"According to my analysis, we are already past the point of no return"

Is democracy in a state of crisis? Phenomena, like deepening inequality and widespread populism, social turmoil and disenfranchised citizens question the future of the democratic system and institutions. How to solve the current democratic crisis is a question that has led to the never-ending debates and discussions, as well as various bottom-up practices.
However, Bas van Bavel, a distinguished professor of Transitions of Economy and Society at Utrecht University, suggests switching the focus. In his book “Invisible Hand?How Market Economies have Emerged and Declined Since AD 500”, with a group of researchers, Bas proves that the above-mentioned phenomena are completely understandable and rather the outcome of the market economy cycle. The Invisible Hand? is a comparative analysis of the economic development and social change over time and across regions. The book, through the historical explanation of market economies – that is, economies having markets as the dominant systems of exchange and allocation – offers a new perspective on the democratic crisis.

In the interview with Bas the focus is on the main insights of his research and the possible alternatives to the economic, political and social downturn. The conclusions might not be positive, but, as Bas says, now we live in the exceptional times where critical thought is spreading faster than ever, and this could be used for out societal benefit.

©N.W.Posthumus Institute

Your book is about the market economy cycles, could you briefly point out the main insights you deliver?

First, I think it is important to define what market and market economy are. People tend to have a very loose understanding of it. What I see is that there is a general focus on the exchange and allocation of goods, products and services. These are markets for output. By the way of the markets, outputs are easy to transact and through the market, it is done more efficiently. These output markets do mostly promote growth and do not often cause a lot of problems. But the orientation on output markets is not very relevant. What is more important is to focus on the markets for input or, let’s say, the building blocks of our lives: land and natural resources, labour and capital. These are the fundamental factors of production, but, unfortunately, the allocation and exchange of them do not receive a lot of attention in thinking about the economy.
Keep in mind that, both input and output can be exchanged and allocated through the market, but also through the state, cooperatives, families, associations, plantations, feudal estates, guilds and other.
Markets are great for exchanging output, but my focus is on market dominance for the exchange of input.

And why is it so important to focus on the allocation and exchange of land, labour and capital?

It’s important because it highly affects the way our societies function and the way they develop over time. The Invisible Hand? is a scientific historical research done by a group of scientists, who address that the market today has the overall dominance over the exchange and allocation of land, labour and capital. We additionally argue that there have been a few earlier societies that had the same market-dominant allocation system like the present one. One of them was found in the Early Middle Ages: Iraq, 600-1000, which at that time probably was the most economically advanced part of Western Eurasia. Other market economies were formed in Italy, which was a market economy from the 13th until the 16th century, in the Netherlands from the 15th century onwards, in England from the 17th century onwards, and in the United States from the 19th century onwards. These cases and the present ones are the only market economies that have existed.
What is relevant is that the dominance of the market as allocation system for land, labour and capital in all of these cases has produced a cycle and created an endogenous development, which out of itself has created dynamism – a cycle of growth and an inevitable decline.

Where does the cycle start?

It starts at the natural state of the society – before there is a free market for land, labour and capital. By this I mean a society that has a feudal elite – an arbitrary ruler or nobility that has a grip over people. This can take all kinds of forms: it can be a dictatorship, absolutist king or a hybrid between democratic and autocratic rule like Russia today. Forms may be various, but this state-society relation is the natural state of the society, in past and present.
The cycle starts by breaking through this. It usually happens via communitarian self-organization. This could be done by revolts and revolutions, but massive confrontational social uprisings do not necessarily bring positive results. Sometimes they just strengthen the existing system. Usually, the good outcomes are created when ordinary people are able to organize themselves together and take the exchange and allocation of land, labour and capital into their own hands. In that way, they consolidate a political and social counterweight to the elite.

Does the breaking through lead to equality in the distribution of land, labour and capital?

Yes. It leads not only to equality, but freedom from the political elite too. Self-organization helps to achieve political equality –accessibility to political decision-making.

What happens after this?

After people have broken the rule of the elite, they become free and they can organize the use of land, labour and capital themselves. However, in a course of time, they realise that it is actually more efficient, or more profitable, to allocate and exchange land, labour and capital via a market system.

So, market economies start from the bottom-up organization?

In a way, but what happens is that over the course of years the newly formed and widespread markets bring competition and polarization. The market elite starts to develop and it gains a stronger grip over the main elements of production. This market elite is not a feudal elite or at least not yet. It is the elite of free people in a free society, but a lot of wealth (capital and land) starts to be accumulated in the hands of a few.

But the newly formed elite still promotes economic growth?

Yes, of course, at least at the beginning of the process these input markets still stimulate further economic growth. However, a small group of people becomes holders of the resources and this results in an increasing wealth inequality. Due to the rising inequality, the growth is to an ever lesser extent translated into the welfare of ordinary people. So, economic growth still goes up, but the welfare of the ordinary people stagnates or even goes down – and this is the next stage.

