The brave new world of finance-13: The new bubble cycle

(For previous posts in this series, see here.)

Karl Marx famously argued that capitalism, while being remarkably resilient in overcoming problems and capable of releasing enormous productive capabilities, also carries within itself the seeds of its own eventual destruction because of its incapacity to accept an equilibrium state. Capitalism requires that companies have to push for continuous expansion and growth and this leads to the creation of monopolies and instabilities that inevitably result in crashes. I never quite understood that aspect of the Marxist critique of capitalism. After all, why couldn’t a company, once it had developed a good product and business model, just continue to plug away at a steady rate of manufacture and sales and profits? Why did it need to grow and expand in size in order to survive? I know that it cannot simply stay the same since developments and competitors will leave it behind. I can understand the need to improve products, even change the product line, and increase efficiency. But why must there also be an imperative to increase market share and profit margins, which often means that one must take actions that are harmful in the long run? Is it caused by simple greed? It seems to be too simplistic to ascribe human emotions as drivers of macro-economic behavior.

Maybe the economists among my readers can explain the theory behind why this drive for growth and increased profits is an intrinsic part of the capitalist system. But there is no question that as a purely empirical matter, the drive for growth in market share and profits seems to be an inexorable law of capitalism, played out over and over again. One sees it in action everywhere, especially these days, as I have already discussed in reference to the newspaper and book publishing industries.

Stockholders demand it. And when I say stockholders, I am not referring to some evil anonymous entities. They are often us, indirectly. The managers of our own mutual funds, pension funds, and other retirement accounts are often the very people forcing the changes that I have identified as deleterious, and they are doing it in our names, in order to increase our wealth.

And therein lies the problem. When the people calling the shots in a business have little or no connection to the workings of the business itself, it seems like a recipe for disaster. Stockholders have only a marginal interest in the long-term health of the company they own. They can bail out at any time and as long as they recoup their investment with a tidy profit, they have no concerns about whether the company they abandoned goes bankrupt, leaving thousand of people, the now-unemployed workers and the communities that depended on them, badly scarred. The classic 1989 documentary Roger and Me that catapulted Michael Moore to prominence told the sad story of the rapid decay of his hometown of Flint, Michigan because of the decision of General Motors to shut down its production plant there and shift production elsewhere.

It seems to me that the current American economy is in terrible shape in a fundamental way although it seems to be doing reasonably well if looked at superficially. As a result of outsourcing and the rise of foreign production centers, the US is producing a smaller and smaller share of tangible goods for the world’s markets. Where the US seems to be growing is in the financial sector, the business of making money from money. But that seems to me to be a highly risky development. The more separated you are from the underlying source of your business, the more risks you run of creating ‘bubbles’, where entities are created that take on a life of their own.

I have written before of the tulip, Beanie Baby and dot-com bubbles. In an article titled The next bubble: Priming the markets for tomorrow’s big crash (Harper’s Magazine, February 2008), Eric Janszen argues that we seem to be entering a new era of business, where bubbles are a routinely recurring feature. Whereas in the immediate aftermath of the earlier big bubbles, financial regulators took steps to prevent repetition and those steps usually worked for decades, he says that things have now changed. Instead of the normal market cycles of growth and compression, the basic economy seems to have shifted to a fundamentally bubble economy, where one period of runaway and artificial growth in one sector is immediately followed, after it crashes, by runaway and artificial growth in a different sector. So the dot-com bubble was followed in less than a decade by the current real-estate bubble. And during these periods of growth, a few people in the financial and banking sectors make huge amounts of money and when the crash inevitably follows, governments are expected to pick up the pieces and to help the individuals who are the collateral damage.

Janszen’s suggestion that we are seeing a fundamental shift in business cycles from the tradition growth-and-compression to a bubble-and-bust one is truly disturbing since the people who end up getting buffeted and damaged the most by such big swings are ordinary people and taxpayers, not the big financial interests who cause the turbulence.

Next: What will be the next bubble?

POST SCRIPT: Encouraging news

A recent Pew survey suggests that more people are beginning to turn away from organized religion. (Click on the graphic labeled ‘Multimedia’ partway down the article for the detailed numbers.)

More than a quarter of adult Americans have left the faith of their childhood to join another religion or no religion, according to a new survey of religious affiliation by the Pew Forum on Religion and Public Life.

The survey also indicates that the group that had the greatest net gain was the unaffiliated. More than 16 percent of American adults say they are not part of any organized faith, which makes the unaffiliated the country’s fourth largest “religious group.”

In the 1980s, the General Social Survey by the National Opinion Research Center indicated that from 5 percent to 8 percent of the population described itself as unaffiliated with a particular religion.

In the Pew survey 7.3 percent of the adult population said they were unaffiliated with a faith as children. That segment increases to 16.1 percent of the population in adulthood, the survey found. The unaffiliated are largely under 50 and male. “Nearly one-in-five men say they have no formal religious affiliation, compared with roughly 13 percent of women,” the survey said.

The rise of the unaffiliated does not mean that Americans are becoming less religious, however. Contrary to assumptions that most of the unaffiliated are atheists or agnostics, most described their religion “as nothing in particular.”

I suspect that despite saying “nothing in particular”, many of those people are on the path to atheism or agnosticism but are hesitant to acknowledge it to themselves or to others, knowing how negatively such people are viewed.


  1. bob says

    In the near future, market speculators will create bubbles then sell out before allowing the bubbles to burst. We already see this on a very small scale with pump and dump stocks.

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