Tag: Economics

In my recent Sidecar piece, I developed the argument that economic disruptions unleashed by surging energy prices – especially in the gas market – can be connected to state climate policies. Adam Tooze, responding in his Chartbook #51, challenges this so-called ‘energy dilemma’ thesis. What Tooze rejects unambiguously is the theory that Western fossil fuel corporations have priced the prospect of climate related policy changes into their investment behaviour, and that this has contributed to the tensions on the supply-side that came to the fore this autumn. While I agree that stronger evidence is needed to reach a definitive conclusion, I nonetheless have several reservations about Tooze’s essay.

In the context of the current crisis, the term ‘energy dilemma’ was coined by Lara Dong, an analyst for the consulting firm IHS Markit, who explained how Chinese authorities have struggled to balance environmental concerns over coal with the need for energy security. Yet this is not a new idea. It can be traced back to the 1970s, when experts became increasingly aware of the tension between achieving affordable and reliable energy provision and limiting the detrimental impact of growing fossil fuel consumption. In 2010, the geographer Michael J. Bradshaw produced a systematic formulation of the dilemma in ‘Global Energy Dilemmas: A Geographical Perspective’, asking: ‘can we have the energy necessary for economic development and, at the same time, manage the transition to a low-carbon energy system necessary to avoid catastrophic climate change?’

Tooze, in his piece, presents the ‘energy dilemma’ thesis as follows:

The canard that continues to circulate is that the supply shortfall is directly connected to climate policy. Too much talk about net zero has discouraged fossil fuel investors, resulting in lower investment, restricted supply and vulnerability to demand shocks.

His creditable aim is to prevent this narrative being used to postpone the green transition. However, it is worth noting from the outset that the definition he presents is a narrow one, limited to the supply constraints that arise from waning private investment in fossil fuels precipitated by climate policies and related discourses. For Tooze, there is an energy dilemma only when climate policies exert an ‘indirect effect’ on private investment that results in limited supply and translates into systemic fragilities.

By contrast, building on Bradshaw’s perspective, ‘energy dilemma’ can be used to refer more broadly to the crisis tendency of capitalism driven by climate policymaking. That is, a dilemma occurs whenever climate policies hamper economic growth. This includes the direct effects of public regulation on economic actors’ operations (in particular, the impact of climate legislation on production, funding activities and consumption patterns) as well as the indirect effects of policy changes – or anticipated ones – on private investment. These elements are closely intertwined. Since both direct and indirect effects place constraints on the supply-side in terms of rising costs or reduced investment opportunities, their outcomes are similar: a cascading effect on volumes, prices and profitability that impacts growth patterns, either directly or via the financial system.

With this broader interpretation of the energy dilemma – in which both direct and indirect factors contribute to a crisis dynamic unleashed by climate policymaking – much of the evidence cited by Tooze does not contradict my thesis but rather confirms it. Take the case of China’s energy crisis. Tooze writes that ‘There is no doubt that deliberate decisions by Beijing to regulate coal-fired electricity generation played a key part.’ Although other details must also be considered, in the context of booming demand a straightforward energy dilemma causality is discernible: binding targets for energy consumption and coal use = energy shortages = manufacturing disruptions and blackouts. This process ‘plays out transnationally and by way of the spillover of Chinese supply constraints both from coal and low-carbon sources, to global LNG markets’ – an observation which appears to give the energy dilemma framework a global dimension, showing how tentative steps in the direction of carbon transition in China fuel tensions on international markets that reverberate in the rising cost of gas, particularly in Europe.

Tooze correctly points out that the attempt of EU authorities to limit their reliance on Russian gas has backfired. The building of oversized LNG storage capacities subsidized by public money in Europe was intended to set up a credible alternative to Russian supply in order to extract cheaper prices from Gazprom. But this integration into global LNG markets has ended up increasing the vulnerability of the region to gas price surges. The internal difficulty of the energy transition is thus compounded by direct exposure to the repercussions of China’s energy metamorphosis. Moreover, Tooze writes that in 2021 ‘the green factor finally does enter the European story’ since ‘a surge in the price of emissions permits in the EU-ETS’, in addition to rising coal prices, prevented European operators from switching back to generating electricity from coal. Here, climate policy directly restricts the possibilities to mobilize cheaper options which would defuse cost pressure – another iteration of the energy dilemma that Tooze purportedly rejects.

However, although many of Tooze’s examples fit within a more broadly conceived energy dilemma framework, the overall thrust of his argument is distinct. He asserts that the dramatic fall in fossil fuel investment since 2015 is not a consequence of climate policies and campaigns but of falling energy prices, themselves related to the American shale-gas revolution of the early 2010s. It is worth interrogating this point further. Focusing on the coal-gas-renewable conundrum in Western countries, we must understand the extent to which the current misalignment between supply and demand is due to decreasing investment in coal, insufficient increase of renewable supplies and/or insufficient investment in gas to bridge the gap – and how climate policies have influenced these interlocking issues.

