On the Road to Elysium When fiction approaches fact

The 2013 movie Elysium depicts a dystopian future of unremitting, jarring poverty juxtaposed with serene, detached wealth. Literally detached: wealth resides in a lavishly equipped, lebensraum-furnished space station, high above an impoverished, exhausted Earth. The planet is only useful as a source of provision and maintenance for the space station; its fruits have been extracted and depleted, while the population is mainly left to its own devices, an excess labor force without the capacity to sustain a decent standard of living, the only purpose of which is to serve the elite floating high above.

It is a haunting image, as it should be. And, admittedly, an extreme one. But it resonates – because in this day and age, the gap between rich and poor has been steadily widening, bringing the Elysium scenario within the realm of the plausible. The purpose of this article is to explore how this has come about.

For starters, the problem with the world system as currently configured is that it divorces consumption from production – a recipe for disaster. For consumption needs to be funded, and there are only two ways to do that. Either produce, or borrow. The modern world has chosen – or, our betters have chosen – for the latter.

In the ideal economy, production and consumption are in a circular flow; supply creates its own demand. Production is in equilibrium with consumption, and pays for consumption. There are neither gluts nor shortfalls.

Of course, this is unrealistic. No economy is a closed loop like this. First, as discussed in the accompanying course as well as in this article, the so-called “problem of saving” makes its appearance, and complicates matters. This leads to two markets, not one – the ordinary market of production and consumption, and the financial market of credit and debt. This two-market framework is a natural outgrowth of the money economy. There is no ultimate disconnect between production and consumption here: the monies that flow into the financial market eventually flow back to the ordinary market in one way or another, closing the production-consumption loop.

But in the modern world system the circular flow of production and consumption is purposely disrupted. This is the heart of what is wrong with the world economy today. It is the issue that urgently needs to be addressed, because it is producing a time bomb that eventually must go off, with unforeseen and unfathomable results.

The disruption of production and consumption is primarily visible in the balance of trade. Nowadays, trade relations are characterized by sustained, sizeable imbalances. The inevitable byproduct of these imbalances, and what makes these imbalances so lethal, is debt. In a previous article, I wrote: “Trade imbalances have to be ‘financed’: in other words, they are paid for by debt. When trade imbalances are incurred, the countries running trade surpluses are also exporting capital: this is called a capital deficit. What they are doing is exporting demand, by exporting excess savings. To put it bluntly: they are extending the credit to the consuming countries that these countries require to buy their production.”

These countries are exporting demand. What does this mean? It means they are seeking to sell production, not to their own, domestic consumers, but to foreign ones. They are disrupting the circular flow. In a normal situation, they would not be exporting demand; domestic demand would match supply; they would be buying what they sell. Of course there are always surpluses and deficits, because no economy is entirely closed. But the sustained effort, the policy decision, to “export demand,” which means to shift consumption abroad, would not exist.

How do they do this? By suppressing domestic consumption. In other words, domestic producers are not being allowed to enjoy the fruits of their labor. The demand they otherwise would generate is being taken from them. Normally this would result in overproduction, a glut of goods and services, and prices would adjust accordingly, falling, bringing the unbalanced situation into equilibrium. But through various manipulations outlined here (under the rubric of currency manipulation), domestic production is put out of joint with domestic consumption, the producers are robbed of a portion of their earnings, and the shortfall is made up for by foreign consumption, which picks up the slack.

Why do they do this? Why engage in a conspiracy against the domestic economy in order to promote exports? Back in the late 1800s, the British economist John Hobson already had an answer. For him, British imperialism was a net loss, costing the country far more than it provided in terms of income or revenue. Not only was it prohibitively expensive, but it disadvantaged a broad swathe of domestic producers. Why engage in it then? His conclusion was that it provided an advantage to various vested interests – particular interests, as opposed to the common good – which in turn were able to influence policy in their favor. In other words, imperialism and colonialism subordinated the national interest to particular interests.

