Public meeting – Financial Crisis and Austerity: the Role of Technology – Oct 2013 – report

October 14th saw the largest attendance so far at a BTF meeting. Due to two speakers having to pull out shortly before the event, Dave King of Luddites200 stood in for them. The first talk was on the causes of the 2008 financial crisis and the role of technology. The conventional story of the crisis centres on financialisation and inadequate regulation of banks, on credit bubbles, and neoliberal globalisation. However, although this is rarely discussed, technology played a very significant role (as the diagram below illustrates).

Financialisation is both part of neoliberalism and also of the process of transfer of manufacturing to China and other East Asian countries. Meanwhile, neoliberal political agendas have led to a squeeze on wages over the last 30 years in western industrialised countries and a transfer of wealth to the richest groups in society. One result of that process was low demand in the economy, since rich people spend a lower proportion of their wealth on consumer goods than middle and low-income people – there are only so many private jets one person can buy.  The lack of demand was counteracted for a decade by massive extension of credit to western consumers, so that these countries could maintain demand for consumer goods, despite the fact that western de-industrialised economies were not earning enough to support that demand. A further result of the wages squeeze for middle and low-income people was their attempt to compensate for this by investment in property, which created the housing price bubble, and in the US in particular, the selling of mortgages to people who quite obviously could not afford them. Low interest rates due to US government policy to stimulate the economy after the dotcom crash and the 9/11 tax also contributed to the credit bubble, as did influx of investment from East Asian countries into the US housing market. This obviously unsustainable situation was concealed for a number of years by the bundling of bad risks into highly complex financial products (derivatives) that supposedly allowed those risks to be hedged.  Derivatives continued to generate high profits for the financial sector, which contributed to an illusion of continuing economic growth. Eventually, as many US ‘sub-prime’ mortgages defaulted, it became clear that the banks were holding trillions of dollars of extremely toxic assets, leading to the bankruptcy of Lehman Brothers in 2008 and the need for bailouts for many banks.

This is the familiar story of the crash. However, there was a significant role of technology in the process, which has been little discussed. Firstly, the derivatives which were the ‘proximate’ cause of the crash are a classic example of fragility caused by technological over-complexity. These instruments created by computer software that can be understood by very few people created an illusion of safety as well as a shiny surface of profitability that covered a fundamentally unsound base.  Secondly, technology has been essential to both the growth of the financial sector and to globalisation and de-industrialisation of western economies. Finally, economists such as Paul Krugman and political figures like Al Gore have begun to acknowledge that the transfer of wealth upwards in western countries is due in significant part to the massive wave of mechanisation and automation that has taken place in the last 30 years. This, after all, is what automation is for. In his recent book, ‘The Future’, Gore argues that the lack of demand in the economy caused by the elimination of many middle-income jobs through technology, is a significant factor in the difficulty that western economies have experienced in recovering from the Great Recession.

Contradictions of capitalism
Interestingly, this dynamic is precisely one of the ‘contradictions of capitalism’ that Marxists have long argued create instability in capitalist economies. It is almost an iron law of capitalism that industrialists must constantly try to automate and mechanise production and thereby reduce labour costs.  (It is crucial to realise that the drive for automation comes from technocracy as well as capitalism: in technocracy increased mechanisation is always desirable although it may be temporarily limited by economic considerations.  That is why so much of our technology [including information technology] originates in the military, where such constraints are weaker and the technocratic mindset is most at home).  Automation inevitably reduces demand in the economy and increases production efficiency, which can tend to lead to over-production that, combined with low demand in the economy, is bound to lead to economic crisis.  It was the need to coordinate supply with demand that led to the Keynesian settlement after World War II.  A further aspect of the effect of ‘capital intensification’ of production is that it has a decreasing rate of return: for a given increase in production efficiency, the increase in profitability gradually declines, leading to an overall tendency to reduced profitability of industrial production.  It is arguable that this has been one of the reasons that capital has shifted from industrial production to the financial sector in the last 30 years, as investors seek a better rate of return on their money. It is perhaps not surprising that these effects, which were predicted in the 19th century, have re-emerged as significant factors in the neoliberal period, in which the stabilising effects of state management of the economy that prevailed throughout the middle of the 20th century have been dispensed with.