On this very complex question, Tooze makes two claims. The first is that divestment from coal was mostly driven by a loss of competitiveness vis-à-vis alternative sources of power generation, especially gas. This was clearly a decisive factor in the short-term, but it would be reckless to dismiss the significance of longer-term financial assessments informed by government climate pledges and civil society pressure on investors. For instance, Magnus Hall, CEO of Vattenfal, explained that his company decided in 2016 to divest from coal-fired power generation in Germany for both short-term economic reasons and longer-term prospects related to climate policy:

society is becoming less and less accepting of coal-fired power generation. And there is an economic truth: it is becoming increasingly difficult to make money from coal in Europe. For our part, we sold our mines and power plants because we knew that these assets had become too risky financially.

Tooze’s second claim concerns the ambiguous position of gas supplies. While the use of gas has grown as a substitute for coal – in part because it is a more flexible complement to renewables – investment has increased in the development of LNG infrastructure for imports. However, production has also decreased in Europe and investment in US shale-gas has slackened. Tooze tries to explain the rationale for this slowdown:  

If there is a force holding back new investment in America’s shale industry today, it is not government climate policy, but the insistence by Wall Street that the shale industry actually pay out dividends rather than plowing back its earnings into new drilling.

There are good reasons to doubt this argument. In fact, from the point of view of capital, not investing – or divesting and distributing profits to shareholders – is a logical way to hollow-out a business without a future. In that sense, the financialization mantra, ‘downsize and distribute’, becomes one way to retreat from fossil fuels and reallocate capital to other sectors. Consistent with this, we observe a marked relative devaluation of the Oil & Gas firms’ market capitalization relative to other sectors in the course of the last decade (Figure 1), reflecting investors’ move away from carbon stranded assets and anticipation of deteriorating prospects. The Wall Street Journal likewise acknowledges that ‘Concerns about long-term demand are exacerbating the oversupply of fossil fuels, and companies say they have become more selective about where they invest’, contributing to one the worst-ever write-downs in 2020. All this can be read as evincing a clear – if dramatically insufficient and untimely – shift away from fossil fuel which, in specific segments of the market and amid booming demand, contributed to the recent shortages in coal, gas and electricity generation.

Tooze states that ‘What 2021 exposes is that the green push since 2015 has been enacted against the backdrop of a regime of low energy prices set by the price collapse in 2014.’ By green push, he means the fact that the replacement of some coal supplies with relatively cleaner gas was supported by a favourable evolution of their relative prices. The big picture is that this is not a viable pathway for green energy, due to methane emissions and underreporting of leakages which suggest that natural gas could be more environmentally destructive that previously thought. However, as far as the energy dilemma debate is concerned, the dividends of a price environment favourable to a shift away from coal simply adds more weight to the idea that the costs of the adjustment are real. Although they were postponed for a couple of years, they are now abruptly manifest.

In this sense, it would be unreasonable to exclude the energy dilemma from our analysis of the present conjuncture. There are straightforward and precise connections between energy market turbulence and climate policies in China and in Europe. The temporary increase in coal supply in China to defuse economic tensions testifies to at least a short-term trade-off between emissions and economic growth. It may be difficult to disentangle the role of low prices from the longer-term decline in private fossil fuel investment since 2015; but we should not dismiss the idea that the latter was partly driven by gloomy forecasts for the sector based on anticipated climate policies. High payouts to shareholders and declining market capitalization can, indeed, be read as symptoms of such forecasts.

Tooze rightly suggests that energy companies are responsible for the myopia concerning the evolution of demand patterns that resulted in insufficient investment in energy. The fact that global investment in renewables and energy efficiency has actually declined since 2015 is indicative of the sector’s lacklustre engagement with decarbonation efforts. Yet although these companies bear collective responsibility, the issue is also systemic. It reveals a deeper coordination problem that enterprises cannot handle via market mechanisms alone. The energy dilemma thesis is in this sense consistent with the IEA’s repeated warnings about the coordination challenges related to the transition, and their exacerbation by slow and inconsistent policymaking:

As the world makes its much-needed way towards net zero emissions, there is an ever-present risk of mismatches between energy supply and demand as a result of a lack of appropriate investment signals, insufficient technological progress, poorly designed policies or bottlenecks arising from a lack of infrastructure.

At present, shortages of coal and gas coincide with booming demand, but if renewable production rapidly expands, electrification accelerates and/or energy consumption significantly slows, a collapse of fossil fuel prices is possible. In spring 2020, oversupply of oil resulting from the pandemic lockdown pushed US prices into negative territory. Further decreases may occur when fossil fuel producers compete to valorize the last sellable resources in a world shifting beyond carbon. However, even if such price slumps take place amid an energy transition, their wider context will be rising costs driven by expensive investment efforts and the deadweight of carbon-asset legacies.

