CHAPTER 1

The Limits of Current Global Capitalism: An Introduction

Overview

Not only in the authors’ teaching experience, in various disciplines, but also in Dr. Svigir’s economics consulting engagements with policy makers at the European Commission (EC), we typically assumed that the quality of knowledge and debates regarding macroeconomics is continuously neglected at large or omitted altogether. It is either reserved for academic discussions or misplaced in the course of the overall understanding of a variety of emergent phenomena in business and economics regarding globalization. That is a shame since macroeconomics, as a discipline, is very much about the part of economics concerned with the large-scale or general economic factors, such as interest rates and national productivity. Macroeconomics is at the heart of the debate on sustainable global capitalism, as it encompasses the whole economic system of a country (and the world!), especially with regard to general levels of output and income and the interrelations among sectors of the economy. In any part of the world, businesses cannot become genuinely sustainable unless the economic system within which they operate is itself supportable of the behaviors that enable viable business practice.

The limitations inherent within the current framework for capitalism need to be investigated. There is a need to explore what might be required to promote a genuinely balanced global economy, global sustainable capitalism, its risks and opportunities for business, and how business leaders may contribute to it. There is also a need to understand better the limitations of the old economic ways and the call for a new operating capitalist system.

Capitalism 1.0

After the collapse of communism and the breakdown of the old Soviet Union, over 20 years ago, global capitalism seems to have triumphed. Capitalism, post-Soviet Union, which we dubbed here “Capitalism 1.0,” became a sort of a legal system that safeguards private property and permits free trade in competitive markets across the globe. At least theoretically, this form of capitalism was supposed to enable individuals to pursue their self-interest freely. Assuming competition restrains these self-interests, society would always benefit from lower prices and broader choices. The problem, however, as illustrated in the cartoon of Figure 1.1, is that dominant forces of self-interest have a natural tendency to collusion and corruption. In other words, with a few exceptions, capitalists, large multinational corporations, and interest groups tend to seek power and use it to rig the market in their favor to the detriment of society.

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Figure 1.1 Crony capitalism leads to corruption and collusion

Source: http://hermes-press.com


In the 1987 film, “Wall Street,” Michael Douglas’ character Gordon Gekko notoriously said that, in capitalism, “it is a zero-sum game: Somebody wins, somebody loses. Money itself isn’t lost or made; it’s simply transferred from one perception to another.” Messages such as these, degrading free markets, have always been widespread, but have gotten ever more pervasive with films like Michael Moore’s “Capitalism: A Love Story” to the more recent documentary “Inside Job,” all shaming the true merits of a free, capitalist society.

Adam Smith, the intellectual father of capitalism, observed over more than 200 years ago that the competitive market, as if by an “invisible hand,” transforms self-interest into a force for the public good. He explained how competition maximizes productivity and social welfare by assuring the optimal allocation of capital and labor in the overall economy. But, as Michael Moore puts it, “This economic system they call capitalism has no moral or ethical core to it,” nor, he says, is it democratic. Proponents of such absurd ideas are often the first to provide solutions, and what better a solution than the benevolence of big government to fight the evils of Big Oil and Walmart? Not quite, though. Frederic Bastiat’s work “That Which Is Seen, and That Which Is Not Seen” shows just how easy it is to ignore the unforeseen consequences of any action, including big government. Contrary to their own beliefs, opponents of the free market are mistaken when saying that big government is the solution to “evil” businesses. In fact, the very opposite is true—government officials and business leaders have increasingly gotten cozy with another and not for the better. When corporations get handouts at the expense of taxpayers, there is a problem, and that problem has nothing to do with capitalism. That problem lies in what economist Russ Roberts and many others call crony capitalism or corporatism.

Karl Marx argued that capitalism would eventually collapse because of this and other internal contradictions of the system. Marx believed that the distribution of income and wealth would become increasingly unequal under capitalism. When the workers could no longer tolerate being exploited by the capitalists, a communist revolution would result. Initially, Marx said, there would be a political transition period in which the state would not be anything more than a revolutionary dictatorship of the proletariat, which would seize all private property from the capitalists on behalf of the working class. Eventually, all class distinctions would disappear, causing the state to wither away and being replaced by an international, and apparently democratic, commune of the proletariat.