What follows after?

The later stage is when the market elite starts to translate its economic power into political power and influence. It is completely rational from their perspective; they start to influence governments through financial markets. Through financial markets, states become indebted to the elite that holds most of the capital. The market elite influences political offices, they even acquire political offices. Then they start to have a grip over the political sphere, which they can use to transform the rules of the game and the rules of the market exchange to suit their interests better.

And what are the consequences of the market elite gaining political power?

If this happens, then, in terms of the economic outcome, markets start to operate in a less efficient and favourable way. They become more monopolized, more unequal and they offer less accessibility for ordinary people. So, the economic effects become less favourable. It is not only the decline of the welfare, but now also the economic growth stagnates or even drops.

Does this mean the collapse of the market economy?

Not necessarily, but this is almost the last stage of the cycle. At this stage, the economy does not generate profits anymore and it becomes less interesting for the market elite to invest capital into that. Then the already political market elite starts to find outlets or other destinations for its capital. This is done through speculation and investments in all kinds of sophisticated financial products, or through foreign investment overseas. These may include investments in profitable enterprises despite their negative ecological effect, such as palm oil plantations. Also, the market elite tends to speculate on the markets for food and raw materials. They also invest in, what could be labelled, coercion instruments, like military, policing or imprisoning measures. At this stage, you can also see a growing investment in science and culture. This is done to acquire status and prestige and at the same time form a new ideological culture, which endorses the position of the elite. Academia becomes influenced by financial investments; the media becomes more influenced by the market investments too.

Are these the last attempts of the market elite to consolidate their influence?

Yes, but then we are already at the end and you can see that we are only one small step away from the situation we started out with. There is very high material inequality and political inequality, and there is this coercive elite that combines economic, political and societal power altogether. This is not yet the starting point of the new cycle, though. It is a misunderstanding to think that after this stage a new cycle will start immediately. After the market cycle ended in the 14th-15th century in Italy, for instance, it took half a millennium for a new cycle to begin.

So, where are we now?

We are in the last half of the cycle that started in Western Europe in the early 20th century, when the ordinary people started self-organizing into cooperatives and other organizations and unions. However, the penultimate cycle that is still proceeding started in the early 19th century in the US. Back then there was a high level of self-organization of the ordinary people, high levels of freedom and economic equality. Around 1800, the US was the most free and equal society in regard to political power and in wealth distribution. Then it became a market economy and now the US is at the very end of the cycle.
You could say that the US is about a century ahead of Western Europe, but the advanced technology and rapid communication make distances less relevant and money transaction quicker. Major changes affect other areas more easily. So, for the first time in history, two of these cycles have joined. You could say that since the 1970s Western Europe is an integrated part of the American market cycle – our cycle has sped up by a few decades.

How can we identify that we are at the end of the cycle in Western Europe?

The main element and indicator is wealth inequality. People normally focus on income inequality, which, again, is the outcome, but not the fundamental element of the market. Income inequality does not fundamentally affect the allocation and exchange of the main elements of production, but wealth inequality does. In US wealth inequality is extremely high now. What nobody tends to discuss is the fact that the private wealth inequality is almost as high in Western European, France, Germany and the Netherlands, also in Norway and Sweden. This means that there is a substantial group of people that is very rich and has the means to control large parts of the economy. Also, this elite can use their economic wealth to influence society, particularly through the control of the media.
Another element is economic stagnation. For a long time, there has been no economic growth. And even more so: the welfare of the ordinary people is stagnating or even declining. For example, the purchasing power of the lowest income groups has not risen in the Netherlands for at least 30 years. According to my analysis, we are already past the point of no return.

Would you say that the spread of populism is an example of this process?

Yes, but populism is an outcome, not the essence of the process. That is why it’s wrong to blame people who follow populist leaders. The point is that a lot of people who follow populist leaders are the most affected and vulnerable populations, while those who speak out most clearly against populism are at the 20-30% top end of society. These people are not in lead of the process, because the leaders are the really wealthy market elites, but at least up to this point, they are benefiting of the market developments. These people have the ability to act against the extreme wealth inequality we have at the moment, but they do not do so.

So, would you say that the cycle indicates the decline of democracy, if so, what are the implications?

These are three big elements that erode democracy from within and make it ever more subjected to the influence of the market elite.
First of all, there is an increasingly less democratic counterweight. States themselves have become more dependent on the market elite. There is a constantly growing indebtedness of our states. That means that through the financial markets, states have become subjected to the power of the market elite, which turns out to be stronger than the democratically elected government, as is shown in Greece and elsewhere.
Owing to the growing market dominance, the democratically elected government has fewer instruments, such as regulations or sanctions, to influence the economy. There is this dominant idea to hand over government’s activities or public services to the market. This means that the democratically elected parliament can do less. When public sectors like energy and public transport are given away to the market, the government can only express its moral discontent, but has zero effective action to regulate it.
Lastly, there is the decline in democracy through a disproportionate ownership of the media. Through media, the market elite can greatly influence or even shape the ideas of voters. There are many examples, such as FOX television in the US, or Rupert Murdoch, one of the UK’s biggest media magnates who campaigned for the Brexit; and also in Germany and the Netherlands, there are certain influential families which have a very high share in the media business.

