PART 1. CAPITALISM'S CONTRADICTORY CHARACTER

Most disputes are due to the fact that there are many scholars, and many ignorant men, so constituted that they can never see more than one side of a fact or idea; and each man claims that the aspect he has seen is the only true and valid aspect.

(Honoré de Balzac, letter to Don Michele Angelo Cajetani, Prince of Teano, dedication in Cousine Bette)

1.1 What is 'Globalisation'?

The recent explosive changes in the world business system constitute a surge forward of capitalism to a global scale. However, despite the dramatic advance of capitalism, it constitutes only the most recent stage in an evolving process that has been under way since human beings' early history. For several thousand years, human history has been organised to an ever-increasing extent around the division of labour, the extension of the scope of the market, and the pursuit of profit. This force has been the central factor in technical progress. Until the early modern period, the main consequence of technical progress was to enable population growth and output more or less to keep pace with each other, advancing together in a complex symbiotic relationship. However, around 200 years ago, a new relationship between population and per capita output emerged. Population growth and per capita output and income began an unprecedented, simultaneous acceleration.

Pre-Modern Capitalism

Capitalism, in the sense of production for profit for the market, is an ancient phenomenon. The incentive to 'truck and barter' has been a central part of the history of the world since ancient times. The evolution of capitalism in early modern Western Europe, within the overall feudal socio-economic structure, has been deeply studied. However, large parts of the world outside Europe contained significant pockets of capitalism within overall non-capitalist socioeconomic structures. These involved urban trading centres and specialist production for both local and distant markets. For millennia in many parts of the world there has been extensive local trade in goods such as grain, vegetables, herbs, furniture, metallurgical products, building materials, and low value textiles and pottery, and long-distance trade in products such as precious metals, minerals, spices, salt, sugar, tea, coffee, and high value textiles and pottery. There is now a rich historical literature on the extensive pockets of capitalism in East and South Asia, as well as on the Middle East. Large parts of the pre-modern world were linked by long-distance international trade in products with high value to weight ratios, from China through South and Southeast Asia, the Middle East, coastal Africa, and Europe.

Industrial production in the pre-modern world was widely dispersed, including specialised industries such as food processing, metallurgy, mining, textiles, carpets, pottery, shipbuilding, salt, sugar, and tea, as well as the construction of canals, ports, roads, bridges and buildings. These often involved relatively large-scale enterprises, amidst a myriad small-scale 'protoindustrial' production. It is estimated that in 1750, China accounted for around one-third of total world manufacturing output, and South Asia for around one-quarter, while 'the West' still accounted for only around 18 per cent (Bairoch, 1982). Commercial growth interacted with institutional change, stimulating the evolution of urban-based legal and financial mechanisms to facilitate commerce.

Research in recent decades has shown that technical changes in the non-Western world played a far more important role in global pre-modern technical progress than was once thought to be the case. Many of the key technical innovations of the late Middle Ages in Europe either originated in Asia, or were independently invented there. Typically, technical progress occurred through innovations by profit-seeking entrepreneurs who responded to commercial opportunities.

The development of capitalism in early modern Europe has been deeply studied by generations of scholars. However, it is becoming increasingly clear that there was powerful embryonic capitalism in other regions of the world prior to that in Europe. Two of the most important examples of this occurred in the Islamic world and in China, which will be examined in more detail in Part 2.

Capitalism 1750–1914

The technical advances that had slowly evolved within the capitalist segments of the non-European world made their way to Europe in the Middle Ages. These interacted with indigenously evolving technical progress and with the fast-evolving capitalist institutions to produce the European Industrial Revolution. Technical progress accelerated far beyond the rates that had previously been achieved. In the eighteenth century, global markets for British-made goods expanded at a fierce rate, with great fluctuations from one period to another. The search for profits to enable British manufacturers to benefit from this process greatly stimulated the search for innovations in manufacturing technologies.

By the middle of the nineteenth century, industrial capitalism had spread across Europe. It was taking firm root in North America behind high protectionist barriers, with unified national capitalist markets ensured by violent civil war. By 1900, the share of 'The West' in global manufacturing output had risen to over three-quarters, from less than one-fifth a mere 150 year previously. The share of China and South Asia together had shrunk to less than one-tenth of the world total, from nearly three-fifths in the mid-eighteenth century (Bairoch, 1982). From the perspective of Europe and North America in the nineteenth century, the non-Western world increasingly assumed the character of a homogenously 'stagnant' economy and society, 'vegetating in the teeth of time'.

