Why the West is in automated decline
America is being steadily crushed by the very global system that it created
We live in an age of conspiracy. Liberals and conservatives alike are increasingly tempted by ‘evil genius theories’ in which some or other cabal of shadowy elites is plotting from their control-room to destroy Western civilisation.
With an electrified shiver, guests at dinner parties in New York and London speculate that Russian agents are orchestrating the rise of Western populism. The story goes that firebrand oligarchs and demagogic politicians are being deployed under the threat of kompromat to sow the seeds of chaos — committing arson to liberal institutions, defiling rule of law, stoking anti-immigrant sentiment and spreading hate and disinformation through social media.
Similarly, certain ‘tin foil hat’ conservatives have become entranced with the notion that there is a liberal elite plot being coordinated by the World Economic Forum to destroy capitalist democracy. The theory is that an international establishment is intent on using the climate emergency and pandemic threats to establish a new communist totalitarian order, in which citizens are forced to have surveillance microchips implanted in their bloodstream.
If only civilisational decline was some diabolically brilliant game of chess. I suspect that part of the reason that these grand theories are gaining traction is that politicians and commentators are struggling to capture the grand sweep of why America and Europe are stagnating.
My own take on this is that the West is suffering from what one might call ‘automated decline’. Countries are being run into the ground on autopilot. The Western civilisation system, presided over by the United States, is locked in a mode of survival that can only lead to its destruction in the long run. Countries are being run into the ground on autopilot. Perhaps it is useful to think about it as a bit like a corrupted version of Hayek’s theory of spontaneous order; everyone in society, including institutions, corporations, leaders, and even voters, are feeding into a system that seems to be maintaining a certain, enigmatic equilibrium. But rather than being progressive, this system is ultimately entropic.
I have touched on this phenomenon with regard to both the UK and America in recent Telegraph columns.
Britain is an intriguing example. Conservatives are keen on the idea that the Whitehall machine has become a tax-raising, growth-crushing monster because it has been infiltrated by Remainer Socialists. As I recently wrote, however, the system is behaving more akin to uncontrolled AI. When Thatcher crushed the Keynesian consensus and castrated the Treasury, the state machine was unwittingly re-programmed to pursue fiscal prudence and low inflation — even at the expense at growth.
Gordon Brown’s PR stunt of granting independence to the Bank of England and George Osbourne’s grandstanding establishment of ‘independent’ forecasting by the OBR has enabled a kind of ‘algorithmic neoliberalism’ to lay waste to the country. While abacus economics reins, pro-growth measures like investment in skills and tax cuts, whose benefits the dominant neoclassical models cannot measure, are systemically overlooked.
I will deal with Britain’s auto-decline in more detail in a separate piece. Given the inauguration — and the fact that I wrote about Trump for the paper this week — America is at the forefront of my mind.
According to anthropologists, across several millennia various civilisations have declined because they eventually become stuck in a positive feedback loop, continuing to engage in the activity that is contributing to decline and destabilisation in the first place. The classic example is Rome, where a growing wealth and commerce due to imperial expansion prompted the emergence of a new middle class which migrated to urban centres. In order to maintain public works, the government hiked taxes on rural areas which in turn further drove flight from the countryside and a fertility crisis, culminating eventually in a systemic collapse.
America is stuck in a positive feedback loop of its own.
In a nutshell the US has created a global order that protects its hegemonic status on a day-to-day level but is, in the long run, ultimately reducing the country to a smoking ruins, demolishing its productive prowess, entrepreneurial dynamism and innovational edge. In other words, the system that America has created to protect itself from challengers is blowing up in its face.
The age of ‘frozen’ free trade
One of the major contributors to this self-defeating system is the highly selective and distorted nature of the global free trade arrangement over which America has presided.
One thing that is striking about the free market revolution since the 1980s is that it has entailed the pursuit of radical financial deregulation and free trade on the one hand, but the erection of a protectionist intellectual property regime on the other. That Thatcher/Reaganism advocated the free flow of capital, goods and services but not ideas is a massive blind spot that is surprisingly rarely discussed. For the last 30 years we have been suspended in an era of ‘frozen free trade’ — in which products and cash are allowed to flow relatively freely but the introduction of new products is tightly controlled.