What would you identify as possible alternatives for this situation?

To my feeling, there is no alternative. The dynamism and the logic of this fundamental process are so strong that it will be very difficult to stop it.

But aren’t there other ways to allocate and exchange land, labour and capital?

There are indeed other ways to do it. I think that if there would be a way to reform this process, it would be done not by the market or by the state, but by the ordinary people forming new organizations to exchange land, labour and capital and form a political and societal counterweight. One way could be by organizing into cooperatives, associations, and unions, maybe some sort of platforms or commons. However, I am critical of the current developments, because at the moment these organizations are far too superficial and small, they don’t encompass the allocation of land labour and capital. So, I would say that the present optimism about the new types of platforms is misguided.
Take sharing economy and all other kinds of virtual platforms as an example. These platforms only accelerate the same market-dominant system rather than redistributing the allocation of resources.

The sharing economy has been criticized numerous times, though.

Yes, at the moment the sharing economy is just an additional appealing tool for the same market economy. The main thing that it has accomplished is that it made capital more profitable. In order to allocate and exchange land, labour and capital one needs to own it. The sharing economy only strengthens and accelerates the current system of ownership. So, that is the fundamental issue.
I can see that a lot of people are very willing and thinking about new cooperatives, but what is needed first is an insight into the fundamental process we live in, in order to understand how pervasive it is. Once this is understood, it could pave the way to a formation of the counterweight. But I still think, no matter how enthusiastic and positive people who think about the developments like cooperatives are, they won’t do this.

What then is needed to take action? Political power?

Political power is also an outcome. They need willingness.

You mentioned ownership. Maybe restructuring ownership will open another path?

Again, it is a good point and it indeed would be needed. It’s good to question the formulation of property rights to land, labour and capital. So, of course, I would agree, but it will not happen. Why would this happen?

Because society would realize that it is better off in this way?

If the majority of people would really think about this and would take respective steps, then they would have to “put all the eggs into one basket”. That is: they have to move out of the current market system into a new system.
I am very sceptical about the possibility that this will happen. I often read about streets creating some kind of a common in order to jointly organize the management of the green or a garden. I agree it is nice, but it is completely irrelevant.

Why do you think it is irrelevant?

Not the practice itself. But, if you look at facts, 99% of the activities of the people who do this are still within the current market system. These people still earn their money working for wages, they save and have the savings invested. Why would people start to think against their rational interest?
I am not against commoning, but I just do not see how this in the way it is done now would bring about change. The problem is that around 20-30% of the people, who think about these issues and are able to organize themselves, have the necessary social and economic capital to do so. So, they are the ones who have the biggest interests in the market system as it is now, and this is the problem. The other 70-80%, which is hit by the system and experiences very negative effects already, have neither social capital nor possibilities to organize themselves.
So, let’s say, if commoning would really work, then people would have to put all their capital, their labour and their grip over the land and natural resources within a cooperative. This is what I mean by “all eggs in one basket”. They need to quit their jobs, merge their houses into one collective and work the land together. If people would do that then it would be a real cooperative and only then something would change. Right now, people live in their own houses – private property –, they have their own salaries from the wage labour, they have their own savings in the bank – all of this represents market economy – and then for few hours a week they jointly work at this cooperative or collective – this is not going to change the system, unfortunately.

Your scientific projections are quite negative, what about (hopeful) future scenarios?

Yes, we are in a downward spiral. However, you could say that this time is not the worst that humankind has experienced throughout history. The contemporary society is the first in history that understands the market economy cycle. We have also progressed significantly in the field of scientific research. The things I’ve explained now are mainly based on a 10-year research done by our group of experts, for example.
We currently live in a time in which, for the first time in history, we are aware of how the negative outcomes are brought about. We understand what means the market cycle is produced and we can identify where are we in that cycle. This information is comprehensive and available to a large extent of the population.
In possible future scenarios, the change is done not by the 70-80% of the society that is already losing – these people don’t have the power to change the system. I am counting on the 20-30% at the top-end of society. By switching the focus from output (products, services) to input (land, labour, capital) and accumulating critical knowledge about the market and market economy cycle, how it functions and where it eventually leads, the people who have something to lose, by giving up this input market system, may understand that they run the risk to lose a lot more in the long run. Only if they become convinced that it is better to leave the input market system now than to wait and lose much more later, then we might see a different path.

How can we make them realize that?

Being critical is the first step.

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