Crony capitalism has been a pervasive feature not only in the American political economy but also all over the world. History is besieged with examples of industries turning to government to get the upper hand, from window manufacturers and “green” energy businesses to labor unions and banks. Friedrich Hayek’s seminal work in the problem of knowledge has shown that no central planner has the wisdom to pick which is right and which is wrong. The question of knowledge is best left for the free market, and for prices to honestly reflect real values.

Marx also argued that a communist society would deliver the highest welfare for most people, at least in theory. In practice, the results have been devastating. There is a movement among young people across the globe glamorizing communism, one of the harshest societies anyone could live in. In the United Kingdom, an increasingly popular phrase “I’m literally a communist,” argued by 26-year-old activist and lecturer Ash Sarkar to Piers Morgan on Good Morning Britain, tells the story of British individuals in a capitalist society who are seeing their peers trapped in jobs which don’t pay enough to survive, with spiraling debt and few opportunities.

Social equality and egalitarianism are attractive words fused in a nightmare. It is not possible to have equality when a single political party conditions you to praise and support it to get what you want. No doubt, Capitalism 1.0 has genuine and harmful flaws, but just as a single among many examples, if we were to reflect on Romania of the 1980s, we will realize what was beyond the egalitarianism motto. Romania has suffered from a rough communism period which ruled for more than 40 years. Under the Romanian People’s Republic, the state followed Eastern Bloc ideology with only one leading political party and nationalization of all banks and large organizations. The Constitution was nothing but a form of deceit. It provided a series of hypothetical freedoms like religion, press, political options, meetings, and protests that were not maintained in practice. Citizens were forced to settle with what the government dictated or face dangerous, often deadly, consequences. The leader of the Romanian Communist Party, Nicolae Ceausescu, went out into history as one of the most extreme communist dictators of all time. In 1982, Ceausescu had only one goal, to pay the external debt Romania had previously acquired. The most abusive era started with him imposing the austerity policy that led to economic stagnation. This encompassed extreme food rations, massive queues in front of a grocery store hours before its opening, and a considerable reduction of electricity and heating in people’s houses.

What is most interesting is that a survey conducted in 2014 showed that 61 percent of Romanians believe that people had a better life during the communism era than in the present. Similarly, 68 percent of people born after 1989, so after the end of communism, share the same view. The flaws of modern capitalist society under Capitalism 1.0, such as corruption or poverty, have led to fond memories of the times when people were not allowed to be against the party, to express their own views, to travel whenever and wherever they wanted to, or to have bread and meat in their house every single day. These are things that we tend to take for granted and cannot imagine how such a limited and harshly enforced system could rule lives.

Another example is the destructive consequences of Soviet communism, becoming more evident as time progresses. The ecological destruction has been immense. Corruption and incompetence have stifled economic creativity. Central planning has produced massive economic stagnation and waste. Technology is often primitive and even hazardous, as demonstrated by the Chernobyl disaster. Products are substandard in quality and scarce in supply. The standard of living is subpar, and health conditions are among the lowest in the world.

While both Adam Smith and Karl Marx agreed on a few fundamental concepts, they diverged on the method of production of goods and services and distribution of resources. Whereas Karl Marx went so far as suggesting revolution by the proletariat against the bourgeoisie for a more just, equitable society, Adam Smith preferred stability and peace over revolution. While Adam Smith’s envisioned ideal society would not distribute resources equitably or eliminate gaping wealth levels between the different classes in a society, Marx’s ideal economy would produce, according to the directives from a central authority, and distribute resources according to the needs of the public. In his idyllic economy, Marx envisioned the elimination of class distinctions and appropriate valuation of a worker’s effort, which is not possible in a capitalistic society in the presence of profit-seeking capitalists who deprive workers of their full share of earnings, according to Marx.

