and progeny.13

  This brings me to David Harvey’s fascinating analysis of what we might call “territorial inertia.” Harvey speaks of a “spatio-temporal fix” in which capital is increasingly imprisoned within immobile physical and social infrastructures that support specific types of production (e.g., labor processes). With an increase in quantities of fixed capital, territorial alliances become more powerful in an effort to maintain current privileges and investments, while protecting them from competition over space. This means no new spatial configurations can be created, leading to an “uneven geographical development of capitalism.” This form of capitalism is “highly inconsistent with sustained accumulation either within the region or on a global scale.”14

  The nation-state is the superglue that holds the spatiotemporal fix in place. It represents territorial inertia that fosters immobility and is obviously at cross-purposes with the development of a network economy composed of “spaces of flows.” The full economic potential of cyberspace is unlikely to be realized so long as capital remains “imprisoned within immobile physical and social infrastructures” fastened in place by the legacy institutions of the nation-state.15

  The whole suite of economic policies, programs, and initiatives undertaken by nation-states, supposedly in pursuit of prosperity, is the legacy of past hegemonies. The fact that every First World nation-state is now incurring massive budget deficits, and resorting to financial repression, says much about the fragility of the status quo. The anachronistic nation-state cannot afford to pay market interest rates on its metastasizing debt. Nor can it confront astronomical unfunded liabilities for social welfare programs that no longer pay their way.

  This confirms that the Breaking Point looms ahead.

  Bismarck’s Bribe

  You live in a world dominated by anachronistic institutions. Governments grew
during the nineteenth century as the scale of warfare and the scale of enterprise rose. The first German Chancellor, Otto von Bismarck, invented the welfare state, by his own confession, as a way of “bribing” ordinary people into believing that the state existed for their benefit. He wrote: “My idea was to bribe the working classes, or shall I say, to win them over, to regard the state as a social institution existing for their sake and interested in their welfare.”16

  Bismarck’s bribe paid off handsomely when great numbers of the German working class volunteered to fight in World War I. Bismarck’s bribe continues to work (after a fashion) in high-income economies today. Some 75 million Americans who either are retired or soon will retire as recipients of a “pay-as-you-go” pension system have a vested interest in the survival of these entitlements.

  Thinking “Outside the Box”

  You have heard the expression “thinking outside the box.” You may have wondered what the “box” was. Here is the answer. The mental box that you are well advised to think “outside of” is the prevailing metageography—the legacy of old hegemonies. As suggested earlier, it colors the way you see the world in more ways than one.

  This is obvious when you encounter antique metageographies on display in old maps embodying imaginations informed by cultures different than our own. Modern “mosaic” maps are presented from a fixed viewpoint, but this, too, is a metageographic convention. The “Cempoala map,” a rare indigenous map from sixteenth-century Mexico, by contrast, has no fixed orientation. It looks at East, West, North, and South at the same time. Viewing it requires constant reorientation, as features that cannot be taken in from the same viewpoint are scattered around the map.