Grigory yavlinsky
Hidden causes of the global crisis
The past year, 2018, recalled the global financial crisis, and not only formally in the spectre of its tenth anniversary. The abrupt decline in the Dow Jones and NASDAQ stock market indices at the end of the year were the most significant since 2008. Pre-Christmas indicators for global stock markets came close to the worst December figures since the Great Depression at the end of the 1920s. In 2018 world markets lost almost $7 trillion, making it their worst year since the 2008 financial crisis. In the third quarter of last year, household debt in the US reached a record $13.5 trillion. Almost 80% of Americans are now living from one pay cheque to the next. The last time household debt was nearly as high was in 2007, not long before the "great recession".

More and more authoritative reports have appeared recently on the impending downturn in the global economy. Emphasising various nuances of the current situation, well-known figures in the contemporary political and financial worlds such as Gordon Brown and Ray Dalio are speaking primarily about the future, and not the past, and about the dangerous consequences of a new economic collapse.

Judging by the aforementioned articles, people are starting to realise, albeit very slowly, that there is a real threat of a new economic crisis that is due not so much to stock market fluctuations as to aggravating political crises in countries forming the nucleus of the global economy. The situation is extremely disturbing: just as the need for action is becoming clearer, an increasing number of questions remain unanswered.

Over the past ten years key factors of the 2008 crisis have still not been eliminated. On the contrary, their influence has only grown intensified. The G7 and G20 met, and there have been endless rounds of summits, talks, and bold statements, especially in the aftermath of the crisis. Overall, however, the lessons of the 2008 crisis have not been learned and its causes have not been eliminated. The main problem is that the crisis was not understood: it was simply extinguished through massive injections of state funds into the private banking sector. In other words, instead of resolving the problem, the semblance of a solution was merely created.

And so now the economic crisis is once more just one step away.

To understand the causes of the crisis and to look for solutions to global economic problems, the context of the discussion needs to be qualitatively expanded so that it is based not only on stock market data and financial reports. We need to revisit a number of key problems with the contemporary global economy that only a decade ago led to the great recession. However, as was the case back then, the governments of both developed and developing countries, and also the global economic elite, are turning a blind eye. Unless we have a thorough understanding of the issues and methodically resolve them, we won't be able to end this continuous cycle of economic crises.
November 30, 2018 Buenos Aires, Argentina
G20 Summit
The following issues are the key problems of the contemporary global economy that are the hidden causes of the crises that the government of the world's leading countries don't want to resolve:

1. The financial sector continues to grow in both absolute and relative terms. The financial sector, transformed from its role of servicing economic requirements to a self-contained entity, generates some of the highest individual managerial incomes. These days the financial sector resembles a bureaucratic structure: on the pretext of performing social functions, it co-opts more and more resources and people , thinking up new functions that require more and more people ad infinitum. Society lost control over the financial sector a long time ago. On the contrary, the financial sector is now able to control politicians and corrupt them in line with its interests; it is very difficult to resist the temptation to make money out of nothing.

2. Group interests (primarily groups linked to the financial sector) are intensifying their influence over the mass media and the political, educational, and academic elite. The agenda and tone of the discussion in each of these environments have manifestly shifted towards the interests of groups who have opened up new niches for enrichment over the past ten years. In the Western public media the thesis that 'the economy of the future is the economy of knowledge and innovation' is perceived as an incontrovertible truth and serves as justification for the redistribution of income to businesses dealing in the products and the results of innovative intellectual activity such as financial engineering, communications and entertainment consumer services, and various forms of content for consumer electronic devices. As a result, in the picture of the world painted by the 'mainstream' mass media and education system, the traditional values of social progress have been pushed behind the scenes, while the new values of 'creativity' and 'innovation' have taken centre stage.

3. The 'brand economy' is growing exponentially compared to the 'economy of goods'. Businesses related to manipulation of consumer consciousness and the establishment of control over marketing channels are growing far more rapidly than production capabilities. Investments in advertising and distribution channels yield substantially greater returns than investments in production. This creates unprecedented opportunities of businesses to increase their margin and simultaneously abuse their position unpunished.

Competition is not disappearing completely, but is degenerating into an oligopoly based on intellectual property: ownership of brands, longstanding marketing channels, and control over the regulatory authorities. Enormous revenues are generated by 'intellectual' and traditional annuities – the revenues of economically developed countries and the biggest multinationals, generated regularly and 'for life' through ownership of brands, trademarks, patent rights, and traditionally large shares in global markets. These economic phenomena became popular in the second half of the 20th century and played a significant role in the intensifying inequality driven by globalisation.
4. The 'new economy' is expanding. It has become less transparent than traditional sectors in that it is virtually impossible to determine objectively either the real costs or the numerous consumer characteristics of products; the production process is a black box, whose contents cannot be monitored.

The 'new economy' is to a large extent virtual. In other words, its functioning is not associated with consumption, accumulation, or even the physical movement of productive resources. To all intents and purposes, this is not so much production as an exchange of money for virtual products, which exist increasingly frequently not in reality, but instead in the consciousness of the consumer via images, objects of desire, and dreams, etc. This new economy is influenced even less by regulators, insofar as the subject of regulation is to large extent undefined – it is difficult to classify, develop, and apply rules and standards – and avoiding regulation is far easier than in traditional sectors.

