Theories of Economic Crisis in the Capitalist System (Part-4)

Wallerstein: Cyclical Rhythms of the Modern World System

Immanuel Wallerstein, unlike many sociologists, analysed the world economy in a historical systematic. The ‘Modern World System’, which Wallerstein calls a capitalist world economy, can be summarised under the following main headings: The modern world system is a capitalist world economy; that is, it is under the influence of the drive for endless capital accumulation.

- This system was born in the 16th century and initially prevailed in most of Europe (with the exception of the Russian and Ottoman Empires) and parts of the American continent.

- East Asia was the last region to be included in this system, and it was only in the middle of the 19th century that the modern world system became the first world system to cover the whole world.

- The capitalist world system is set up within a world economy dominated by centre-periphery relations and a political structure of sovereign states within the framework of an interstate system.

- The fundamental contradictions of the capitalist system are expressed in a series of cyclical rhythms which, in the course of the system, have served to contain these contradictions.

- These cycles have led to regular, slow-moving but important geographical shifts in the positions of accumulation and power, but these shifts have not changed the fundamental relations of inequality within the system.

- At a point where the fluctuations in the system become so large and unstable that the institutions of the system can no longer guarantee the renewal of their viability, one or more systems will be replaced by a transitional period.

Wallerstein's theory of the Modern World System was born in reaction to the ‘dualistic’ notions that formed the foundations of development theory in the period following World War II. The main theoretical basis of the dualistic approach was the work of Arthur Lewis, Nobel Prize winner in Economics, entitled ‘The Theory of Economic Growth’. The basic assumption of the study was based on the idea that underdeveloped countries could be divided into modern and traditional sectors and accordingly, the modernisation of economies could be achieved by shifting resources from traditional sectors to modern sectors (import substitution industrialisation). The Modern World System, which we say was born as a reaction to this understanding, argues that the economy does not consist of two different sectors, as the dualists believed, but that both sectors are part of a larger whole (the capitalist economic system).

Wallerstein argues that the Modern World System was born in the 16th century and was not completed until the second half of the 19th century. How a system that is not valid all over the world can be called a world system is also a subject of criticism. According to Wallerstein, a world system does not have to be applied all over the world. In order for a system to be called a ‘world system’, it is sufficient that it prevails above the level determined by the political borders of states.

In this analysis, however, the states that have ruled from the 16th century to the present day and their political borders are ignored (which means ignoring the histories and societies of the states) and a single system is expected to explain all these complex relations. Wallerstein sees nation states as parts of a single capitalist system that fulfil different functions. The functions of these parts are determined by the international division of labour between the periphery and the centre. It is difficult to assume that these parts with different interests within the modern world system always and everywhere act in a way that ensures the continuity of the system.

In Wallerstein's analysis, labour in the peripheral countries formed the basis of the model. According to Wallerstein, all forms such as slavery, serfdom, wage labour are capitalist labour relations. Many economists disagreed with Wallerstein's definition and argued that wage labour emerged in the advanced stages of capitalism and that practices such as slavery and serfdom were not related to capitalism. Moreover, ignoring constraints such as geopolitical pressures, wars, etc. over time is another aspect of the model that is open to criticism. According to Wallerstein, it is not true that capitalism, as a historical system, represents progress compared to the previous historical systems it destroyed or transformed. One of the problems in analysing progress is the one-sidedness of all proposed measures. Scientific and technological progress is said to be undeniable and breathtaking, which is especially true since most technical knowledge is cumulative. However, Wallerstein argues that how much knowledge we have lost in the worldwide rise of the ideology of universalism has never been seriously discussed.

In summary, the element that Wallerstein recognises as key in this system is capital. In the system, all commodity chains, regardless of their size, transcend state borders. Wallerstein says that the transfer of profits from one region to another explains the centre-periphery relationship. Wallerstein expressed the basic contradiction of the system as follows:

‘While the interest of all capitalists seems to lie in the reduction of all costs of production, the cost reductions realised have often favoured some capitalists over others, so that some capitalists have preferred to increase their share in a smaller overall difference rather than to settle for a small share for the sake of a larger overall difference. The endeavour to reduce the costs of production often disrupted the flow and distribution of money, thus preventing the continuity in the increase of buyers necessary for the completion of the accumulation process. It is not enough, therefore, to say that everyone pursues his or her own interests. Self-interest often and entirely ‘rationally’ drives individuals to engage in activities in the opposite direction.’