The same thing is happening today. Certain countries are pushing exports, generating massive trade surpluses year after year; while certain other countries are living beyond their means, running the mirror image of trade deficits, year after year. The usual mantra we then hear is that the exporting countries are virtuous, disciplined, hard-working, while the importing countries are lazy, decadent, improvident – but it would be more accurate to characterize each as victims of a regime, which exploits both ends of the trade equation.

The transnational capitalist class (TCC – of which more here), composed of various manifestations of “Davos Man,” is the ultimate beneficiary. By engaging in this debt-funded, imbalance-riddled economic system, it is able to funnel the surplus value generated by forced savings into its own pockets, while allowing various debt mechanisms to provide for the indispensable consumption that enables this gravy train to keep going.

In other words, a significant portion of the ever-burgeoning global debt burden is simply the flip side of an equally significant sum of profits disappearing straight into the pockets of our modern-day benefactors, the global corporate elite, along with their cronies, facilitators, and enablers in their various support roles in government, politics, academia, the entertainment industry, and the news media. The tab will be paid by future generations, when those various debt instruments come due. Après nous, le déluge.

This is the source of the widening gap between rich and poor worldwide. This is the road to Elysium.

How is this debt-funded consumption sustained? Let the reader understand: this is the key to the modern political scene. This arrangement, this racket, runs through a political system revolving around identity politics. This is what makes the gimcrack mechanism go. Identity politics, as I outline here, serves to defuse and divert opposition to the global capitalist regime. It deflects leftist agitation away from its home base, the class struggle, toward the safe – for hegemonic capitalism – alternative of identity politics. In fact, it serves as a key brick in the edifice of this hegemonic capitalism, for identity politics dovetails precisely with the culture-ideology of consumerism that locks peoples and nations into their economic roles within the system.

It turns out that identity politics provides the justification, under the guise of “human rights,” for never-ending deficit spending on entitlements. In other words, not only does it foster the ideology of consumerism, it also provides the legitimation for debt-financed consumption, which is the key to maintaining the gravy train of profits into the pockets of Davos Man.

In this age, respect for human rights is considered the sine qua non of civilized society. But what are human rights really? An understanding of their origin sheds light on their conflicted character. They came along during the “Age of Enlightenment” of the 18th century, to take the place of religion as the source of law. As I wrote back in 1995:

Religion was relegated to the privacy of one’s own conscience. It was therefore also removed from any influence on public life. What replaced it, in early liberalism, was a focus on property rights; when that produced alienation, the focus shifted to collective property redistribution. These are modernism’s first principles, and they are Epicurean, materialist, consumerist. Both foci, property and redistribution, have at their core the consumerist individual. It is consumption – appetite – which this society worships. Human rights mean that each individual has the inalienable right to satisfy those appetites. To deny one such a right is to violate one’s integrity as a human being. When a conflict of appetites arises, or when appetite conflicts with a real right (such as with abortion), the strongest (i.e., the one with the best legal representation or the most effective propaganda machine) wins.

Hence, consumerism is not simply a function of households spending beyond their means. It is also a function of entitlements, as currently defined and implemented by welfare states. In his scathing indictment of rights-as-entitlements, P.J. O’Rourke was not far from the mark: “Freedom is not … entitlement. An entitlement is what people on welfare get, and how free are they? It’s not an endlessly expanding list of rights — the ‘right’ to education, the ‘right’ to health care, the ‘right’ to food and housing. That’s not freedom, that’s dependency. Those aren’t rights, those are the rations of slavery — hay and a barn for human cattle.” If this sounds harsh and unfair, think about it. These are the rations of a peculiar form of slavery – to an unseen hegemonic power holding the nations in its sway. We are satisfied to eat the crumbs falling from the table of the TCC.

