Редакция журнала «Позитивные изменения»
Позитивные изменения. Тематический выпуск «Экономика будущего» (2023). Positive changes. Special issue «The economy of the future» (2023)
The Present and Future of the World Economy. Forecast by Mikhail Khazin
Elena Avramenko
DOI 10.55140/2782–5817–2023–3-S1–78–89
A new column, “True to the Book,” offers our readers an introduction to the most important publications on impact investing, social impact assessment, and humanity’s economic development in general.
The article presented in this issue is based on the book “Memories of the Future” by the famous economist Mikhail Khazin, published in 2021. The book not only shows the evolution of the global economic system since the birth of capitalism to the present day, but also attempts to describe the world after capitalism ends. Elena Avramenko, a regular contributor to the Positive Changes Journal, prepared an overview of the key theses of this work.
Elena Avramenko
Expert of the project “Development of a Social and Economic Impact Assessment Model for NGOs” by the GLADWAY Foundation, Lean 6 Sigma Green Belt master
THE INEVITABILITY OF CRISIS
Of the many factors influencing the economic development of our society, Mikhail Khazin particularly singles out the factor of “deepening division of labor.” Increasing private demand creates the conditions for a more pronounced division of labor, and this, in turn, leads to an increase in productivity. These economic phenomena follow each other in a closed cycle, reaching a new level of technology with each new cycle. That is, economic development is directly related to the division of labor, but new mechanisms are needed each time to respond to a constant increase in demand.
In the course of the human development, certain ways of stimulating demand and reducing the producers’ risks have appeared. Increases in actual demand were linked to the development of new territorial markets – the “economic globalization.” Demand was also supported by the continuously increasing timeframes, as purchases were credited against the buyers’ future income. With this expansion of demand, an impending crisis of the capitalist economic model was inevitable. The increase in final demand has been swallowing longer and longer time intervals, and today the world economy has arrived at a state that one present-day American politician described this way: “We’re already out of demand for two generations ahead.”
Mikhail Khazin describes the prerequisites of the crisis, the current stage of development of the world economy and its likely future prospects in several theses.
THE DIVISION OF LABOR IS THE BASIS OF SCIENTIFIC AND TECHNOLOGICAL PROGRESS
“The modern capitalist economy is built on the supremacy of the division of labor. Accordingly, development within the current economic paradigm is the deepening of the division of labor, which is the basis of a development model called scientific and technological progress (STP). The prerequisite for this process is innovation, that is, emergence of new products as well as new ways of making old ones. The difference from previous models is that innovation has become an immanent (inalienable) part of the economic mechanism of capitalism.” [p. 405][92]
In this case, innovation is a natural and continuous process for any producer of goods or services. In a market economy, competition pushes the search for advantages, which are created by innovation, both in production technology and in marketing. And since innovations become a permanent part of the continuous economic process, their cost should be included each time in the cost of production. The added value increases and the pricing changes. It should also be noted that innovative developments require investment, which forces the manufacturer to come to lending institutions.
THE DEEPENING DIVISION OF LABOR IS A FINITE PROCESS
“The deepening division of labor inevitably entails greater risks for the producer, who must find its place in an increasingly complex production chain. If there are no mechanisms to mitigate these risks, then at some point further division of labor becomes impossible, and the system goes into a deep crisis. Accordingly, within an isolated economic system (not interacting with the outside world), the natural deepening of the division of labor can only develop up to a certain fixed level, after which returns on further innovation diminish and scientific and technological progress slows down at first and then stops completely.” [p. 405]
REDUCING THE RISKS FOR PRODUCERS IS THE MOST IMPORTANT MECHANISM IN THE STP SYSTEM
“At some point, development within the STP paradigm becomes possible strictly with the use of producer risk reduction mechanisms. Only four such mechanisms have been invented: income redistribution; producer lending (risks are partially transferred to the banking system and partially redistributed); expansion of product markets (reducing producer risks within the original economic system); consumer lending (producer risks are reduced by redistributing them among other participants in the economic process). The former two work at the micro level (i.e., they do not increase the resource of the economic system as a whole), while the latter two affect the macro level as well, i.e., they allow expanding the system as a whole.” [p. 405]
Mikhail Khazin describes in detail the producers’ risks in increasingly complex technological systems. They are first of all associated with lack of knowledge and uncertainty in the future relations with suppliers, customers and competitors. If a producer recreates merely a part of a complex process (product or service), then the buyers in a changing environment may be expected to replace its product with a similar, more suitable one, from another supplier, or similar goods will be produced by those who previously sold their components to that producer. That is why the producer is always neck-deep in the STP race.