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Figure 1.2 Global income percentile 1993–2016

Source: The Economist, https://economist.com/open-future/2018/04/16/fixing-the-flaws-in-todays-capitalism


Smith’s prognostications, however, have been abnormally accurate. It is in this predictive sense that recent events mark the triumph of Adam Smith’s ideas over those of Karl Marx. Capitalism, in principle, has outlasted communism. Although Capitalism 1.0 tends toward the inadequate distribution of income and wealth, it has delivered far larger prosperity to far more people than any other economic system. Moreover, in an ironic twist, it indeed confounded communists—most notably Marx, Engels, and Lenin—who predicted that capitalism would eventually collapse. Smith did warn that special interests could do a great deal of harm, but he believed that the power of capitalism would prevail.

Smith acknowledged that in a capitalist economy, nowadays a global capitalism one, some individuals would likely become much wealthier than others. He argued that as long as there was economic development, the rich would get richer, but the poor would also be better off. Marx, of course, predicted that the poor would become more miserable. Interestingly enough, the number of wealthy individuals in communist China, the world’s largest economy in purchase parity power (PPP), or second biggest in dollar terms, has grown exponentially over the past decade. This is possible thanks to a sort of Sino-capitalist system, where the Chinese government is allowing an economic and political system in which the country’s trade and industry are being controlled, at least in part (not to be confused with a free market), by private owners for profit, rather than by the state. China has embarked on a privatization process of its state-owned enterprises (SOE), allowing for at least a freer market.

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Figure 1.3 Real-wage growth, average annual % change, 1998–2008, 2008–2016

Source: The Economist, https://economist.com/open-future/2018/04/16/fixing-the-flaws-in-todays-capitalism


Nonetheless, despite the advantages of the capitalism principle, as portrayed by Smith, Capitalism 1.0 needs to be reformulated. Wealthy nations across the globe show evidence that the economy no longer works for many of its people. Globalization has brought enormous benefits to the world as a whole, but middle-income people in rich countries seem to have fared poorly in recent years, as shown in Figure 1.2.

As depicted in Figure 1.3, high unemployment is also a major problem, afflicting much of Europe and most of the world’s economies. The United States and the United Kingdom have (relatively) low unemployment but have seen a big rise in insecure work. Real-wage growth across the rich world has been measly.

Negative Impacts of Individual Interests

The savings and loan crisis in the United States is an extraordinarily good example of the damage that individual interests can do. The fact that the U.S. economy has continued to grow despite this and many other shocks, including the 1987 stock market crash, the 1989 collapse of the junk-bond market, and the massive collapse of the global financial markets in 2007 to 2011, strongly supports Smith’s unswerving faith in the resilience of the capitalist system.

Not surprisingly, however, many hard-working people feel alienated. The feeling that the economy does not work for ordinary people has driven many toward populist causes, including Brexit and Boris Johnson, Donald Trump, and the National Front in France. Support for capitalism among young people is low, as shown in Figure 1.4.

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Figure 1.4 Support for capitalism in America, 2016, %

Source: The Economist, https://economist.com/open-future/2018/04/16/fixing-the-flaws-in-todays-capitalism


Noteworthy is the fact that competition for wealth and social status was hardly created by the capitalist system. People have always competed for these things. Thanks to capitalism, though, this competition is now less violent, and true poverty is easier to avoid.

Hoodwinking the Economy

Nowadays, Smith is often remembered as a champion of the capitalist society, but nothing could be further from the truth. Contrary to the conventional view, he did not advocate unrestrained capitalism, and he indeed was not an admirer of capitalists. Smith repeatedly warned that in pursuing their self-interests, capitalists tend to join in powerful special interest groups. These coalitions seek political influence to promote public policies that benefit themselves, often at the expense of public interest. In his writings, Smith often railed against the capitalists and accused them of hoodwinking the nation. He frequently observed that the benefits of merchants and manufacturers always run contrary to those of the general public. Because their interests are at odds with the public interest, capitalists advocate policies that they claim to be good for the entire nation, but in fact, are suitable only for themselves.