Tooze and I agree on the limits of the price mechanism to guide the green transition and the necessity of macroeconomic planning. When it comes to the energy dilemma question, I sympathize with his reluctance to give fossil-interests any argument that could be used to postpone further greenhouse gas reduction. Yet we must also resist the delusion that crisis tendencies related to climate policy are not at stake. A smooth transition beyond carbon is no longer an option. There is no Pareto-efficient way of eradicating fossil fuel use in a timeframe compatible with the prevention of climate disorders. A zero-sum or even negative-sum game is in play, which means that some parts of the population will bear the cost of the adjustment more than others.

This looming distributive conflict puts drastic constraints on class compromises. At this stage, I do not see what should prevent a large progressive front from rallying in favour of restrictions on the avoidable emissions related to the consumption patterns of the ultra-rich. A class-biased punitive ecology could become an effective means to stop ecologically perverse expenditure from rebounding onto the poorest. It could also be a stepping-stone to broader social mobilizations. Crucially, the primary implication of the crisis tendency is not the impossibility of humanity to handle the challenges of the energy transition, but the additional barriers to collective agency erected by the imperative of capital valorization. Subordinating profit-making to rapid decarbonation is, in my view, a price worth paying for the cause of climate justice.

Read on: Cédric Durand, ‘In the Crisis Cockpit’, NLR 116/117.

The ecological bifurcation is not a gala dinner. After a summer of extreme climatic events and a new IPCC report confirming its most worrying forecasts, large parts of the world are now roiled by an energy crisis that prefigures further economic troubles down the road. This conjuncture has buried the dream of a harmonious transition to a post-carbon world, bringing the question of capitalism’s ecological crisis to the fore. At COP26, the dominant tone is one of powerlessness, where impending miseries have left humanity cornered between the immediate demands of systemic reproduction and the acceleration of climate disorders.  

Prima facie, one might think that steps are being taken to address this cataclysm. More than 50 countries – plus the entire European Union – have pledged to meet net zero emissions targets that would see global energy-related CO2 emissions fall by 40% between now and 2050. Yet a sober reading of the scientific data shows that the green transition is well off track. Falling short of global net zero means that temperatures will continue to rise, pushing the world well above 2°C by 2100. According to the UNEP, nationally determined contributions, which countries were requested to submit in advance of COP26, would reduce 2030 emissions by 7.5%. Yet a 30% drop is needed to limit warming to 2°C, while 55% would be required for 1.5°C.

As a recent Nature editorial warned, many of these countries have made net-zero pledges without a concrete plan to get there. Which gases will be targeted? To what extent does net-zero rely on effective reduction rather than offsetting schemes? The latter have become particularly attractive for rich countries and polluting corporations, since they do not directly diminish emissions and involve transferring the burden of carbon-cutting to low- and medium-income nations (which will be most severely affected by climate breakdown). On these crucial issues, reliable information and transparent commitments are nowhere to be found, jeopardizing the possibility of credible international scientific monitoring. The bottom line: based on the current global climate policies – those implemented and those proposed – the world is on track for a devastating increase in emissions during the next decade.

In spite of this, capitalism has already experienced the first major economic shock related to the transition beyond carbon. The surge in energy prices is due to several factors, including a disorderly rebound from the pandemic, poorly designed energy markets in the UK and EU which exacerbate price volatility, and Russia’s willingness to secure its long-term energy incomes. However, at a more structural level, the impact of first efforts made to restrict the use of fossil fuels cannot be overlooked. Due to government limits on coal burning, plus shareholders’ growing reluctance to commit to projects that could be largely obsolete in thirty years, investment in fossil fuel has been falling. Although this contraction of the supply is not enough to save the climate, it is still proving too much for capitalist growth.

Putting together several recent events gives a taste of things to come. In the Punjab region of India, severe shortages of coal have caused unscheduled power blackouts. In China, more than half the provincial jurisdictions have imposed strict power-rationing measures. Several companies, including key Apple suppliers, have recently been forced to halt or reduce operations at facilities in Jiangsu province, after local governments restricted the supply of electricity. Those restrictions were an attempt to comply with national emissions targets by restricting coal-fired power generation, which still accounts for about two thirds of China’s electricity. To contain the spillover of these disruptions, Chinese authorities have put a temporary brake on their climate ambitions, ordering 72 coal mines to increase their supply and relaunching imports of Australian coal that were halted for months in the midst of diplomatic tensions between the two countries.