Government-financed “discretionary spending” keeps the boat floating, even when jobs are scarce and salaries are stagnant, and households have maxed out their credit cards. The economies of the consumer countries have for years had their production capacity hollowed out as with numbing regularity jobs have been shipped overseas. This has had the inevitable effect of producing a structural shortfall in purchasing power. This shortfall was first made up for with the real estate bubble of the early 2000s, but since the crash, it has been maintained by massive deficit spending on the part of the Obama administration.

How the pie is divided up, and who gets a seat at the table, now turns out to be a crucial factor behind the identity politics agenda. The government now plays the role of benefactor to various disadvantaged groups, which are encouraged to develop and maintain an identity precisely as disadvantaged groups, in order to form a consumption-based coalition to 1) maintain the power of the ruling elite (in other words, deflect and coopt the class struggle), and 2) maintain demand for below-market global production, thus keeping the gravy train going.

In the current US political constellation, African-Americans are perhaps the key members to be mollified in terms of this “coalition management.” African-Americans have been whipped up into a frenzy of anti-authoritarianism (mainly against the police, but also against the white majority generally) which seemed a bit odd to those of us who thought that the worst aspects of racism were behind us, but who now have almost been led to believe that racism has never been worse. The plot thickens when one realizes that groups like the Ford Foundation and George Soros’s Open Society Foundation have contributed tens, if not hundreds, of millions to the major front group for this movement, Black Lives Matter. Knowing what we now know, it would appear that this is yet another effort to shunt a disgruntled voting bloc away from dangerous activity (such as voting for a presidential candidate who wishes to confront the system as presently constructed, rather than maintain it) and back into the safe confines of identity politics, in which factions vie with each other for favors, rather than with the central power for justice.

The timing of the emergence of the Black Lives Matter movement lends credence to the notion that this agitation has been part of a strategy of coalition management. The death of Trayvon Martin in 2012 can be seen as a watershed in this emergence, for it was soon after that the #BlackLivesMatter hashtag first made its appearance. But it wasn’t until the death of Michael Brown in Ferguson, Missouri, in August 2014 that things became heated. This was followed by the incidents involving Freddie Gray in Baltimore and Eric Garner in New York. By now this has generated an all-out attack on policing specifically and the allegedly racist character of white society generally, with incidents of attacks on both becoming a drearily repeating spectacle.

What is curious about this, again, is the timing. For the so-called “new wave” of immigration began at roughly the same time. Reports of this “new wave” began trickling in in 2013. This new wave of immigrants, bolstered by a massive influx of children (itself spurred by Deferred Action for Childhood Arrivals, President Obama’s 2012 initiative to provide illegal immigrant minors), produced a surge in numbers of new immigrants, both legal and illegal, in 2014 and 2015.

In terms of coalition management, this influx creates problems. The two groups, illegal or unauthorized immigrants and African-Americans, compete for the same jobs and the same benefits from government. That the administration and the Democratic Party is promoting and indeed sponsoring the wave of immigration has the potential to not sit well with existing coalition members like African-Americans, or the working class generally. Therefore, it would seem entirely plausible that, to deflect attention from this conflict, the African-American community has been stoked with allegations of rampant racism, making use of every plausible such incident to reinforce a general narrative that the enemy is not a competing coalition member, viz., immigrants, but the Other, those outside the Democrat coalition, or in other words, whites, conservatives, the police, Christians. This is a matter of speculation; perhaps Wikileaks emails will shed more light on the decision-making process.

Regardless, this is what coalition management  in the age of identity politics looks like.

There is one more aspect that deserves highlighting, and it is connected with the need to maintain consumption levels in Western countries. The phenomenon of mass migration, encompassing both immigration and the influx of Middle Eastern refugees, runs contrary to the national interest of the target countries, and the widespread opposition to the scale with which it is being conducted has fed massive unrest against the ruling class. What is being missed in all of this is that these newly imported populations constitute fresh sources of consumption, regardless of whether employment and thus purchasing power is available for them or not. For in the age of human rights and the welfare state, consumption will be maintained, whether by production or, as we have learned, simply by mortgaging the future through deficit spending to maintain entitlements. All of these migrants can consume much more of that below-market production if they are ensconced in the rich Western countries than if they remained in their countries of origin. In this manner the gravy train keeps chugging along.