These are hardly the words of a champion of the unrestrained pursuit of self-interest. To counter the political manipulations of the special interests, Smith believed that selfishness could be disciplined and channeled in socially beneficial directions. He saw three mechanisms that together would do the job: self-discipline, the competitive market, and a system of justice. Individuals have the aptitude to be both good and bad, Smith argued, suggesting that we either tend to agree or disagree with our behavior, depending on the circumstances, on how it benefits us or not. Smith recognized that self-discipline was not enough and that many people would violate their moral conscience and act in ways harmful to society if there were not at least two other checks—the competitive market and a system of justice.

Today, in the United States and throughout the world, the clearest example of the excesses of Capitalism 1.0 and the destructive influence of special interests is the global financial crisis, which by 2013 had already cost more than $22 trillion. It was by far the biggest and most spectacular failure in the entire financial history of the United States, with dire consequences for the whole global economy, especially for advanced economies, and by (extended) contagion, emerging markets, although not as much to frontier economies.

Savings and investments in the American money market by emerging economies, especially the BRICS (Brazil, Russia, India, China, and South Africa) but China as it refused Washington’s recommendations to open up its markets without restrains, financed the excessive consumption of the United States in the early 2000s, which indirectly led to a global financial crisis. The crisis started from the real estate mortgage market, with disrupting processes beginning in the American financial market, which contradicted all previously known equilibrium theories of every school of economics. The field of economics has yet to come up with models or empirical approaches to explain this (new) disequilibrium. Naturally, the issues of reasonable risks and greed, credit ratings and shareholder control, limited liability, and market regulations are aspects which cannot be ignored.

The global financial crisis, estimated to have led to trillions of dollars of loss all over the world, was not caused by a war or a significant recession. It was caused by the shadow banking system of the United States, including but not limited to greed and predatory practices of the investment banks, hedge funds, and supermarket-owned banks, as well as the elegant mathematical models that are based on irrelevant premises and were not even truthfully understood by most financial managers. At the time, an explanation was given, very casually and with not much transparency, by suggesting that the crisis was caused by the liquidity shortage of the American banks, which was the result of the overvaluation of assets. In other words, the most critical causing factor was never mentioned, which was the focal point of the anatomy of the crisis, namely, the greedy and irresponsible Wall Street investment companies.

These financial institutions transformed barely documented subprime mortgage loans, designed for clients with weak credit rating into exotic and poisonous financial products through multiple leverages. Several financial institutions were involved, which included, apart from American banks and hedge funds, other institutions such as Lehman Brothers, Goldman Sachs, Salomon Brothers, J. P. Morgan, Citibank, Wells Fargo, AIG, and Bear Stearns. In addition, several foreign banks operating on Wall Street, including the Swiss UBS, the German Deutsche Bank, the English Barclay’s, were all involved in these deals. Their global branch networks were equally situated in advanced economies such as Japan, the United Kingdom, and Germany, as well as in the emerging ones such as China, Brazil, and South Korea, to name a few. These financial institutions sold utterly unfounded expectations and unsecured stocks to noncreditworthy middle-class investors for large sums and earned astronomic amounts with proprietary trading. The leverage trade in the derivatives of the real estate mortgages was extensive even when the fallacious rating of these derivatives by the American Moody’s, S&P, Fitch, and so on became visible and it was increasingly likely that the American real estate market bubble was going to burst.

Gauging the damage from the global financial crisis is, therefore, not candid, even with the benefit of reflection provided by 10 years of history, because the counter-factual of what might have happened in its absence is inscrutable. However, as argued in December 2018 by David Turner and Patrice Ollivaud, at the Organization for Economic Cooperation and Development (OECD) Economics Department, a naïve, but commonly adopted approach of comparing the postcrisis path of GDP with the precrisis trend exaggerates the cost and can lead to misleading policy conclusions. Such an approach is akin to treating the crisis as a meteorite from outer space, which is entirely unrelated or exogenous to preceding macroeconomic developments. This is improbable because the precrisis trend in GDP involved unsustainable trends in asset prices, most obviously house prices, driven by an extended period of rapid excessive credit growth across most of the advanced economies.