Based on the paradigm of STP limitations, Khazin goes on to describe a specific kind of crisis arising from the limited opportunities for deepening the division of labor.
THE STP PARADIGM IS TIME-LIMITED
“Since the Earth is finite by nature, the market cannot expand infinitely. All other mechanisms reducing producer risks either redistribute them within the economic system or are time-limited. Consequently (and this is the main economic achievement of Marxism), the STP paradigm is also time-limited by design. As a consequence, capitalism itself is finite.” [p. 406]
THE TOPIC OF NTP GRINDING TO A HALT IS TABOOED IN TODAY’S SCIENTIFIC COMMUNITY
“Given the previous thesis, the development of Marxism since its emergence in the mid-19th century followed two main lines of thought: searching for new evidence and signs of the end of capitalism and developing models for building a post-capitalist society. But Adam Smith’s thesis quoted above about stopping the STP had been really elaborated on only until the beginning of the 20th century, becoming a taboo after Rosa Luxemburg’s death.” [p. 407]
ECONOMICS AS AN ALTERNATIVE TO MARXISM
“In the late 19th and early 20th centuries, the need to confront the Marxist thesis of the end of capitalism led to the creation of an alternative economic science, conventionally called ‘economics’. Its fundamental difference from the political economy of Smith and Marx is the strictest taboo on researching the demise of capitalism. Since Adam Smith’s thesis described above has not really vanished, economics used a different composition to disguise it: unlike political economy, which is built top-down from macro- to micro-economics, ‘economics’ is built bottom-up – from micro- to macro-economics. Because of that, many of the economic themes already elaborated in the 19th century are called into question again.” [p. 407]
A CRISIS OF DIMINISHING RETURNS ON CAPITAL IS INEVITABLE
“An inevitable consequence of the growth of the division of labor being limited in a closed economic system (once other fundamentally limited ways have been exhausted) is the need to expand it in order to continue the development. The inability to expand sooner or later results in a development crisis, which is fundamentally different from the traditional cyclic overproduction crises, described in more detail both within the political economy (mostly by the Marxists since the late 19th century) and ‘economics’. This type of crisis has been called the capital efficiency crisis (CEC), since it is manifested externally as a rapid decline in the possibility of capital reproduction and the ability to generate natural (i.e. not through redistribution) returns on the capital. A fundamentally important feature of the CEC is that it can only be stopped by substantially reducing producers’ risks, which is only possible by expanding markets!” [p.408]
The world economy has now reached its limits, and the expansion of markets has halted. The world is now experiencing CEC, as described by Mikhail Khazin. To understand the genesis of the current state of capitalism, Khazin performs a detailed historical analysis based on the concept of technology areas, with a deep dive into the history of the last two centuries.
TECHNOLOGY AREAS COMPETING WITH ONE ANOTHER
“The need to expand the economic system for continued development naturally leads to the concept of technology areas – that is, large self-sufficient systems of division of labor that support its deepening through constant expansion. The term ‘self-sufficient’ in this context means that the economic interaction between areas is much less pronounced than that within them, and therefore cannot be considered crucial. Due to the need to expand markets, the interaction of different technology areas inevitably becomes acutely competitive sooner or later, and their coexistence becomes impossible.” [p. 408]
This is followed by conclusions on the current global mismatch between expenses and income and the search for a model to overcome the crisis situation.
TO GET OUT OF THE CRISIS, WE NEED TO BALANCE INCOME AND EXPENSES
“Reaganomics resulted in structural disparities in the global economy (as of today, its entirety lies within with the American technology area) and in the United States growing to colossal proportions, most notably the divergence between the real disposable household income and expenditures (i.e. the standard of living), the latter being much higher. The crisis will continue until revenues and expenses are returned to a relative equilibrium, and the fall in expenses is expected to be about 30–35 % for the global economy, about 50 % for the European Union, and about 55–60 % for the United States.” [p. 410]
THE EXTENT OF DIVISION OF LABOR SHOULD DECREASE
“The reduction of income in terms of the division of labor corresponds to a reduction in the number of consumers, which means that the extent of division of labor must decrease. In today’s United States, real household income is at the level of the late 1950s, and it will decline even further as the crisis progresses. In fact, this means that the optimal level of the technology area will return to the level of 300–500 million people or even less (taking into account the digitalization of economic management).” [p. 411]
IN THE FUTURE, THE WORLD WILL BREAK UP INTO NEW TECHNOLOGY AREAS
“Since the current infrastructure (primarily financial one) of the labor division system was built for global markets, it will become unprofitable as demand falls (in fact, this has already happened, most of the international financial institutions and states live on money printer’s life support). This means that it will be economically profitable to break up the world into several new technology areas, which are likely to be created by issuing new regional currencies; I call them currency zones for this reason. Theoretically, in the process of crisis and post-crisis recovery, not all potential currency zones can finally emerge as full-fledged technology areas in the new, post-crisis environment.” [p. 410]
The author returns to the idea of dividing the world into separate areas, which follows from the established assumptions. Despite global stagnation, in his opinion, each individual area will be able to redirect its resources to internal development.
