First - thanks for this incredible wellspring of resources which I find very interesting & useful.
In my own understanding of this, SC leads to more of a Gaussian distribution of outcomes (balance & ergodicity) while SP leads to power law distributions (imbalance & funnels). Under a Gold standard, SP ultimately leads to deflation as trade imbalances mount. The end state of this cycle of capitalism looks a lot like it’s going to be asset & currency deflation. Both drive collapsing regimes into revolution or war that can lead to system reorganisation (FDR, Bretton Woods) or attempted system stabilisation (Versailles Treaty, 2008 bailout). The problem with stabilisations is that they often allow the system to cascade to another level of collapse that is deeper & darker. Or they require extreme top down control to maintain the system state as it keeps cascading through new thresholds.
I don’t know if you read William White or Michael Hudson? William White talks about ‘small collapses’ & ‘narrow money’ as a way to create a more stable (constantly re-organising system). Hudson takes a vast historical view of economies doing lots of work on Babylonian debt jubilees etc. I think to fit Hudson into your paradigm - he would equate oligarchy with SP, against the SC of hierarchical early cultures that cancelled debt after bad harvests & redistributed. Effectively SC has a cultural & productive dimension whereas SP has only a financial dimension.
I am still reading through your work (a labyrinth!) but I also don’t see how sovereign policy change (on taxes, monetary policy) will change anything while capital can flow freely? The problem faced by the Anglo-Saxon trade deficit countries is that production is pushed out by capital flows. You could increase income tax & promote R&D with more effective corporate taxation but … if capital pours into your assets & stock markets because these supply a quicker, higher return than slow, patient investment then this can’t be solved with sovereign policy alone? IMO this is creating a gov debt ratchet whereby Anglo Saxon Govs are creating money to pay foregone wages, which is allocated to (cheaper) imports, which suppresses production while increasing bank reserves (through gov bonds) who then multiply this into assets. And the whole thing is impossible to fix with traditional democratic politics because there isn’t time, in a single election cycle, to collapse the debt, rebuild productive capacity, increase wages, raise living standards etc etc especially if foreign capitalists are pouring money into your asset markets.
I subscribed to your Substack and read your post on complexity. Deep stuff, very interesting and I can seem some parallels with process engineering which is the paradigm I work with.
Thanks. The main difference - I would say - is that I'm interested in open, organic systems where criticality can lead to emergence. Whereas engineers think about closed systems with some engineered redundancy to cover novel system states. Economies are open systems so in my view of the world, you're really trying to find a handful of variables around which a stable system can pivot sustainably for long periods. But you also need your system to incorporate enough adaptability to respond to novelty without breaking.
Tbh, I came to all this when I was researching organisational methods. I discovered the Toyota Production System and W E Deming. I realised that Deming's ideas had injected adaptability into the rigid system of assembly lines and industrial production. The human - or more importantly, group of humans - uses creativity (an emergent property) to attend to an unexpected system state. This had a huge effect on me. I stopped believing in simple extrapolation and predictability (from my old corporate consultant days) and started to see that adaptability is the key to any complex system.
I like your work because you look at long cycles, not just what's happening today. I think you're also trying to identify the core variables that determine system state. I would guess that currently the variables that 'make' the system are things like globalisation, monopolisation and neoliberal ideology. The (amplifying) feedback loops are things like central bank behaviour, SP, taxation policy, 'deep state' actors e.g. MIC and finance landscape, especially toxic VC/PE. Stressors on the system would be things like energy / resource scarcity, debt, geopolitical competition. In the absence of stabilisers such as unions, anti-trust, effective elections, community organising etc; we are now seeing full-on populism. This is an entirely obvious reaction to a system that is out of control. The problem is that new system states may well emerge that are stable but pretty antithetical to what we've become used to in the West. We could easily transition to a system of hierarchy, loyalty, conformity, tribalism etc; All the things that Harvey Whitehouse talks about.
Anyway, sorry for the long reply. I have a lot of reading to do on your stuff. I have found it very interesting!
I’m a process engineer. In my social science thinking I use cliodynamics, the study of historical dynamics. It treats history as a process that can, in theory, be described as a system of differential equations in time. It seeks to describe aspects or “portions” of the historical “system” in terms of a small set of differential equations that are tractable. Even simply system show a wide variety of behavior, convergence to a steady state equilibrium (fixed attractor) cycles (convergence to a limit cycle attractor), chaotic (chaotic attractor) or runaway behavior.