According to the latest analyses (see Cassidy 2010), the global financial crisis was directly caused by the inefficient market allocation of international, primarily Chinese, savings flowing into the United States. The vast liquidity abundance amassed in the American financial sector was used to enhance American living standards and finance the disproportionately high consumption of the American economy, instead of productive goals or the efficient transformation of the struggling American industry’s production structure, such as by making the American steel production or motor industry more competitive. The bursting of the IT bubble in the second half of the 1990s, followed by significant cuts in IT investments, was an additional factor in this tendency. This process and many of its interim developments finally led to the credit crisis on the real estate mortgage market as well as the credit card market. First, a minor economic recession occurred in the American economy, and then the world was pushed into a financial crisis by the high appetite for risk demonstrated by investors from all over the world. To date, very little is known about the International Monetary Fund’s (IMF) role or activities during the crisis. The IMF undertook an exponentially more significant task in the management of the crisis (see Csáki 2009) and presumably absorbed even higher proceeds than during the Bretton Woods era. Consequently, if we may say so, the IMF is one of the winners of the crisis.

The Global Financial Crisis

The crisis and its management were analyzed by numerous scholars, investigative journalists, economists, book authors, and the media, both in the United States and abroad. These analyses are mostly dominated by macroeconomic papers and discussions, focusing primarily on the role of the contradictory Keynes and neoclassic schools and the crisis of economic science (Móczár 2010a). Mellár (2010) undertook an even more significant assignment when he briefly described all textbook macro models and reached a conclusion that, as these models did not include the financial sector, they could not predict the financial crisis.

In our view, the central lasting macroeconomic damage from the global financial crisis is accounted for by lost productivity. The OECD suggests that for most member countries experiencing a banking crisis, most of this lost productivity was considered for by lower growth in capital per worker, rather than lower total factor productivity (TFP), as depicted in Figure 1.5. The loss in capital per worker illustrates how a severe adverse demand shock can be transformed into an adverse supply shock via an accelerator effect on investment that then reduces the capital stock. Also, increasing evidence, including from corporate-level research, suggests that many nations where interest rates were particularly low in the precrisis period, especially in Southern Europe, experienced a substantial misallocation of capital. These countries are also among those that experienced a more abrupt postcrisis adjustment in capital stock growth. The fall in capital stock growth was also exacerbated in some countries by cutbacks in public investment after the crisis.

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Figure 1.5 Estimates of the loss in trend productivity due to the global financial crisis

Source: Ollivaud, P., Y. Guillemette and D. Turner (2018).

Notes: The Countries shown are those OECD countries experiencing a banking crisis after the GFC. The bars show the estimated deflection in components of trend productivity relative to pre-crisis trend distinguishing between a capital per worker and a TFP component


There is a broad consensus that this crisis could not have developed without any prior events. However, opinions differ as to how long we should go back in history. Michael Lewis, an American bestseller author, who writes for the general public about scandalous American finances, would go back to his book Liar’s Pocker (1982). Notwithstanding, he culminates the predatory practices of Wall Street in another of his book titled The Big Short (2010), revealing the Wall Street bombastic deal of securitization of mortgages, invented by the Salomon Brothers, which took off and saturated the markets by the mid-1990s. On the other hand, one of the few economists who warned about the impending crisis, Rajan (2005) from Chicago, would go back only to the crisis waves sweeping across the emerging markets of the 1990s. These waves caused the collapse of the economies of East Asia, made the stock exchange and real estate market twin bubble burst in Japan, rendered Russia insolvent, and created considerable financial difficulties for Argentina, Brazil, and Turkey. The emerging countries opted for the simplest possible solution to avoid the crash: they became a lot more cautious in external borrowing, their governments and companies cut back on capital investments, and their households spent less. With such restrictions, these emerging countries soon turned from net importers into net exporters of financial investments.