This is how we have embarked on the road to Elysium. Debt-funded consumption is combined with structurally low-wage, low-regulation, environmentally-unfriendly production. It is a massive engagement in transactions of decline which unchecked will lead to a situation in which the Elysium of science fiction will increasingly approach reality.

The Problem of Saving

When Schumpeter writes, “Now to the question: what is a savings account?”,[1] he is not being facetious. There is more to savings than meets the eye. Of course, the bare fact of saving is simple enough to understand. Rather than spend all of our earnings, we take some and put it to one side. What could be more straightforward?

Actually, the problem is not so much understanding what savings, or a savings account, is, but what kind of effect it has. And that is anything but straightforward.

Essentially, what is accomplished with the act of saving is the removal of circulating medium from the cycle which is what an economy is.

An economy is a cycle or a circular flow: this is one of the first lessons of basic economics, encapsulated in the principle originally put forward by Jean-Baptiste Say, “supply creates its own demand.” All this means is that, at the end of the day, the producers are the consumer and the consumers, the producers. It is the same people producing who do the consuming, and vice versa.

At least, this is the basic picture, before things get complicated with things like foreign trade and fiscal policy. And things like savings. For what savings does is remove some of the circulating medium by which this economic cycle does its cycling. There are two aspects to the cycle: the circulation of goods and service, and the accompanying circulating medium by which the goods and services are accounted. When a shortfall of the circulating medium crops up, the result is deflation. And so, saving on the face of it has a deflating effect on wages and prices. And a deflationary environment is noxious to economic growth.

As a result, we have what economists have dubbed the “paradox of thrift” whereby saving, normally thought of as an act of economic virtue, or at least efficiency, actually depresses economic activity. The details as to how this occurs differ depending on the analyst, but the upshot is that saving, far from being the benign, even constructive act that it may well be on the personal level, actually has, or can have, a negative effect on the economy at large.

So which is it? Do we really have a paradox here along the lines of moral man, immoral society? Is personal saving something good for the individual or the household or other economic entity, but bad for the economy at large?

To figure this out, we have to take a look at what actually happens in the act of saving. First, of course, there is the proverbial mattress, or, especially in the days of coinage, the chest. In such a case, we have the circulating medium definitively removed from the economy for however much time the saver desires. (Or for much longer than that, as witness contemporary discoveries of hoards of coins from e.g. Roman times.) We can call this form of saving “hoarding.” It is peripheral to the main discussion.

What happens in the modern world is something different. When we save, our first resort is not the mattress but the bank. And when we do this, our money earns interest. What is interest? Let’s just say that is another of those phenomena that economists have a hard time figuring out. Perhaps we can address that subject in a future article. For now, we mention it in passing with the caveat that in the contemporary zero-interest-rate environment, it is not the incentive for saving that it normally might be.

So we put our money in banks. What happens then? Does it just sit there, like in the mattress? Not in the modern system. Instead, it enters into a second market, which runs independently of the market for goods and services with which we are already acquainted. We speak of the financial market. Banks (and non-bank financial institutions) are the gatekeepers of this market. We include a graphic taken from the accompanying course to indicate the structure of this second market.

Figure 3:  Two Markets, Two Monetary Circulations
Figure 1:  Two Markets, Two Monetary Circulations

Savings, then, go into this market, where they are “put to use” to earn income for the bank or other financial entity. The differential between what these latter entities earn and the interest they pay out is their profit.

What happens on this market? There are several submarkets which determine this. The bond market is where corporate and government borrowers go to get ahold of some of these savings. The stock market is where corporate interests go to sell stock in their companies – the money that goes here is not savings in the strict sense, as is money lodged with banks, but it does fall under the same category of earnings set aside to earn a separate income and to be available for future use, so we include it in our discussion.

