Capitalism is in an induced coma. When the crisis is over will a simple kiss awake it like Sleeping Beauty? Or will ‘all the king’s men’ be puzzling over ‘how to put Humpty together again’?
The more it is demobilised the harder the restart
It is not too difficult to see that the longer and deeper the economic demobilisation, the greater the uncertainties of how to restart the system. The deepening demobilisation threatens the survival of more and more parts of the system.
A simple rhyme sums up the basic rules of running a business
Turnover is vanity
Profit is sanity
But cash is king
Any fool can generate turnover. If you sell at a loss you get turnover. Making a profit is harder. But hardest of all, in the short run, is managing your cash flow. Without this even profitable companies go under. Now a huge number of companies have little or no turnover, little or no profits and money flowing out faster than it is coming it. This is a recipe for bankruptcy.
And when it begins to improve it will not be easy. The ending of the medical lockdown will be gradual and any wider return to ‘normal’ may be slower still. Human movement will be easier to bring back to life than economic movement.
Capitalism will have to be politically reconstructed before our eyes.
People have said before that things will change and they have not. Some will fight like furies to get back to how things were. So politics matters.
But how do they do it economically? Let us focus on the problems of a narrow return to the economic ‘normal’.
Can global capitalism come back quickly?
The international movements of goods, capital and people are still shutting down. Only technology in the form of knowledge may be moving faster. Given the human movement restrictions that will remain in place it is hard to see the international economy exploding back into life.
The balance of power and coordination problems will be greater. After 1945 restoration was helped by the hegemonic role of the USA. Today no one country will be able to play the same role not only because of ‘national interest’ but the lack of a means to underpin even a Marshall Plan type boost from a dominant power.
A restoration of a more national capitalism?
Economists love thinking about the money supply, inflation, interest rates, growth, employment. These are aggregates that can be manipulated in models They are less good about thinking about the nitty gritty of how an economy and business actually works.
Let us use the simple language of demand and supply.
Demand is the easier problem but still hard. There is a lot of money sloshing around the system. Restraining spending is going to be a serious short-term problem as people try spend, spend, spend.
Restoring Supply is the bigger issue
But who will supply? We can crudely divide the economy into five sectors
- Those sectors and companies which are managing to sustain activity albeit with major adjustments to what they do – say supermarkets and some parts of their supply chains.
- Those sectors that are keeping going but being forced to do things that may not be needed when ‘the war so over’ – think of those supplying the NHS, even parts of the financial system etc
- Those sectors which have been kept going by current or future bail-outs – from transport to universities
- Those sectors and companies which have been furloughed – think airlines, tourism.
- Those companies which have and will go bankrupt – you can name them.
Short term recovery issues will be formidable. There will be simple cash flow problems. Behind them will be the issue of supply chain restorations – not simply the logistics but production.
How can the bankrupt come back?
For the furloughed, past business models may simply not be possible It is difficult to imagine international travel or international education recovering quickly. Where now for outsourcing? What of pension funds?
Remember too that capitalism is a linked system so take down one part or fail to restore it and the viability of other bits remains at risk.
Linking Demand and Supply
Supply and demand need to have be put back together. Despite the textbooks this does not happening magically. How will this be done and what are the rules? Can you restore the housing market without first determining the rules on which the finance industry is restored?
What about state expenditure? The issue is not just its level but the model. Take local government in the UK. Rightly or wrongly business rates have been seen as an essential prop of local government funding. Will they be restored overnight? Probably not. So, can local government get back to the old funding model? Probably not.
Many rules have been suspended. Deregulators love this aspect. Less’ red tape’, fewer rules work etc. But will anybody want to follow their advice economically if a free for all was seen to add to the remobilisation chaos?
In arguing this I am certainly not complacent. ‘Really existing capitalism’ has deep roots. But it is important to understand the extent to which, like Humpty’s shell, the system is cracking. No one predicted this type of break up but this is where we are.
A kiss will not do it. Those who want to get back to the old ways will need a very clever ‘to put it back together again’.