In Europe, it was the surge in gas prices that triggered the current crisis. Haunted by the memory of the gilets jaunes uprising against Macron’s carbon tax, governments have intervened with energy subsidies for the popular classes. More unexpectedly, though, gas price increases have precipitated chain reactions in the manufacturing sector. The case of fertilizers is telling. A US group, CF Industries, decided to shut down production of its UK fertilizer plants, which had become unprofitable due to price increases. As a by-product of its operations, the firm previously supplied 45% of the UK’s food-grade CO2 – whose loss unleashed weeks of chaos for the industry, affecting various sectors from beer and soft drinks to food packaging and meat. Globally, the surge of gas prices is affecting the farming sector via the increase in fertilizer prices. In Thailand, the cost of fertilizers is on track to double from 2020, raising costs for many rice producers and putting the planting season at risk. If this continues, governments may have to step in to ensure essential food supplies.

The global and widespread repercussions of energy shortages and price increases underscores the complex fallout involved in the structural transformation necessary to eliminate carbon emissions. While a reduction is underway in the supply of hydrocarbon, increases in sustainable energy sources are not sufficient to meet growing demand. This leaves an energy mismatch that could derail the transition altogether. In this context, countries can either return to the most readily available energy source – coal – or cause an economic contraction driven by the surge in costs and their effects on profitability, consumption prices and the stability of the financial system. In the short term, then, there is a trade-off between ecological objectives and the requirement to foster growth. But does this energy dilemma hold in the medium and long term? Will we ultimately face a choice between climate and growth?

A successful carbon transition implies the harmonious unfolding of two processes complexly related at the material, economic and financial levels. First, a process of disbandment must take place. Sources of carbon must be drastically reduced: above all hydrocarbon extraction, electricity production by coal and gas, fuel-based transport systems, the construction sector (due to the high level of emissions involved in cement and steel production) and the meat industry. What is at stake here is degrowth in the most straightforward sense: equipment must be scrapped, fossil fuel reserves must stay in the soil, intensive cattle-breeding must be abandoned and an array of related professional skills must be made redundant.

All things being equal, the elimination of production capacities implies a contraction of supply which would lead to generalized inflationary pressure. This is even more likely because the sectors most affected are located at the commanding heights of modern economies. Cascading through the other sectors, pressure on costs will dent firms’ mark-up, global profits and/or consumer purchasing power, unleashing wild recessionary forces. In addition, degrowth of the carbon economy is a net loss from the point of view of the valorization of financial capital: huge amounts of stranded assets must be wiped out since underlying expected profits are foregone, paving the way for fire sales and ricocheting onto the mass of fictitious capital. These interrelated dynamics will fuel each other, as recessionary forces increase debt defaults while financial crisis freezes the access to credit.

The other side of the transition is a major investment push to accommodate the supply shock caused by the degrowth of the carbon sector. While changing consumption habits could play a role, especially in affluent countries, the creation of new carbon-free production capacities, improvements in efficiency, electrification of transport, industrial and heating systems (along with the deployment of carbon capture in some instances) are also necessary to compensate for the phasing out of greenhouse gas emissions. From a capitalist perspective, these could represent new profit opportunities, so long as the costs of production are not prohibitive relative to available demand. Attracted by this valorization, green finance could step in and accelerate the transition, propelling a new wave of accumulation capable of sustaining employment and living standards.

Yet it is important to bear in mind that timing is everything: making such adjustments in fifty years is completely different from having to disengage drastically in a decade. And from where we are now, the prospects for a smooth and adequate switch to green energy are slim, to say the least. The scaling back of the carbon sector remains uncertain due to the inherent contingency of political processes and the persistent lack of engagement from state authorities. It is illustrative that one single Senator, Joe Manchin III of west Virginia, can block the US Democrats’ programme to facilitate the replacement of coal- and gas-fired power plants.

As illustrated by the current disruptions, the lack of readily available alternatives could also hamper the phasing-out of fossil fuels. According to the IEA: ‘Transition-related spending […] remains far short of what is required to meet rising demand for energy services in a sustainable way. The deficit is visible across all sectors and regions.’ In its latest Energy Report, Bloomberg estimates that a growing global economy will require a level of investment in energy supply and infrastructure between $92 trillion and $173 trillion over the next thirty years. Annual investment will need to more than double, rising from around $1.7 trillion per year today, to somewhere between $3.1 trillion and $5.8 trillion per year on average. The magnitude of such a macroeconomic adjustment would be unprecedented.

From the perspective of mainstream economics, this adjustment is still a matter of getting the prices right. In a recent report commissioned by French President Emmanuel Macron, two leading economists in the field, Christian Gollier and Mar Reguant, argue that ‘The value of carbon should be used as a yardstick for all dimensions of public policymaking.’ Although standards and regulations should not be ruled out, ‘well-designed carbon pricing’ via a carbon tax or cap-and trade mechanism must play the leading role. Market mechanisms are expected to internalize the negative externalities of greenhouse gas emissions, allowing for an orderly transition on both the supply and demand sides. ‘Carbon pricing has the advantage of focusing on efficiency in terms of cost per ton of CO2, without the need to identify in advance which measures will work.’ Reflecting the plasticity of market adjustment, a carbon price – ‘unlike more prescriptive measures’ – opens up a space for ‘innovative solutions’.