TECHNOLOGY AREAS WILL FIGHT FOR MARKETS
“Unless a new model of economic development, alternative to the STP, is invented, we are doomed to repeat the history of the twentieth century, i.e. the new technology areas competing for markets, that is, for the opportunity to develop further. However, this process will begin only after more or less independent areas are formed – in 20–30 years after the acute phase of the crisis ends and the minimal levels of aggregate demand are reached.” [p. 411]
THE ACCUMULATED KNOWLEDGE WILL FORM THE BASIS OF A NEW ECONOMIC PARADIGM
“The essential difference between the post-crisis situation, i.e. the competition of (relatively) independent currency zones, and the situation of the 19th and 20th centuries is that the existing economic theory will allow the zones’ elites to actively seek new paradigms of economic development. At the same time, of course, it must be understood that if the world were to break up into currency zones, capitalism would still be in place for at least a few decades.” [p. 411]
Mikhail Khazin predicted the disintegration of the global economy into currency zones back in 2008, and today we are seeing it becoming a reality increasingly fast. This raises a legitimate and very troubling question: what awaits us after the end of capitalism?
NEW WORLD, NEW VALUES
So, according to the prediction of Mikhail Khazin, the unified global system of division of labor will break up into independent currency zones. It will certainly cause a decrease in the division of labor, a simplification of technology, and a drop in living standards. But this is the only way out of the crisis, since there are no external resources left to maintain the old system.
Each region will recover from the crisis on its own, and to restore the economy it will have to stop siphoning off resources to its metropole and establish barriers to commodity and currency movement. Regions with excessive infrastructure will experience the greatest decline. Regions with insufficient infrastructure will be able to create it by limiting the withdrawal of the resources from the region.
In such a scenario, we can expect the global economy to roll back to the level of early 20th century. The only thing that inspires optimism in this situation is the development of technology in recent years. But all of the above does not mean that nothing good awaits the average people in the future.
Of course, once the world is divided into separate currency zones and technology areas, living standards will not rise immediately. But the humans are not about just economic activity. Along with the renewal of the economy, the system of values will also be renewed: the consumerist ideals will be replaced by the importance of personal and spiritual development. With a properly organized zonal economy, survival issues will be resolved, and excessive consumption will be replaced by a rational approach to the use of resources. The humans will have to think about why they came into this world, and stop the race of consumerism.
The new world might not turn out to be so bad, after all. In his book, Mikhail Khazin describes specific nuances of the post-crisis economy.
THE NEW ECONOMIC MODEL IS NOT THE USSR
As soon as we start talking alternatives to capitalism, associations with the Soviet Union are inevitable, since this state used to be such an alternative. However, Mikhail Khazin points out the disadvantages of Soviet socialism which are beyond any doubt.
“Is it possible to think of an alternative construct that can resist the capitalist model without falling into the trap of the Soviet system, which turned out to be too bureaucratized and rigid, ultimately causing its demise in the 1980s? <…> If we recall the basic points of criticism in relation to socialism and capitalism, they roughly look like this: capitalism has serious problems with social justice, while socialism, in turn, heavily restricts the personal activity of the people. Generally speaking, the most active people are not able to be active – first and foremost, in business. It is clear that these problems are largely related: it was the fear that a staunch, although talented, individualist would actively destroy the system of social stability that restricted him under socialism.” [pp. 415–417]
SOLIDARITY ACCUMULATION INSTEAD OF A CREDIT MERRY GO ROUND
Analyzing the strengths and weaknesses of building an economy alternative to capitalism in the USSR, Mikhail Khazin concludes that economic projects based on the solidarity accumulation as a source of lending can be successful in the new world.