5. The 'intellectualisation' – or even the 'softwarisation' – of the economy is also becoming more complex. The greater the number of links in the chain between the original resources and end users, the harder it is to understand the connections between activities and their results. The abundance of intermediary links and processes creates a favourable environment for intellectual manipulation and the creation of new ways of generating a profit 'out of thin air'. Business is being penetrated by the parasitic practices of unchecked bureaucratic structures: growth and multiplication through the artificial stimulation of needs, immunity from external control, and the creation of an air of mystery around their own activity. Products and production are becoming increasingly complex and immaterial, thereby rendering them opaque for most people.

The move towards a higher proportion of 'intellectual' components in final costs only reflects in part actual growth in expenditure on R&D, the acquisition of patents, etc., in the production cost structure. To a large extent, the shift reflects a change in the structure in consumer demand evolving towards services and 'innovative' products. This shift is not spontaneous. It represents the active influence of big multinationals on the collective consciousness – in this case, consumer consciousness – with the means to roll out powerful promotional campaigns and create global distribution networks for their products.
6. The new international division of labour is deepening. The 'new economy' is located in rich and prosperous countries, whereas less profitable traditional industries are moving to countries with cheaper workforces and far less stringent environmental regulations. Intellectual property – trademarks, patents and exclusive rights to provide a number of services – is acquiring more and more significance for the prosperity of wealthier countries. This also affects the prevailing ideology in the West. Instead of aspirations for equal opportunities and a reduction in the gap between countries, there is meritocracy, a minimisation of redistribution, and exceedingly liberal economic relations applicable to the international economy.

7. A quarter of a century has passed without the threat of a global war. The threat of war objectively spurs the whole of society to limit individualism in the face of common objectives, to adopt a greater level of self-discipline and implement rigid controls in the interests of survival. The illusion of the absence of an external enemy has given free rein to a 'convenient' foreign policy that pays no attention to either the longstanding rules of the game in international relations, including formal legality.

Over the past decade it became particularly perceptible that after the destruction of the bipolar world, there was no longer any need to promote the ideas of justice and equality. Even though this was to a large extent hypocritical, it was still extremely important for the structure of life. This is the basis of propaganda in support of absolute meritocracy that stretches credulity: for example, 'the poor are to blame for being poor'; 'wealth is a natural reflection of the worth of individual people and entire nations'. Furthermore, it is no longer important how riches were obtained through certain "services", while the receipt of rental income and speculative income is perceived as honourable and dignified - 'creativity' is preferred to usefulness and effectiveness.

8. The picture painted for society by mainstream economic science, or to be more exact, social sciences, bears less and less resemblance to reality. As a rule, this picture disregards the fact that the economic system itself must rely on in-built non-economic moral imperatives in order to function normally. Without non-market values in the world such as honesty, respect for the individual, and aspirations to create social entities, there would not even be a market based on contemporary understanding of the concept. The overwhelming majority of economists are embedded in the system. As a result the so-called 'expert community' has become no less venal, passionate and inclined to profiting from people's ignorance and weaknesses than business and bureaucratic groups. Meanwhile tell-tale signs can be discerned in turn: a comfortable existence, regalia, good positions, and a certain level of social status and recognition.
New Yorker, May 11, 2017
9. The move from post-industrialisation to postmodernism is accelerating. The latter is understood to mean aspirations to discard intelligibly concrete meaning and transform means into the end. In economic terms, this implies that production and consumption are trading places: the producer does not exist for a consumer independent of production: on the contrary, the producer now creates the consumer that it needs, shaping the requirement for this product, whether goods or services.

The economic mainstream proceeds from such logic: any activity generating income counts as real economic activity constituting a fully-fledged social product. In other words, anything generating a profit is therefore effectively moral and useful. The most important principle 'Anything beneficial merits adequate payment ' has been replaced by another one: 'Anything with a price is beneficial and therefore duly requires payment'.

Furthermore, insofar as the most effective form of business is connected to the generation of the maximum revenue at minimal cost, it transpires that the maximum efficiency, in other words, the ideal business activity, is to derive income from 'intellectual property', such as trademarks, technology, and techniques used to shape consumer consciousness, needs and standards artificially inspired by consumer behaviour. In the listed instances, the costs of the 'manufacturer' of such products may be close to zero, while the income can be infinite. Accordingly, efficiency – understood as the ratio between income and expenses – can attain truly fantastic proportions.

The past half century shows that it is not only the individual, but also society as a whole that has become susceptible to targeted marketing. The entire 'new economy' is essentially built on the premise that the needs and preferences of the consumer are not a given and that they can be affected and even be shaped as one sees fit. Accordingly, business does not have to adapt to society. On the contrary, society can be significantly adapted to business.

Initially when advertisers discovered this fact, they did not accord any theoretical structure to their observations. Then it transpired that political technologies could be built on this basis, and subsequently vast new markets could be created for business as well, provided that work with mass consumers was organised correctly. And this results in the irrational cult of innovations and high-tech and the thesis that the only right commodity is emotion, as the consumer essentially does not pay for 'bits of hardware' or 'rags', but instead for the satisfaction of owning the source of his own 'coolness'.