By way of background, in the 1990s — at the very same time that West was championing global market deregulation, and the radical liberation of financial capital — America erected a new globally enforced order of intellectual property protectionism, enforced via the WTO. This seems to have been at least partly at the behest of the US-based 12 member Intellectual Property Committee (IPC), comprising CEOs of sectors including big pharma, entertainment and software industries. The late Susan Sell of George Washington University wrote a phenomenal book on this, which I thoroughly recommend.
On the other hand, America has prioritised the free flow of goods and capital across the world. This has served to reinforce what has become the central pillar of US dominance, which is dollar hegemony.
The dollar hegemony house of cards
Dollar hegemony has become so fundamental to American survival because it is no longer the world’s centre of production. Since the 1970s US has struggled to adapt from the age of industrial mass production to a new era where economies are driven by the knowledge economy, advanced technology and mass personalised consumerism.
Whereas traditional mass production requires efficiency, the organised deployment of mechanised manpower, logistical skill, and the ability to standardise and scale, the next phase of economic progress will hinge on the harnessing mass creativity, symbiosis with AI, the ‘laboratisation’ of offices and factories, and the ability of corporations to tap knowledge at source (rather than relying on top-down measures). For various fundamental reasons that I will go into for another piece in due course, America (and European countries) are struggling to get around this transition and the need to rip up the old ways of doing things.
There is nothing remarkable about the fact America is floundering. According to Elman Service’s Law of Evolutionary Potential, the more specialised and adapted a form in a given stage of evolution, the smaller its potential for ascending to the next stage.
As the anthropology professor Matthew Melko has observed, once entrenched, a civilisation’s capacity to adapt or transform itself in the face of shifting circumstances becomes limited.
So it is proving with America. Rather than reinventing its approach to production and innovation, America has fallen into a trap whereby its supremacy hinges on its status as the world’s most traded currency. The US amasses significant sums in seigniorage — which is basically the fee that other countries pay to hold large quantities of US dollars in their foreign exchange reserves. It is able to impose sanctions on other countries, crippling them by restricting access to the dollar-dominated financial system. Most importantly however, the special status of the dollar means that the American government is able to effectively print money out of thin air to maintain its massive military spending without risking hyperinflation. Meanwhile, its mortal competitors must finance their own militaries and public infrastructure through the conventional method of taxing the profits of local enterprise.
Below is a nifty documentary on the jaw-dropping Ponzi scheme that is sustaining American power.
It comes down to the fact that no country on earth can push a button to print more money and then simply give it to its defence department to spend on the latest AI surveillance technology. That would risk hyperinflation and currency collapse. But what the US can do — which no other country can on a comparable scale — is print gargantuan sums of money and then convert the cash into IOUs (government bonds), which it then flogs to global investors, including central banks, pension funds and wealthy individuals.
The status quo with its emphasis on free trade in goods and global financialisation has enabled this strange farce to continue. The availability of buyers for US bonds is predicated on the US running a deficit with several countries across Asia and the Middle East, whether it is through the purchase of oil from Saudi Arabia or cheap electronic consumer goods from China.
This is because countries like China and Saudi Arabia buy US bonds with the profit surplus that comes from running a trade surplus with Washington. They are unable to use all of this surplus to invest in their country, as converting the profits into local currency would cause their local currency to strengthen against the dollar, undermining the competitiveness of the exports upon which their national profits rely.
Extreme deregulation has further helped bolster this system. The US has the world's deepest and most liquid financial markets, making it a seductive destination for global investment. This further strengthens demand for dollars. The explosion of global finance has also enabled America to offset some of the impact of the cataclysmic collapse of industry. Since the 1980s manufacturing firms that have suffered losses in production have nonetheless filed impressive profits resulting from financial ventures, such as insurance products or speculating in the futures market.