This free-market, techno-optimistic perspective ensures that capitalist growth and climate stabilization are reconciliable. However, it suffers from two main shortcomings. The first is the blindness of the carbon-pricing approach to the macroeconomic dynamics involved in the transition effort. A recent report by Jean Pisani Ferry, written for the Peterson Institute for International Economics, plays down the possibility of any smooth adjustment driven by market prices, while also dashing the hopes of a Green New Deal that could lift all boats.

Observing that ‘Procrastination has reduced the chances of engineering an orderly transition’, the report notes that there is ‘no guarantee that the transition to carbon neutrality will be good for growth.’ The process is quite simple: 1) since decarbonation implies an accelerated obsolescence of some part of existing capital stock, supply will be reduced; 2) in the meantime, more investment will be necessary. The burning question then becomes: are there sufficient resources in the economy to allow for more investment alongside weakened supply? The answer depends on the amount of slack in the economy – that is, idle productive capacity and unemployment. But considering the size of the adjustment and the compressed timeframe, this cannot be taken for granted. In Pisani Ferry’s view, ‘Impact on growth will be ambiguous, impact on consumption should be negative. Climate action is like a military build-up when facing a threat: good for welfare in the long run, but bad for consumer satisfaction’. Shifting the resources from consumption to investment means that consumers will inevitably bear the cost of the effort.

In spite of his neo-Keynesian perspective, Pisani-Ferry opens up an insightful discussion on the political conditions that would allow for a reduction in living standards and a green class-war fought along income lines. Yet, in its attachment to the price mechanism, his argument shares with the market-adjustment approach an irrational emphasis on the efficiency of CO2 emission reduction. The second shortcoming of Gollier and Reguant’s contribution becomes apparent when they call for ‘a combination of climate actions with the lowest possible cost per ton of CO2 equivalent not emitted’. Indeed, as the authors themselves recognize, the setting of carbon prices is highly uncertain. Evaluations can range from $45 to $14,300 per ton, depending on the time horizon and the reduction targeted. With such variability, there is no point in trying to optimize the cost of carbon reduction intertemporally. What is important is not the cost of the adjustment, but rather the certainty that the stabilization of the climate will occur.  

Delineating the specificities of the Japanese developmental state, the political scientist Chalmers Johnson made a distinction that could also be applied to the transition debate:

A regulatory, or market rational, state concerns itself with the form and procedures – the rules, if you will – of economic competition, but it doesn’t concern itself with substantive matters […] The developmental state, or plan-rational state, by contrast, has as its dominant feature precisely the setting of such substantive social and economic goals.

In other words, while the first aims at efficiency – by making the most economical uses of resources – the second is concerned with effectiveness: that is, by the ability to achieve a given goal, be it war or industrialization. Given the existential threat posed by climate change and the fact that there exists a simple and stable metric to limit our exposure, our concern should be with the effectiveness of reducing greenhouse gases rather the efficiency of the effort. Instead of using the price mechanism to let the market decide where the effort should lie, it is infinitely more straightforward to add up targets at the sectoral and geographical levels, and provide a consistent reduction plan to ensure that the overall goal will be achieved in time.

Morgan Stanley’s Ruchir Sharma, writing on this question in the FT, raises a point which indirectly makes the case for ecological planning. He notes that the investment push necessary to transition beyond carbon presents us with a trivially material problem: on the one hand, dirty activities – particularly in the sectors of mining or metal production – are rendered unprofitable due to increased regulation or higher carbon prices; on the other hand, investment for the greening of the infrastructure requires such resources to expand capacities. Decreasing supply plus rising demand is therefore a recipe for what he calls ‘greenflation’. Sharma therefore argues that ‘Blocking new mines and oil rigs will not always be the environmentally and socially responsible move.’

As the spokesperson of an institution with vested interest in polluting commodities, Sharma is hardly a neutral commentator. But the problem he articulates – how to supply enough dirty material to build a clean-energy economy – is a real one, and relates to another issue with the putative market-driven transition: carbon pricing does not allow society to discriminate between spurious uses of carbon – such as sending billionaires into space – and vital uses such as building the infrastructure for a non-carbon economy. In a successful transition, the first would be made impossible, the second as cheap as possible. As such, a unique carbon price becomes a clear pathway to failure.