Large parts of the 'non-Western' world were integrated through military conquest into global industrial capitalism, including China, South and Southeast Asia, Australia, South America, the North American 'West', and Africa. The period witnessed explosive growth of international trade, facilitated by technical progress in transport, including the railway, the steamship, and refrigeration. Merchandise exports as a share of GDP for the whole world rose from 1.0 per cent in 1820 to 7.9 per cent in 1914 (Wolf, 2004: 110 ). International movements of capital accelerated, especially in the latter part of the period. Foreign assets as a share of world GDP rose from 6.9 per cent in 1870 to 17.5 per cent in 1914 (Wolf, 2004: 113). By the end of the nineteenth century, industrial capitalism had enjoyed over a century of high-speed growth, with large parts of the world integrated by relatively open trade systems and free movement of capital. The integration of global markets reached levels far beyond those of the pre-modern epoch. The world appeared to be on the threshold of limitless expansion of global capitalism.

Capitalism 1914–1970s

The remorseless advance of global capitalism was interrupted rudely in 1914. A succession of phenomena stifled its growth for much of the twentieth century. These included the impact of the Civil War and anti-Japanese Wars in China, the war in the Pacific, and the First and Second World Wars.

In the high-income countries, the searing impact of the Great Depression led to the introduction of 'beggar-my-neighbour' policies of high tariff protection in the inter-war years, and a sharp decline in the growth of world trade. Exchange controls were applied widely. In the post-war period, trade protection in the manufacturing sector of the high-income countries was gradually reduced. In the inter-war years, capital flows out of the high-income countries slumped, and in the post-war period, high-income countries maintained severe restrictions on international capital flows. In addition, in the post-war period, most of the Western European countries nationalised large swathes of the economy, including a large part of the steel, oil and chemical, coal, automobile, aerospace, post and telecommunications, rail, port, airport, gas and electricity networks.

The Russian Revolution ushered in a series of communist revolutions, including those in Eastern Europe, in China and in Southeast Asia. By 1950, a 'sea of communism' extended from the Elbe in the West to China and Vietnam, committed to establishing a 'non-capitalist economy', from which the anarchy of the market was eliminated. The communist economies drastically limited their interaction with global capitalism, cutting off vast swathes of the world, containing around two-fifths of the world's population from the reach of industrial capitalism.

Developing countries, which were heavily dependent on primary product exports, were devastated by the impact of the Great Depression and the associated collapse of primary product prices. Post-war economic policies in developing countries were influenced deeply by this experience. In addition, the Soviet Union appeared to offer an alternative route towards self-reliant development, freed from the disruptive effects of the 'anarchic' international economic system. In the post-war period, throughout the non-communist developing world, economic policies focused on import substituting industrialisation. Most countries heavily protected indigenous manufacturing and established large state-owned enterprises as the core of the manufacturing sector. The philosophy of the 'Big Push', led by the state, dominated development philosophy. It was hoped that the resulting structural transformation would free developing countries from reliance on primary products with their associated price instability and perceived 'unequal exchange' with manufactured goods imports, and permit accelerated growth through more extensive indigenous manufactured goods production, which was thought to be characterised by greater opportunities to benefit from economies of scale and technical progress.

Capitalism Since the Mid-1970s

The net effect of the phenomena outlined in the previous section was to stifle the expansion of global capitalism that had been unfolding in the nineteenth century and up to the First World War. From the mid-1970s onwards a series of far-reaching changes set the scene for the renewal of the spread of global capitalism. Like a spring that has been held under pressure, the release of pressure was followed by an explosive expansion.

In the high-income countries, the mid-1970s saw the start of far-reaching institutional and policy changes. In 1974, following the first oil crisis, after decades of restrictions on international capital flows, the high-income countries moved decisively towards floating exchange rates and freedom of international capital movements. The massive increase in international capital flows meant that foreign assets as a share of world GDP increased from 17.7 per cent in 1980 to 56.8 per cent in 1995 (Wolf, 2004: 113). In the 1980s and 1990s, Europe's vast structure of state-owned enterprises was almost completely privatised. Numerous of these large and technically powerful but poorly-run firms were transformed into global business giants by the turn of the twenty-first century.

In the communist world, the death of Chairman Mao in 1976 began a period of comprehensive system reform. In China, reform was gradual, 'touching stones to cross the river', with steadily deepening penetration of market forces under the leadership of the Chinese Communist Party (CCP). The 'Chinese wall' between the domestic and global economy was dismantled brick by brick. By 2004, China had risen to be the world's third largest exporter and the largest recipient of annual flows of FDI, with an accumulated stock of almost US$ 500 billion. In the former USSR and Eastern Europe, after a period of experimentation with gradual economic reform, Communist Party rule collapsed. In the 1990s the whole region opened up to international investment and trade.