All this was, of course, a perfectly understandable thing for the world hegemon to do, in order to protect its supremacy, even though it is no longer the factory of the world.
The American autumn
It is clear by now, however, that this system is steadily imploding. This is partly because at the same time as it is allowing America to tread water, it is also further eroding its innovational dynamism and productive competitiveness.
According to libertarian folklore, the explosion of global finance decades constitutes a rare free market triumph. The story goes that until the clampdown in wake of the 20008 crash, the derivatives market was an oasis in the desert, gloriously free of the state meddling that has been sucking enterprise dry in the wider economy. The Left meanwhile are fond of the idea that markets have heralded a new reckless era of casino capitalism driven by unparalleled greed.
Both of these views overlook the crucial fact that the explosion of finance is a sign not of rampant entrepreneurialism but of dangerously diminishing risk appetite. Financialisation enables entrepreneurs to avoid the risks that are part and parcel of the real economy – not least the potential entry to market of new technologies and products. Unlike a factory or piece of software, financial products can transform themselves as soon as a profit risk appears.
True, financial markets are driven by a desire for plump profits. But they are also fired by an almost pathological determination to liquidate risk from the system of capital accumulation. This is reflected in the rise of too-big-to-fail banks and cycles of boom and bust that must be subsidised by the taxpayer. So too in the financial world’s vulnerability to deep and absurd levels of self-deception over the theoretical ability to eliminate risk through meticulous modelling and elegant mathematics. The credit crunch ultimately spiralled out of the widespread false belief on Wall Street and in the City of London that a derivative was a risk-reducing instrument and could not be a risk-increasing one.
Meanwhile, pressure on developing countries from America-dominated institutions like the IMF and World Bank to liberalise their economies has often been paradoxically motivated by a desire not to spread entrepreneurial dynamism but to minimise risk for Western investors. Conditional ‘structural adjustment’ loans have often come with strings attached, such as the privatisation of state-owned enterprises, which Western finance firms have often purchased at undervalued prices, and a commitment to austerity measures that have effectively shielded American financial entrepreneurs from losses in the case of bad investments.
To service their debts, many developing countries have been compelled to sell off valuable assets like natural resources or public utilities to Western financial investors. This process, known as ‘asset stripping’ has given rise to the accusation that the financial markets have facilitated a jaw-dropping transfer of wealth from the Global South to the West. Moral judgments aside, perhaps what is most striking about this is that Western finance and governments have been able to accumulate trillions of dollars of capital from the Third World at minimal risk.
All this is to say that the American-led financialisation the global economy is fundamentally a “sign of autumn” — that is of eking power rather than of indefinite strength. In his classic, The Long Twentieth Century, Giovanni Arrighi argued that a series of cycles referred to as "long centuries" have marked modern history, from the 15th-16th century dominated by Genoa and the 19th century of Britain to the current era of US supremacy.
Each regime eventually enters a crisis phase, marked by increased global competition in trade and production, prompting the flight of investment into finance. Not only does this eventually end in a series of disastrous bubbles and crashes but the drift of capital from the ailing hegemon to its challengers, as financial investors go in search of higher yields.
Approaching implosion
America has two added problems that are catalysing its decline. One is that the costs of maintaining its hegemony are growing to a point that is unsustainable through the current system of money printing. With the rise of China, the costs of maintaining its military are growing substantially. As a democracy, a system that is predicated on suffering from a trade deficit — which essentially demands that the rust belt remain in the grips of death — is clearly insupportable. This is of course aside from ongoing debates about the gradual, inevitable de-dollarisation of the global economy, as other currencies became more popular and convenient in various regions, such as the renminbi across Asia.
In wake of this clearly America needs to do something to improve its competitiveness in advanced manufacturing, technology and the knowledge economy more broadly. But it is stuck in a rut.
Talent and capital is being sucked away from the real economy into finance, aggravating and reinforcing the innovational slowdown in the production of good and services in the ‘real’ economy. While the West needs engineers, designers, and chemists, it is more prestigious and lucrative to become a banker. Those who might have become robotics inventors and software entrepreneurs are instead channelling their aptitude for visionary thinking and obsessive appreciation of the niche as venture capitalists.