This brings us back to an old but still decisive argument: rebuilding an economy – in this case one which phases out fossil fuels – requires restructuring the chain of relations between its diverse segments, which suggests that the fate of the economy as a whole depends on its point of least resistance. As Alexandr Bogdanov noted in the context of building the young Soviet state, ‘Because of these interdependent relationships, the process of enlargement of the economy is subject in its entirety to the law of the weakest point.’ This line of thought was later developed by Wassily Leontief in his contributions to input-output analysis. It holds that market adjustments are simply not up to structural transformation. In such situations, what’s required is a careful and adaptative planning mechanism able to identify and deal with a moving landscape of bottlenecks.

When one considers the economic challenges of restructuring economies to keep carbon emissions in line with the stabilization of the climate, this discussion acquires a new framing. Effectiveness must take precedence over efficiency in reducing emissions. That means abandoning the fetish of the price mechanism in order to plan how the remaining dirty resources will be used in the service of clean infrastructure. Such planning must have international reach, since the greatest opportunities for energy-supply decarbonation are located in the Global South. Moreover, as transformation on the supply side will not be enough, demand-side transformations will also be essential to stay within planetary boundaries. Energy requirements for providing decent living standards to the global population can be drastically reduced, but in addition to the use of the most efficient available technologies, this implies a radical transformation of consumption patterns, including political procedures to prioritize between competing consumption claims.

With its longstanding concern for planning and socialized consumption, international socialism is an obvious candidate to take on such a historic task. Though the poor state of socialist politics doesn’t conjure much optimism, the catastrophic conjuncture we are entering – along with price volatility and the ongoing spasms of capitalist crises – could increase the fluidity of the situation. In such circumstances, the left must be flexible enough to seize any political opportunity that will advance the cause of a democratic ecological transition.

Read on: Mike Davis, ‘Who Will Build the Ark?’, NLR 61.

The extent of the break with neoliberalism initiated by the Biden administration will depend upon both the unfolding of Washingtonian politics and the impact of mobilizations from below. Yet in the background, impersonal forces will continue to affect the metamorphosis of capitalism through its successive stages. It is from these structural constraints and opportunities that the fabric of the current conjuncture is woven. What can contemporary political economy tell us about them? Beyond the sphere of mainstream liberal thought, an array of recent theoretical contributions have tried to diagnose the current moment by situating it in the long-term rhythms of capitalist development. They offer a fresh light, if not a magic key, for understanding the systemic shift represented by Bidenomics.

Such forces of change are routinely ignored by liberal economists. Market exchange is viewed as a sphere of activity that depends solely on itself; conscious collective intervention must not interfere with the invisible hand or spontaneous order. However, it is increasingly clear that this faith in self-equilibrating market adjustment cannot provide a general theory of rapid socioeconomic change, nor a specific explanation of our present political turbulence. Recognizing this limitation, The Economist recently rejected neoclassical equilibrium modelling and Friedmanite instrumentalism in favour of evolutionary economics, which ‘seeks to explain real-world phenomena as the outcome of a process of continuous change’. ‘The past informs the present’, it declared. ‘Economic choices are made within and informed by historical, cultural and institutional contexts’.

This intervention signals the weakened grip of neoclassical economics on the profession as a whole. Yet the evolutionary schema nonetheless retains a deep loyalty to bourgeois ideology, premised on the belief that Natura non facit saltum, ‘nature does not make jumps’. For this school of thought, evolution is always incremental. There may be pragmatic exceptions to this rule, such as when neoliberals embrace shock therapy to dismantle the remnants of the ‘unnatural’ socialist order in Eastern Europe, or launch a revolution against the French social model in the style of Emmanuel Macron. But this opportunistic voluntarism is rooted in the presupposition of the transhistorical virtues of the market; it neither relies on a theory of periods in capitalist history, nor on an explanation of its turning points beyond ad-hoc arguments.  

Four decades ago, John Elliott wrote in the Quarterly Journal of Economics that despite their opposed ideological commitments, Marx and Schumpeter agreed on the three salient characteristics of capitalism’s evolutionary dynamic: ‘It comes from within the economic system and is not merely an adaptation to exogenous changes. It occurs discontinuously rather than smoothly. It brings qualitative changes or “revolutions”, which fundamentally displace old equilibria and create radically new conditions.’ Pierre Dockès delineated this ‘mutationist’ perspective in his monumental work, Le Capitalisme et ses rythmes (2017): ‘mutation affects not an aspect or a character of the productive order, but the system itself: a change of state. From a certain threshold, there is percolation: the quantitative change of the elements crystallizes into a qualitative change of the state of the system’.

Still, the question remains: What is driving this percolation, and how exactly does it crystallize?  More to the point, which long-term trends are pushing the current mutation beyond neoliberalism?

*

To illuminate these issues, we can first turn to the rich intellectual tradition derived from Schumpeter and Nikolaï Kondratiev, which links technological change to multi-decade waves of capital accumulation. For this tradition, clusters of innovation are deployed during the expansionary phase up to the point where most profitable avenues have been exhausted. Then a depressionary phase fosters an intensive search for new business opportunities, sowing the seeds of a new potential expansionary phase. These shifts are long waves rather than cycles. While depressions are an ineluctable outcome of capitalist development, it is by no means inevitable that a fresh phase of expansion will be unleashed.