With the collapse of communism and the disintegration of the old Soviet Union, global capitalism had apparently succeeded. Economists point to declining growth rates, technological lag, and general inefficiency of the communist economic system as the decisive factors in bringing the regime down. An alternative argument, however, is that it was not so much a financial crisis that forced reform, as the drive for improvement in itself created a political crisis. Whatever the reasons, the clash of ideologies appeared to be over.

While the western capitalism is the only example of capitalism as the world understands it, good or bad, aside from communism, the only means of meeting people’s collective needs, for allocating scarce resources and distributing wealth, it has also been an example of the excesses. Capitalism has also been blamed for its contribution to the global financial meltdown, which has led the world, especially the United States, into the most prolonged and most profound global financial crisis in living memory. Since then, western capitalism is still groaning at the seams, suffering a crisis of liquidity, reliability, and confidence, and is naturally undergoing a wise degree of introspection.

So, what is wrong with Capitalism 1.0? After all, historically, it has delivered unprecedented growth and prosperity, hasn’t it? The challenges facing the planet today are unique and extraordinary: climate change, water scarcity, poverty, disease, growing inequality of income and wealth, demographic shifts, transborder and internal migration, urbanization, and a global economy in a state of constant dramatic volatility and flux, to name but a few. While governments and civil society will need to be part of the solution to these massive challenges, ultimately, it will be corporations and investors that will mobilize the capital needed to overcome them.

Umair Haque, economist, author, and blogger, points out in his excellent book The New Capitalist Manifesto that real growth in the developed economies reached a contrary inflection point decades ago and has been steadily slowing for half a century. David Korten, U.S. economist, author, and former Harvard professor, also shows us that any perceived growth has also been more of an illusion. He dubbed it “unsustainable phantom wealth,” based on financial bubbles, abuse of power by banks to create credit from nothing, corporate asset stripping, baseless credit ratings, and creative accounting. The world of financial stability, environmental sustainability, economic justice, and peace that most psychologically healthy people want is possible if we replace a defective operating system that values only money, seeks to monetize every relationship, and pits each person in competition with every other for dominance.

A better plan, as many economists have been arguing, is to force bankrupt banks into government receivership. As part of the sale and distribution of assets to meet creditor claims, these banks should be broken up and their local branches sold to local investors. These new, individual community banks and mutual savings and loan associations should be chartered to serve the needs of the masses, also known as Main Street, through lending to local manufacturers, merchants, farmers, and homeowners within a stable regulatory framework.

Under Capitalism 1.0, even with its economic growth, more limited in size than perhaps realized, one still needs to account for the trickle-down effect, with prosperity reaching only a privileged few, and a decline in real income for the majority. In fact, from 1980 to 2005, the highest-earning one percent of the U.S. population increased its share of taxable income from 9 to 19 percent, with most of the gain going to the top one-tenth of that one percent. This situation is not unique to the United States, as the case in the United Kingdom is worse still, with the fastest-growing gap between rich and poor in the developed world. The system is designed to concentrate wealth.

Whichever way one looks, Capitalism 1.0 has failed to create shared prosperity, not to mention the fact we have not even considered the environment yet, although we must. Some of the most widely recognized causes of the crash in capital markets are also the principal, underlying causes of the environmental crisis we now face. We seem not to realize how far beyond our means we have been living, environmentally as well as financially. And we still do not correctly understand the way those two spheres of human activity are connected. The shock to the system, causing the near collapse of our global banking industry, has been traumatic. Even so, that is nothing compared to the near-imminent collapse of the ecological systems on which we depend on, particularly a stable climate.

In 2018, according to Oxfam, 2,200 billionaires worldwide saw their wealth grow by 12 percent, while the poorest half of the world saw its wealth fall by 11 percent, which is hard to believe at a time when global poverty is consistently falling. Figure 1.6 provides a region composed of the global wealth distribution in 2018.