“So, how did the particular state, the USSR, ensure the basic idea of the Red Project – the prohibition of private appropriation of the loan interest? Very simple: it took this income in favor of the state and then divided it the way it saw fit: partly to support the development of existing enterprises, partly to invest in new ones, partly for promising research. The cost of credit remained constant at all times, for everyone, the only difference being between the rates for businesses and individuals. And in order to prevent formation of an alternative system and accumulation of surplus capital, private ownership was prohibited… More precisely, it did exist in small and even medium-sized business sectors until the mid-50s (in the form of ‘artels’), and it partially could exist until the end of socialism in the form of cooperative entities, but it never played a major role since Stalin’s death. So there was social justice (relative, of course), but it was difficult to engage in any individual activity on own initiative, as there was no place to get resources from. This is when I started pondering about artels in particular. Where were they getting their resources from? Turns out they could borrow from the State Bank! <…> The fixed interest rate and the absence of private capital allowed them to take a rather proportional (i.e., fair) share of the wealth from everyone and thus contribute to the country’s economy. But this model is not specific for the USSR. If we talk about the present day, it is often used by conservative states to finance important projects. Japan does it most often, which, in fact, allows this country to have one of the largest debt-to-GDP ratios. But there are other examples, mainly those that can be called inclusive economic systems.” [p. 418]
PRIORITIZING THE LONG-TERM INTERESTS OF THE ECONOMY
Mikhail Khazin notes that the solidarity-based method of accumulation loses to the time-based one, and there are objective reasons for this. First, it is more difficult to use (it is always easier to arrange a loan than a collective investment in the real sector). Second, its procedure (collection and guarantees for depositors) is not as well-tuned as the banking system. Thirdly, the creation of Ponzi schemes is virtually impossible within that kind of economy. The solidarity-based accumulation may be worse from the expansion perspective, but it is more efficient from the perspective of the long-term economic interests.
“Can an economy that uses a purely solidary system of capital concentration win the competition with a capitalist economy that is known to be faster? As the example of the USSR showed, yes, it can. But only in the competition of large economic systems and global projects. At the level of households and small communities, the USSR was unable to compete with the West: the standard of living at the Soviet Union’s peak in the early 1980s was only 70 percent of that of the United States (in terms of purchasing power parity). At the same time, the psychological feeling of falling behind was even stronger, and it was especially strong for those people who should have been the leaders of the innovation process. The high extent of bureaucratization of life in the Soviet Union since the second half of the 1970s did not allow such people to reveal their potential: in fact, they were carefully locked out of the economic life. And if we recall that the sharp rise in living standards of the Soviet people that started in the mid-1970s was associated with the beginning of oil exports, the picture becomes especially sad. So why didn’t the USSR support an inclusive economy, an economy of small communities? We can assume many reasons, but the main one seems to have been that any private concentration of capital at that time was perceived as an attempt to undermine the proletarian state.” [p. 422]
TRUST AND CONTROL ARE THE KEY POINTS
Several generations of Soviet people have extremely negative experiences of investing in any projects: these include fraudulent Ponzi schemes, vouchers for enterprises that disappeared in the haze of the 1990s, and many other well-known cases. How does one create solidarity capital with this kind of attitude? Mikhail Khazin believes that the problem of trust can be solved by modern technology, which will allow people to control their assets.
“It should be noted that in a capitalist economy, where ‘homo homini lupus est’ is the main principle (such a system of relations naturally follows from the economic model of capitalism), the key problem of the solidarity system of capital accumulation is trust. Roughly speaking, how can you guarantee that the people you trust with your money (or other assets) will not grab the cash and run away to London? As a matter of fact, they often do. For this exact reason, this method is most often used by small communities, which clearly stand out from the general population, and this difference is causing them quite a lot of problems. That is, solidarity within this small system is of greater value to each member of the community. The Old Believers protested against the state-controlled church, certain national communities defend their identity, and other groups have other distinctive characteristics. As soon as this “friend-foe” identification disappears, virtually all guarantees disappear along with it. However, modern technologies like blockchain solve this problem radically, because they allow you to control your assets (and all other assets, given proper consent) in such a community in real time. In other words, it is possible not just to raise money for a specific project through crowdfunding (by and large with a complete loss of control), but to be much more seriously involved in the development of a new project. Moreover, if such a model is applied on a mass scale, it will begin to stimulate new social technologies. These will be designed not just to raise money for a project, but to raise it within a certain community of people who are interested in this project, for financial and also other reasons. In other words, the key to raising resources for new projects will be social construction, the creation of new social groups and constructs. At the same time, this system must inevitably be combined with lending (since working capital lending hasn’t gone anywhere), but the latter can follow the Soviet policy, i.e., being carried out through a state bank, which will issue loans at a fixed rate and under a fairly universal procedure.” [p. 424]
SOCIO-TECHNICAL PROGRESS INSTEAD OF SCIENTIFIC AND TECHNICAL PROGRESS
Our thinking is largely shaped by capitalist ideas, and a set of stereotypes prevents us from giving the new scenario of economic development an unbiased look. But we should definitely understand that time will change and we will change accordingly. The scenario outlined by Mikhail Khazin will take years to develop, and the movement toward the new reality will be very gradual. This movement will probably result in the creation of a new system of social relations.