According to Ernest Mandel’s Long Waves of Capitalist Development (1980), ‘it is not technological innovation per se which triggers a new long-term expansion. Only when this expansion has already begun can technological innovations occur on a massive scale’.  This requires ‘both a sharp increase in the rate of profit and a huge widening of the market’. Because ‘the capitalist way of securing the first condition conflicts with the capitalist way of assuring the second’, Mandel argues that ‘changes in the social environment in which capitalism operates’ must intervene. In sum, while downturns are endogenous, upturns require exogenous ‘system shocks’ – wars, counter-revolutions, working-class defeats, the discovery of new resources – to allow capital accumulation to take off again.

Before his death in 1995, Mandel identified the ‘total integration of the former USSR and the People’s Republic of China into the capitalist world market’, along with a ‘major defeat of the working class’, as preconditions for an upswing. This analysis was partially borne out: the expansion of global value chains and the increasing rate of exploitation resulting from neoliberal policies, plus the availability of a huge reserve workforce, were decisive changes that propelled the upturn of the global economy from the mid-90s up to the 2008 crash. But due to mounting overcapacity and anemic demand, a full expansionary phase led by the digital economy failed to materialize.  

Mandel’s theory is seldom mentioned nowadays, but one can nonetheless find some of his ideas in the influential work of Carlotta Perez and Mariana Mazzucato. In a 2014 joint paper entitled ‘Innovation as Growth Policy: the challenge for Europe’, they too sought to describe the conditions for an economic upswing. ‘Markets alone cannot return us to prosperity’, they wrote. ‘Investment is driven by innovation; specifically, by the perception of where new technological opportunities lie. Private investment only kicks in when those opportunities are clear; public investment must be directed towards creating those opportunities across all policy spaces and affecting the entire economy’. Perez and Mazzucato attempted to move beyond Mandel’s reliance on ‘system shocks’ by giving the state responsibility for the extra-economic factors necessary to launch an expansion. Desirable innovation should be made profitable through industrial policy – financial regulation, demand management, education, etc. – while adequate tax, fiscal and monetary policies should equip this active state with the necessary resources. 

Thus, the forces of change can lie outside the economic sphere. For Perez and Mazzucato, the ‘current problems are structural’ (read: endogenous) and date back to decades before the 2008 crisis. But, crucially, they believe that conditions to overcome them lie in the autonomy of policymaking. Policy can change structural conditions. This is an inescapable lesson from Communist Party-led Chinese catch-up, and the basic rationale for state capitalism’s return to grace.

If one accepts this argument, it is tempting to push it a step further by exploring the factors that might foster institutional change and reframe the conditions for capital accumulation. What immediately comes to mind is Karl Polanyi’s ‘double movement’. In The Great Transformation (1944), he writes that ‘while laissez-faire economy was the product of deliberate state action, subsequent restrictions on laissez-faire started in a spontaneous way’. If liberalization is a political project, the destructive impact of market forces is automatically ‘stopped by the realistic self-protection of society’. While Polanyi’s focus is on institutional change rather than accumulation waves, his analysis draws an unmissable connection between the two.

A recent contribution from the post-Keynesian school picks up where Polanyi left off, proposing an elegant endogenization of institutionally-driven class conflict in long-run economic fluctuation. In Michalis Nikiforos’s model, ‘The increase in the profit share is related to the domination of the self-regulating market and inevitably leads to a crisis. Society will mobilize to protect itself and there will be a counter-movement, which…shows up as an increase in the wage share’. For Nikiforos, ‘this counter-movement can also later lead to a crisis that will make the emergence of the self-regulating market more appealing and will lead to a change in the direction of distribution and an increase in the profit share’. He argues that the instability of income distribution is due to class struggle dynamics: the more power a class has, the greater its potential to appropriate a larger share of societal income. But the power of each class in turn rests on ‘its potential effects on the macroeconomic performance of the economy’. When excess profit begins to damage the economy in general, the political pressure mounts for an arrangement more favorable to wages. And vice versa.

This framework allows for a straightforward interpretation of the current conjuncture: ‘The recent crisis and the current stagnation are the result of the neoliberal institutional arrangements, which emerged as a response to the profit-squeeze and the crisis of the 1970s…The sudden rise of egalitarian political forces that were until very recently on the fringe of the political system, or the popularity of Piketty’s book, are all manifestations of society’s reaction against the institutional arrangements responsible for the crisis and the stagnation’. The unidimensional focus on the distribution of income is of course a limitation of Nikiforos’s model, but the advantage is that it provides an explanatory mechanism at both ends of the fluctuation.