“For future use” – this already indicates that the so-called paradox of thrift need not be so paradoxical. The writers on the problem of saving often seem to talk as if the money put into saving will never come back. In fact, the whole point of saving is to put earnings aside for “a rainy day,” or for the later purchase of big-ticket items, or for retirement – at any rate, not to eliminate it but to return it to circulation at some future time. And in a developed economy, over time the money put aside as savings will be counterbalanced by money previously set aside as savings and now returning to circulation. In addition, this money may have been supplemented by earnings on the financial market, which means that more money will be returning to circulation than left it. So on the face of it, this shouldn’t be a problem.

But there is a problem, and it is this. In normal situations this flow of funds back and forth between the ordinary and the financial markets is not problematic. But in the contemporary situation, it is.

One reason is because the ordinary market is being hit from various directions, making it unproductive and therefore unattractive. Firstly there are what Jane Jacobs (see this post for more on her) called “transactions of decline,” in which government removes money from productive activities, precisely because they are productive, and redistributes it to non-productive activities, precisely because they are unproductive. This can have a Keynesian motivation, whereby Say’s Law is turned on its head: demand then creates its own supply, and all government has to do is distribute money around to consumers (breaking the link between production and consumption) to generate productivity. According to Keynesians, this should in and of itself bring about prosperity, but as Jacobs points out, it only undermines productive activity and the human capital that underlies that productive activity, and so becomes a self-generating downward spiral.

Other things government engages in that undermine productivity are excessive taxation and regulation. All of this makes the ordinary market an unproductive affair, in which risks exceed rewards. The upshot is that savers put their money, not in ordinary investment, but in the financial market, which essentially is a zero-sum game, but in which at least the prospect of a decent return beckons.

And so more funds flow into the financial market than flow out, creating a dearth of liquidity in the ordinary market, which manifests itself in low interest rates combined with difficulty in borrowing (despite those low interest rates).

The flip side of the dearth of liquidity in the ordinary market is a glut of liquidity in the financial market. As funds pile into the market, returns there diminish and the quest for “alpha” (market-beating returns) becomes a frenzy. This is what happened during the 2000s in the run-up to the credit crisis. With the excess liquidity in the financial market, funds were available for lending that never would have been lent in a normal risk/reward analysis, often under political duress. An example is the subprime lending that took place. Michael Lewis (see this post for more on him) wrote about this in two of his most important books, The Big Short and Boomerang (the latter in particular gives a dramatic picture of the workings of the liquidity glut).

This was exacerbated by the trillions of dollars kept in the financial market by exporting countries like Japan and China (see this post this post for more on this), in their attempts to hold down the values of their domestic currencies. That in itself added substantially to the glut. But the very fact that what these countries were doing– looked at globally – was further undermining productivity by destroying productive capacity in rich countries while misdirecting investment in their own countries, only meant that another nail was being driven in the coffin of the ordinary market. Such “global value chains,” when established and maintained through currency manipulation and other fiscal and monetary policies designed to create unfair advantage for exporters at everyone else’s expense, only make the ordinary market even less attractive, which is another reason for the flight to financial markets, and even to inert investments like gold and other luxury items such as works of art.

A lot of work has to be done to restore ordinary markets to decent functionality. One of these is a return to an emphasis on the national economy as opposed to the lopsided emphasis on global-value-chain globalism such as obtains today. And within the national economy, a return to emphasizing the production side of the economy. Consumption does not magically engender productive activity; in particular, deficit spending to fund consumption is as pernicious a fiscal policy as can be devised. Various forms of capital are needed for that, various forms of infrastructure, from legal to educational (virtue versus entitlement) to religious. All of this is fodder for new discussions, so we’ll leave it at that for now.

This topic and more are dealt with more fully in the accompanying course.


[1] Treatise on Money, p. 147.