Although diversifying into financial services has enabled many manufacturing firms to survive, the lucrative financial assets on their balance sheets may well be disincentivising investment in R&D.
The stagnation in household appliances is particularly intriguing. If you happen to be reading this in your kitchen, look around you. The invention of pretty much all of the gizmos in the room predate the Fifties. The electric fridge was invented in 1913, the blender in 1922, the microwave in 1945. Both dish washers and electric stoves are Victorian-age technologies.
It is bizarre that we are all walking around with pocket-sized portals to our own personal, pixellated worlds and yet we are still awaiting the era of self-cleaning counters, and robot choppers. I spend my Sunday evenings scrubbing my bathroom tiles just like my grandmother did. And at the rate we are going in so will my granddaughter too. I ask you — where are the grout-liquidating surface tiles? Where are the augmented reality cleaning assistants? The answer seems to lie at least partly in the lack of incentive for appliance companies to innovate amid financialisation.
GE — once the untouchable colossus of American industry — has struggled to regain focus after becoming increasingly dependent on financial services from the 1970s, and was recently kicked off the Dow Jones and effectively dismantled. Bosch seems more interested in acquiring cryptocurrency tokens through its venture capital spinoff than pioneering the next household revolution.
The overly generous length and scope of patents enjoyed by big business as a result of IP protectionism is having a similar effect.
The conventional argument is that IP is a vital incentive for innovators. There is much resistance to relaxing rules, not least based on the argument that Western firms would be at even greater risk of falling prey to piracy by China, a country that stands accused of flagrantly and relentlessly engaging in egregious levels of intellectual property theft.
Quite aside from the fact that the United States too engaged in intellectual piracy to keep apace with Britain’s industrial advancement — even illicitly obtaining pirated plans for Edmund Cartwright’s power loom — the impact of overly restrictive IP on domestic innovation may in fact be more damaging to America and the wider West than a loosening in some aspects of copyright.
It may well be that pharmaceuticals is, in some cases, something of an exceptional case, with inventors requiring generous IP just because of the exceptional research and regulatory costs involved in getting a new medicine to market.
However, one wonders whether strong IP is a crucial carrot across all industries, or even all aspects of medical discoveries. We are at point where it is not actually possible to invent anything and then get it to market in the US and Europe without stepping on at least one patent. This includes science, where a researcher might fight that an artificially created molecule or protein that they need to work with as part of their cancer-related research is patented, and spend considerable time and money negotiating the right to do so. There is a danger that IP is effectively closing off entire areas of scientific research, as scientists are hesitant to enter areas where the IP situation is unclear.
In areas which seem to quite fundamentally require a more open innovation system — such as software development — the patenting regime is a massive inhibitor. The sheer complexity of modern software systems, with their intricate interdependencies and vast codebases, which often surpasses the capacity of any single team to fully grasp and maintain, demands a system of data sharing and research pooling.
This is not to mention the fact that the IP system prevents smaller companies and startups from forming arrangements in which they can share the costs of research and development, thus competing with more established players.
With the preservation of the current global economic system and the dynamics of big business now diametrically opposed to the cause of mass prosperity, it is no wonder that hostility to capitalism has become widespread.
It is clear that there needs to be some kind of Bretton Woods moment, with massive radical reform to the global trading system and WTO to encourage a steady but strong shift from financial to productive innovation.
Worryingly instead a consensus has congealed that free trade globalisation is a total disaster and needs to be reversed through protectionism, a return to state interventionism, industrial planning, and the expulsion of China from the WTO.
Both the Left and Right are becoming bogged down with other issues. Conservatives look set to expend much of their intellectual energy in coming years figuring out how to massively reduce mass migration and deal with border control. The Left is meanwhile, becoming obsessed with soaking the wealthy, tearing down Big Tech and generally waging war on oligarchy. Meanwhile, the cycle of decline continues…..