Dave Dewhurst of Occupy London gave a fascinating talk on two current technological aspects of the finance system, derivatives and High Frequency Trading (HFT) . The latter process has now come to dominate trading and stocks – 60 to 70% of which are now traded by automated computer algorithms. These algorithms have been optimised as pure gambling devices that integrate information from many sources in order to detect which way the market is moving and to buy and sell accordingly. Here, speed is of the essence, and the computer systems are able to complete trades in milliseconds. Victory in this competition goes to the fastest algorithm, and this has led to the speed of light becoming a factor: 300 million dollars have been spent on a project to connect the Chicago and New York stock exchanges by a ‘straight-as-an-arrow’ fibre-optic link, including tunnels through the Allegheny mountains, since doing this is able to shave 3 milliseconds off the time needed for a signal to pass between the Chicago and New York computer centres. HFT has also contributed to instability of the stock market, most notoriously in the ‘Flash Crash’ of 2010 in which the New York stock market dropped dramatically over a period of 12 minutes for no apparent reason. Investigations found that this was the result of positive feedback between many automatic trading algorithms. Apparently, when the economist Joseph Stiglitz recommended that, to prevent this happening again, offers to buy or sell must remain open for one second, the finance industry refused, claiming that this would destroy the global economy.

High Frequency Trading is also an example of the ongoing automation of large sectors of both the economy and the public sector – one result of HFT is that thousands of stock traders have lost their jobs. This tendency of industrial capitalism, which the Luddites fought against, has continued inexorably for the last 200 years. Perhaps the most traumatic effects have been in agriculture, which used to employ 80 – 90% of people, and now employs just 2%. As noted above, information technologies have created a massive wave of job losses over the last 30 years, with the repeated phenomenon of ‘jobless recoveries’ from recession, in which economic growth recovers but the overall number of jobs does not. The automation of routine middle-income jobs has now been acknowledged as a major contribution to the ‘squeezed middle’ that politicians worry about: at present these jobs seem easier to automate than either highly-skilled professional occupations or low-paid service-sector jobs that require considerable human interaction. Economists have always dubbed the argument that new technology leads to unemployment as ‘the Luddite fallacy’, arguing that those jobs are quickly replaced in new industries as technology creates growth and new economic opportunities. Now, however, even bastions of economic orthodoxy like The Economist Magazine have begun to admit that ‘the fallacy’ may actually be no fallacy at all, the reason being that because information technology can be applied to almost every economic process, the new jobs that are generated are very few, because they are occupied not by people but by software and robots. As Al Gore has pointed out, this process is already beginning to undermine the shift of industrial jobs to low-wage Asian countries, as even these jobs become susceptible to automation. A recent high-profile example of this was at Foxconn, the manufacturer of Apple iPods, which experienced strikes and unrest at its factories, following a wave of worker suicides attributed to stressful working conditions. In response, Foxconn announced that it would be installing a million robots in its factories over the next few years. The Economist recently noted that this trend may see the return of manufacturing to western countries, although it admitted that these factories would contain a very small number of highly-skilled workers overseeing a nearly completely automated production process.

Automation is now moving beyond middle-income jobs and is beginning to invade professional areas as algorithms become ever smarter. There now exists software that can write new stories, perform ‘legal discovery’ more accurately than junior lawyers, and even diagnose tumours in hospital x-rays. These trends have led to a wave of books by information technology experts heralding the future of artificial intelligence and robotics. Google driverless cars, for example, are generating a fresh wave of speculation about a future in which employment will simply cease to exist for most people. Alongside the traditional breathless hype about the utopian leisure society this will herald, in which people will be free to spend their time in creative pursuits, is a wave of concern about how the economy will work in this situation. The logical solution, a citizens’ minimum income guarantee, perhaps funded by taxation on highly-automated companies, is beginning to be floated, but current political trends, such as the wave of hostility to benefit ‘scroungers’, suggest that it may be politically very difficult to achieve. The alternative of increasing social unrest may be even less palatable. Luddites200 is currently looking for partners in the trade union movement to begin to address these issues and would welcome any contact about this.

The overall picture that emerges is of technology playing a central role in the shape and functioning of the economy, one that despite the dogmas of ‘innovation’ and ‘growth through technology’ actually often undermines the entire basis of the economy, as well as creating bizarre distortions.  As technology runs the stock market and shapes the productive economy according to its own logic, the sense of ‘technology out of control’ and of a world organised according to systems with no human element strikingly recalls our discussions in the first BTF meeting (see below) about the threat of autonomous drones and killer robots.  That serves as a reminder that ‘capitalism’ is an inadequate description of our society – it must be understood as technocratic capitalism.  Those two structures generally push in the same direction, but not always, and sometimes capitalism seems the more rational.

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