While society only has a fragmented understanding of the situation, once it has crystallised, this will mark the advent of an epochal revolution in the economic history of humanity. This revolution is comparable to the transition from a hunter-gatherer society to industrial production.
November 3, 2017
People line up to buy new iPhone X at the Apple store in Eaton Centre, Toronto, Canada
10. Against the backdrop of growth in ever more diverse types of consumption, points of reference such as professional career, public recognition and reputation within the framework of professional communities are becoming less and less significant. The occupational and social structure that developed in the second half of the 20th century is disintegrating, along with its corresponding traditions, conscience, rules, and ethics. The old communities are disappearing – professional, territorial, and cultural, and also based on a shared economic life – whereas the new communities are fluid, virtual, and not sufficiently profound to steer life towards a set of intelligible rules. In the West, several generations have grown up for whom the struggle for existence through hard physical labour is an abstraction. The influence of a traditional work ethic and the sense of personal responsibility for life's basic material conditions are waning in society.

At the same time, a new mass economic class of IT specialists – programmers, systems administrators, hackers and so on – is emerging. As the proliferation of new technology continues apace, individuals and companies find themselves dependent on IT specialists. Thus, a new social division is arising between the holders of sacred technological know-how and everyone else, a knowledge gap that can lend itself to different kinds of fraud, making the distinction somewhat criminogenic.

11. And last, but not least there is one very simple but at the same time key axiom for economic growth and development: morality is the most important part of economic life. This is not a reference to individual morality and personal qualities, but rather public morality representing the informal rules that need to be observed in the interests of survival, self-preservation, and success in life. However, for more than half a century public morality has been ignored by politicians, society, business and the mass media. Unfortunately, the attitudes couched within this axiom have been constantly degraded over the past 50 years.

Public morality – as a rule of life – and economic mechanisms are inextricably linked: each is part of the other. Market capitalism is tightly bound to social morality through trust in social and economic institutions. Without trust, the market only functions in its most primitive form. Without trust, the currently complex economic system finds itself paralysed, something which is most perceptible in times of crisis. Conversely, the higher the level of trust in institutions, the more active and efficient the workings of the economic machine. Trust, to an extremely significant degree, is a product of social morality. Through a system of moral restraints, trust prevents society from committing dishonest acts, without necessarily involving the law-enforcement agencies.

Accordingly, the decline in morality lessens the effectiveness of the system. Furthermore, the link between these two phenomena has a dynamic character: when the economic situation begins to worsen and a crisis is brewing, the conditions of public morality as a rule also worsen, which in turn only brings the crisis even nearer.
Wall Street symbol, The Charging Bull chewing US dollars
BRYAN R. SMITH/AFP/Getty Images, Oleksandr Kuznetsov/iStock, studiodr/iStock
These considerations follow, inter alia, from the crisis of 2007–2009. Of course, there were objective premises for the crisis a decade ago: both cyclical price movements and stock market bubbles, which arise periodically and inevitably – and which burst just as inevitably. However, if everyone had done what they were supposed to have done, as prescribed by a sense of duty and conscience, such a crisis could have been averted. Candid recognition of this fact can be found in the well-known landmark report from the Financial Crisis Inquiry Commission. Furthermore, virtually everyone who wrote seriously and in detail on the financial crisis remarked that the scale of abuse and downright deception in this sphere had grown openly and substantially over the course of two decades leading up to the crisis.

Today, at the start of 2019, the key issue is that all the monstrous phenomena identified as the direct causes of the financial crisis ten years ago – which include the dependence of jobs and income in developed countries on the volatility of the financial markets, lax regulation, the dominance of the financial lobby, and the irresponsibility and impunity of senior management – are not only still in place, but are also growing. This demonstrates that the roots of the problem remain and that the situation, to all intents and purposes, has not changed.

Therefore, it needs to be acknowledged that in this time of a fourth industrial revolution and the profound qualitative changes in the socio-political life of society, the economic and social model that now holds sway in the developed world is far from as perfect as one might be led to believe. If society and the state are incapable of fulfilling their functions to secure a safe and prosperous future, it is not because people have become worse, in that 'they have left God behind', 'they have no conscience', etc. It is because the economy is now different and the outside world has changed, while politicians and ruling elites, judging by the decisions that they have made, have not only failed to eliminate the causes of previous crises, but have also qualitatively failed to grasp the new trends in global economic and political developments.

To put it succinctly, the root cause of the approaching crisis is not only to be found in cyclically recurring problems, but also in the qualitative shift that has changed the face and nature of capitalism today (to find out more about these changes, please see Realeconomik: The Hidden Cause of the Great Recession, Yale University Press, 2011). These upheavals not only leave their mark on the economy. Combined with the fruits of the fourth industrial revolution, they are altering humanity itself. Failure to acknowledge these upheavals makes it impossible to avoid global economic crises, or even to rule out the possibility of large-scale war. It also makes it impossible to engage in the conscious construction and active creation of our future.
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