Economists influenced by the so-called Regulation School have also tried to explain the recurrence of ‘structural crises’ which necessitate a major institutional restructuring and produce a new balance of class forces. In The Rise and Fall of Neoliberal Capitalism, published in 2015, David Kotz anticipated a movement toward a more regulated form of capitalism, defined by a stronger state influencing and constraining the market. He notes that ‘the current crisis is not the first but the third crisis of a liberal form of capitalism in the United States. Each of the previous two crises was followed by a regulated form of capitalism. Big business played an important role in the shift to regulated capitalism both in 1900 and in the late 1940s, with large social movements creating a context that led big business leaders to support or acquiesce in an expanded state role.’

One of the strengths of the Regulation School, inherited from its Althusserian ascendency, is that its theorization of the succession of accumulation regimes is not limited to the regulated/liberal dichotomy. Each mode of regulation is organized under the constraint of a specific institutional form that weighs on the other components of the system. This allows for a serious engagement with capitalism’s qualitative evolution through its successive stages. Under this framework, competition, the capital-labor nexus and finance have each played prominent roles in different historical periods. Looking ahead, Robert Boyer sees the current conjuncture as open to producing three potential forms of regulated capitalism: a bio-capitalism centered around anthropogenetic activities; a platform capitalism associated with the rise of large digital companies; and a neo-dirigist state capitalism linked either to the Chinese model or to what he calls ‘democratic populism’.

The downside of the Regulation approach, however, is that the precise mechanisms of change tend to be overlooked. While mounting dysfunctionalities in the accumulation regime lead to a structural crisis, the process by which a new regime emerges is unpredictable – depending on trouvailles (incidental discoveries) rationalized ex-post by policymakers, theoreticians and social actors. The fascination with capitalism’s capacity to resuscitate itself after crises comes at the cost of an impoverished political imagination.

The most promising extension of the Regulation School – which comes closer to formulating a coherent theory of institutional change – can be found in Bruno Amable and Stefano Palombarini’s The Last Neoliberal (2021), an incisive analysis of Macron’s France. For Amable and Palombarini, macroeconomic dynamics, institutions and political mediations exist as a totality. Society’s institutional architecture stems from the historical sedimentation of macro-social compromises which are the result of irreducibly conflicting political processes. Those political processes are themselves determined by economic dynamics through the evolving expectations of various social groups. Following Gramsci, the neorealist approach places a clear emphasis on the autonomy of politics. Social expectations are not fixed in a crude expression of interests but proceed from moving ideological representations that respond to a specific political elaboration.

Macron is swimming against the international tide, toward an intensification of neoliberal restructuring. Amable and Palombarini’s theory provides a powerful interpretation of this phenomenon. The progressive disarticulation of the strongly coordinated national model, which took place over four decades of incremental neoliberal reform, disappointed the expectations of popular classes. This led to a disaggregation of the traditional right-wing and left-wing blocs, paving the way for a full-bloodedly neoliberal-bourgeois movement, embodied by Macron. However, the lack of popular support for this movement hinders is ability to pursue radical neoliberalization. This was forcefully demonstrated by the gilet jaunes, even before the Covid-19 crisis rendered the neoliberal playbook obsolete.

*

There is much to learn from these various iterations – Polanyian, post-Keynesian, Regulation, Gramscian – of the historical stages approach: the non-linearity of change, the contingency of technological-economic expansion on adequate institutional settings, the socio-political reactions to the destructive forces of markets, and the qualitative changes to the system brought about by its mutations. These insights help us to decipher the current conjuncture and forecast its possible directions. However, we must also keep sight of the cumulative effects of  successive developmental stages. Contradictions do not just exist within each phase; they also build up from stage to stage, as the dynamics of one accumulation regime conflict with its forerunners. Capitalism, as a system, is ageing.

With the globalization of manufacturing, overcapacity continues to mount and spatial fixes continue to exhaust themselves, making the internal contradiction of the process of accumulation manifest at a truly global level. It remains doubtful that services industrialization and its international fragmentation could create opportunities large enough to absorb this mass of overaccumulated capital. In the meantime, what James O’Connor described as the second contradiction of capitalism is gaining steam. For O’Connor, a key obstacle to capitalist development arises not within the accumulation process per se but ‘between capitalist production relations (and productive forces) and the conditions of capitalist production’, due to ‘capitalism’s economically self-destructive appropriation and use of labor power, urban infrastructure and space, and external nature or environment’. The ecological crisis, the rising price of healthcare and education, the deterioration of physical infrastructure – all this indicates increasing costs on the supply-side that could further hamper the accumulation process. Dealing with these issues is by no means out of reach of human agency. But it would be foolish not to ask whether the additional systemic constraint of profit-making may have set the bar too high.

Read on: Ernest Mandel, ‘The Industrial Cycle in Late Capitalism’, NLR 1/90.