In the light of these explanations, Wallerstein added that capitalism has produced a ‘homo economicus’, but that this human being is somewhat confused. Inequalities in the system are described by Wallerstein as follows: ‘The level at which wage labourers could accept work depended on the type of household in which they lived. The reason for the difference in this threshold, which we can call the lowest acceptable wage threshold, is related to the economics of survival. In cases where the proletarian household depends primarily on wage income, this wage has to cover the minimum expenses required for survival and reproduction. If, on the other hand, the share of wages in total household income is smaller, it is rational for the individual to accept a wage that contributes less to household income than its proportional share in real income, and if not, the wage job must be replaced by less remunerative work.’

Capitalism, on empirical observation, resembles a cycle of growths and recessions which alternate in the system as a whole. They are like the breathing mechanisms of the capitalist organism, drawing in purifying oxygen and expelling toxic waste. The accumulated wastes are economic inefficiencies, which are re-politicised through the process of unequal exchange. The cleansing oxygen is the more efficient distribution of resources made possible by the orderly restructuring of commodity chains.

The two most important cyclical rhythms,

50- to 60-year Kondratiyef cycles in which primary sources of profit move between the sphere of production and the sphere of finance

Hegemonic cycles of 100-150 years, involving the rise and fall of successive guarantors of global order, each with a distinctive form of control.

In terms of hegemonic cycles, according to Wallerstein, the United States was in a rising struggle for hegemony from 1873, achieved complete hegemonic supremacy in 1945, and began a slow decline from the 1970s. The follies of George W. Bush have accelerated this slow decline. The world emerged from Kondratieff's B phase in 1945 and made a rapid entry into the A phase of the modern world system. It peaked in 1967-73 and began to decline. The B phase we are currently in lasted considerably longer than the previous B phases. We know the characteristics of the Kondratieff B phase well, having lived through it since the 1970s. Profit rates from productive activities, especially those believed to be the most profitable, fall. As a result, the capitalist, expecting high profits, turns to the financial sphere, which revolves mainly around speculation. In order to avoid a further decline in profitability, production activities are moved from the centre to other parts of the world system, paying for lower personnel costs with lower transaction costs. This explains why factories proliferate in China, India, Brazil, while jobs disappear in Detroit, Essen, Nagoya. As for speculative bubbles, some people make a lot of money from them, and speculative bubbles burst sooner or later. If one asks why this Kondratieff's phase B lasted so long, the answer must be sought in the regular and effective intervention in the market by such powers as the US Treasury and Federal Reserve, the International Monetary Fund and its collaborators in Western Europe, and Japan in support of the world economy: 1987 (stock crisis), 1989 (savings and loan collapse), 1997 (East Asian financial crisis), 1998 (Long Term Capital Management debacle). These forces thought that they could defeat the system by learning from the previous Kondratieff B phases. However, by its very nature, this was only possible to a certain extent.

Wallerstein's theory is quite comprehensive in terms of recognising the world we are living in today and is explained in detail with its economic and historical origins. His following remarks about the crisis we are living in are quite assertive: ‘The fact that for more than 500 years the three main costs of capitalist production - personnel costs, inputs and taxation - have risen so uninterruptedly as the probable selling prices that it is today impossible to make high profits from monopoly-style production, which is the basis for serious capital accumulation ... The modern world system, as a historical system, has entered a fatal crisis and is unlikely to survive for another fifty years. However, since its outcome is uncertain, we do not know whether the resulting system will be better or worse than the one in which we now live... We do know that the transition period will be a terrible one, full of serious problems. What happens when we reach this point where the system (to speak in the language of complexity theory) forks? The first result is the extreme chaotic complexity that our world system is experiencing now and will probably experience for another 20-25 years.’

Wallerstein's expectations regarding the 2009 crisis are summarised below:

We are heading towards a protectionist world (forget so-called globalisation).

We are heading towards a world in which the government plays a much more direct role in production.

We are heading towards a government-orientated populist redistribution of resources. It could be left-of-centre social democratic or far-right authoritarian.

We are heading towards acute social conflicts within states over ever smaller shares.

In the short term, the overall picture is not very favourable.

(to be continued)