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Figure 1.6 Region composition of the global wealth distribution in 2018

Source: Credit Suisse Global Wealth Report 2018


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Figure 1.7 Share of the global population living in extreme poverty, by world region

Source: World Bank, 2016


The rich are definitely getting way richer, which is a problem, but it is also true that the world’s poorest people are getting less poor, which can be verified in a variety of statistics, at least the World Bank’s estimates of how many people live on less than $1.90 a day (based on 2011 PPP prices), as shown in Figure 1.7. This data is based on household surveys, which take years to collect, so it is out of date at any given time, but economic growth in India, China, and even sub-Saharan Africa suggests that the progress continued through to the present day.

It is astonishing to reflect upon the fact that the core tenets of Capitalism 1.0 have warranted so little applied attention, by any of the major political parties, over the last two or three decades. Some strange herd mentality has been at work, excluding from the mass media the few voices which have been raised in warning about the potential risks entailed in embracing capitalism of this kind.

The Impact on the Environment

Environmental deregulation has been equally problematic, and it is now similarly inevitable that calls for much stricter regulation can only increase in the future. In Europe, there has been a slowdown in regulatory interventions from the EU, which started in the 1970s and 1980s. These interventions have done more than anything else to help improve both the quality of the physical environment and the quality of life for European citizens. Nonetheless, the EU government just seemed to have lost their regulatory nerve in the face of unprecedented lobbying by big corporations, opting instead for the use of voluntary agreements, or market measures instead of what has been endlessly disparaged as “command and control” regulations.

In the United States, back during the administration of George Bush, deregulation was in full swing, as he set out to dismantle the fundamental pillars of environmental regulation, including but not limited to the Clean Air Act, the Clean Water Act, the Endangered Species Act, and so forth. Trump’s administration goes on to suggest climate change is a hoax. The consequences of grotesquely inadequate regulation, government after government, administration after administration, are all around us. Thomas Friedman summarizes this admirably in his book titled Hot, Flat and Crowded:

There are no cushions left; there’s nowhere to hide; there are no more green fields to dump your garbage into, no more oceans to overfishing, no more endless forests to cut down. We have reached a stage where the effects of our way of life on the earth’s climate and biodiversity can no longer be ‘externalized’ or ignored or confined. Our environmental savings account is empty. It does not pay now or pay ever pay later. It pays now, or there will be no later. There will be no avoiding accountability for the total cost of ownership of what you produce and consume. The days of a ‘subprime planet’ are over—a planet we could own for no money down, where there were no interest payments until sometime far into the future, and all the real costs were hidden.

As our debts to the banks and others have built up, so have our obligations to nature, at least regarding the unsustainable depletion of natural resources, measured by the loss of top-soil, forests, freshwater, and biodiversity. Everybody knows that liquidating capital assets to fuel current consumption is crazy, but nobody seems to know how to stop it. Judging by the regularity with which politicians trot out today’s favorite green clichés, with quotes such as “we do not inherit the world from our parents; we borrow it from our children,” you’d think they understood the difference between capital and interest. But they do not.

Some time ago, the Global Footprint Network and the New Economics Foundation launched a new initiative, under the name “Ecological Debt Day,” to mark the point in the calendar year at which society exceeded the total volume of resources available to it every year. If we intend to maintain intact our stocks of natural capital, in 2008, their report demonstrated that we went over the limits around September of that year. The direction we are heading is obvious, as are the moral consequences. This kind of deficit consumption is, in effect, draining the capital entitlements of future generations. Given that we never heard a single politician indicate the slightest awareness of this phenomenon, let alone any declared intention of planning to pay back against these ecological debts, we should recognize this for what it is: intergenerational larceny on a staggering scale.

The phenomenon is hardly surprising. When the global population is still increasing by around 70 million people every year, when per capita resource consumption is still increasing every year in all but the poorest countries, and when grown technological productivity can do little more than offset a small part of that combined impact, overshooting our targets is unavoidable. And though no one should ever underestimate the misery caused to hundreds of millions of people by getting into debt and getting stuck in debt, it is our debt to the natural world that matters more than anything else. After Capitalism 1.0 spent billions at trying to recapitalize the banking system, we now hope Capitalism 2.0, sustainable capitalism, can recapitalize the world’s environment on an even more heroic scale.

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