In the non-communist developing world, there was wide dissatisfaction with the pace of growth of output and living standards. Across most of the developing world, average annual growth rates of output per head were around 2–3 per cent per annum (Wolf, 2004: 107). It was felt widely that in many areas 'import substituting growth' had run its course, and that only more comprehensive integration with the international economy would enable output and income growth to accelerate. The 'conventional wisdom' in development thinking shifted profoundly, and turned full circle compared with that of the 1950s and 1960s. In the 1980s and 1990s, non-communist developing countries carried out comprehensive privatisation of state assets, dismantled protectionist barriers and opened their economies to international investment. Between 1990 and 2002, foreign trade as a share of the GDP of low and middle-income countries rose from 33 per cent to 52 per cent; the annual flow of FDI to low and middle-income countries rose from US$ 24 billion to US$ 147 billion; and stock market capitalisation as a share of the GDP of low and middle-income countries rose from 19 per cent to 33 per cent (World Bank, 2004).

From the 1970s onwards, the global economy took up where it had left off before the First World War. Once again, private enterprise dominated, international trade was relatively unregulated and capital could flow freely across national borders. Leading global firms increasingly were international in terms of their markets, employees and the composition of ownership. The principal difference with the period before 1914 was the migration of people. In the former period there were massive international migrations to the 'lands of recent settlement', but in the present period, international migration, especially of poor people, is severely restricted. However, in most respects the world economy has again entered a period of free markets and a 'global level playing field' comparable to the late nineteenth century, the previous highpoint of the liberal economy.

1.2 Capitalist Rationality in the Epoch of the Global Business Revolution

The battle of competition is fought by cheapening commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore the larger capital beats the smaller ... Everywhere the increased scale of industrial establishments is the starting-point for a more comprehensive organization of the collective work of many, for a wider development of their material motive force — in other words, for the progressive transformation of isolated processes of production, carried on by customary methods, into processes of production socially combined and scientifically arranged.

(Marx, 1967: 626–7)

Big industry universalized competition ... established means of communication and the modern world market ... By universal competition it forced individuals to strain their energy to the utmost ... It produced world history for the first time, insofar as it made all civilized nations and every individual member of them dependent for the satisfaction of his wants on the whole world, thus destroying the formal natural exclusiveness of separate nations.

(Marx, 1960: 56)

Free Trade dissolves the hitherto existing nationalities and pushes to its climax the tension between proletariat and bourgeoisie. In one word, the system of free trade precipitates the social revolution.

(Marx, Selected Works, Vol. 1: 64–5, quoted in Avineri, 1968: 252)

The bourgeoisie, by the rapid development of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilization. The cheap prices of its commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians' intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilization into their midst, that is, to become bourgeois themselves. In one word it creates a world after its own image.

(Marx and Engels, 1968: 38–9)

1.2.1 Capitalism and Coordination

Since the earliest days of the emergence of capitalist markets, the market mechanism has acted as an instrument for coordinating the activities of individual economic agents each engaged in their own special function within the overall division of labour. However, the nature of that coordinating mechanism has shifted greatly over time, not least in the epoch of the Global Business Revolution.

The Invisible Hand

Through the process of the division of labour and exchange, human beings establish complex forms of inter-dependence and cooperation, even though they may not intend that this is so and may be only dimly aware of it. Economists have long marvelled at the independently functioning market, which allows the actions of market participants to be 'magically' coordinated without any apparent guiding hand. Markets were coordinated in this fashion throughout the trading centres of the Islamic world, in South Asia and in China, long before the European countries entered their period of early modern market expansion.

Smith, capitalism and the scientific revolution. Writing on the eve of the Industrial Revolution, Adam Smith produced the most famous of all analyses of the division of labour and the impact upon cooperation among people. Smith places the central role of the division of labour at the heart of his analysis of economic development, making it the first sentence of the first chapter of the Wealth of Nations: 'The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied, seem to have been the effects of the division of labour' (Smith, 1976, Vol. 1: 7). Smith examines closely the variety of objects in the accommodation of 'the most common artificer or day-labourer in a civilized and thriving country', and concludes that 'the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation' (Smith, 1976, Vol. 1: 15): 'If we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and cooperation of many thousands, the very meanest person in a civilized country could not be provided, even according to what we very falsely imagine, the easy and simple manner in which he is commonly accommodated' (Smith, 1976, Vol. 1: 16). The division of labour does not evolve through conscious human agency: 'The division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another' (Smith, 1976, Vol. 1: 17).