“Note that such solidarity projects will be quite limited at the start, as it will be difficult to concentrate a large amount of capital. This is also due to the fact that the legal and technical procedures for monitoring and protection of the participants (they are now more than just depositors) require a fairly serious elaboration, but as the system develops, those can become quite serious. In fact, the banking system and the corresponding legislation have also been developing for quite a long time, many hundreds of years. So the solidarity system of capital concentration has a rather long and complicated way to go. We should also note that this model removes the problem of connecting innovation to value: since investment in innovation under this system is free of charge, it does not increase the cost of the finished products. And if an industry fails to raise sufficient capital, innovation in it simply stops for a while – until appropriate social technologies and projects can be invented to raise money for them. A solidarity-based concentration of capital allows both the new social models to be constructed. where virtually any individual can participate in a variety of projects and groups of interest, creating an entirely new reality. That is, theoretically, it will be possible to say that a society built on scientific and technological progress will shift to a society built on socio-technical progress. And it can create the new human and a new system of social relations even faster than the USSR tried to do.” [p. 425]
THE VALUES ECONOMY
According to Mikhail Khazin, the old system will resist, but will unable to compete with the new system, which has numerous advantages. One of its undoubted merits is its reliance on shared values in economic projects. Of course, there will still be fraudsters on the way to forming solidarity capital. But it is the state that has to take the lead in regulating the matter of new values.
“In particular, we will have to very careful and diligent in describing the relations between the participants of such projects and the system of their management (managers), as well as opportunities for the participants to withdraw and make a profit. But still, the most important feature of this system is that it is free from the problems associated with the time-based concentration of capital (lending). First, because it does not project itself into the future, and therefore is not strictly pegged to the growth rate. The new projects will slow down when savings are in short supply, and speed up as they are in the surplus. Managers will not be required to make a profit and provide capitalization until a fixed deadline. And critical industries will be shaped by the state, much like the military industrial complex in the USSR/Russia. Second, since it includes not only the economic but also the social component, it will force the society to structure itself in a way that brings it closer to the most constructive value-based systems. Roughly speaking, the most responsible and honest people will prosper, while fraudsters and swindlers will face serious problems. First of all, the reason is that the first thing a person trying to raise 10 million for its project will be asked is to present previous 1-million projects. And if they cannot answer, or the answer is not satisfactory… <…> Third, since the cost of investment in such system is zero, the borrowings are actually concentrated from savings, as under feudalism. As a consequence, it does not project itself into the future, it cannot have a situation in which the volume of investment in the production sector becomes so large that repaying it results in a future crisis. By the way, it does not prohibit the lending-based acceleration of private demand at all, this tool can theoretically be used too. But investment funds and banks, which invest in the fixed assets of enterprises out of money encumbered with almost mandatory returns, should be banned. At the same time, loans secured by participation in solidarity projects should also be prohibited. In fact, this model is free from the problems that inevitably limit the lifespan of ‘classical’ capitalism.” [pp. 427–428]
Thus, scientific and technological progress and the capitalist economy must become a thing of the past. We are facing the next stage of economic development, which Mikhail Khazin calls the socio-technical progress.
TO BE CONTINUED…
No matter how hard it is to live in interesting times, we must have the steadfast intention to find new models that can lead us to success given the circumstances. One of those models is proposed by Mikhail Khazin in his book and discussed by us in this article. Do we want to change along with the world and change the world for the better, or do we go with the flow and grieve about the past? The choice is up to us. Even if we are not yet free from the global political developments, we can already begin to redefine our internal values, so we can live happily outside the consumerist society that is coming to an end.