In the first two cases one can make predicts of future behavior, in the third case you can’t predict behavior but you can manage the chaos (it’s like weather, fundamentally unpredictable). In the final case the system blows up, this is just bad. You can prevent blowups by running intrinsically safe. Run your process so that there is never sufficient reactants in a vessel that were they all the react at once (explode) the tank would not rupture. Or you can run an intrinsically unsafe process with redundant control systems to prevent an explosive situation from arise. Finally you can choose to run a risky system and hope you lucky.
A human system example is financial crises. The 1929-33 crisis was traumatic. Policy makers decided no more and put “governors” (high tax rates, bans on stock buybacks & financial regulations) in the financial system to make it intrinsically safe. Enough “financial fuel” was never present that when ignited with “speculative juices” would cause the system to blow up. And for 75 years we did not have panics. But with the governors present it was a lot harder to get superrich, resulting in rich people who were less rich that they were before or after the governors were present. My financial stress indicator (FSI) is designed to show times when “Minsky moments” are possible.
There is an opportunity to test this idea. Back in the day when we had panics that were spaced 9-22 years apart with an average of 18 years. Next year it will be 18 years since 2008 and it will be 22 years in 2030. So if this model is right and the timing if the “panic cycle” is still the same we should get another financial crisis between now and 2030.
Thank you! The actual SC we once had featured high marginal tax rates, dividends taxes an ordinary income (and so subjected to these rates), illegal stock buybacks and balanced government budgets.
With balanced budgets, government bonds are not available for investment of foreigner-held dollars. With stock buybacks illegal and dividend highly taxed there is a disincentive for sticking profits into the stock market as happens under SP. This removes a major source of upward bias for the stock market. See this post
In our modern SP world there is a US government with a bottomless appetite for debt, and a stock market than simply goes up all the time because it is continuously being stimulated by built-in inflows of profits. So there are lots of places for investor money to go. But under the SC world there are not attractive returns from government debt, and the stock market is in bear mode half the time. Financial investments simply are not as attractive and foreign holders of dollars will have a lot less interest in dollars meaning the value of the dollar will fall until the trade deficit is eliminated. As this point there is no net flow of dollars out of the country that would need to be invested in financial assets back in the US.
The key to SC-promoting policy is the placing of roadblocks towards financial investment. This culture was implemented in the aftermath of the stock crash and subsequent Great Depression. This economically traumatic experience made a whole generation take a very dim view on financial speculation. My gut feeling is the only way you could ever implement SC is in the wake of a similar economic catastrophe that would allow the government to pass the necessary tax hikes and make stock buybacks illegal. Not only that but we would need an inflation scare before this in order to put a fear of deficits back into the minds of policymakers.
If this set of circumstances were to arise, then policymakers would need to establish a dispensation which gives them 12 years, rather than four, to enact the changes.
Very nice walkthrough of your cultural assessment of capitalism based on structural incentives. Cultural economics flows from the societal rules that pertain to law and property.
I’m wondering if you see a need to innovate the legal system that supports and attaches to capitalism, either SC or SP.
Your post also calls out the financialization process that can drive inequality. How does the monetary system choice underpin SC vs SP? What rules should govern who can create money? What if a country left income taxes behind entirely and moved to transaction taxes and land (property) taxes to balance state and private fund flows?
I don’t see how the monetary system would impact of culture. Culture affects the objective of capitalism. I define capitalism as an economic system in which capital plays the dominant role, in which specialist businessmen called capitalists seek to grow the stock of either “real” or productive capital, or financial capital (market capitalization). SC culture maximizes the former and SP the latter. It is unclear to me how the monetary system might affect what sort of capital growth is maximized (SC or SP. I note that SC capitalism flourished under the Bretton Woods gold standard, and I believe gold played an important role in its collapse see here https://mikealexander.substack.com/p/nixon-gore-the-paths-not-taken
We may have had something resembling SP culture in the 1920’s, it’s hard to say for certain since I do not have data on stock buybacks or similar operations back then. Inequality was high which is consistent with SP, and I treat it as SP.
We used the gold exchange system then so I conclude that SP can operate under a gold standard. An the SP capitalism we have now is operating under a fiat system. So I think SP operates in different kinds of monetary systems. I am not sure that SC would be stable under a fiat system, however.
As for the alternate tax systems, SP capitalism would be the one selected. These all have the property that executive income has no upper bound. Since option compensation is the lowest choice for the company it seems that without an income tax with high top marginal rates you will always have an environment selecting for SP capitalism.
I appreciate your answer. Sometimes a discussion of overlapping frameworks creates fuzzy edges. The care you take to articulate SC vs SP structural forces is evident.
I agree that the monetary system is not a direct driver of culture. In my opinion, it can influence incentives that drive investment, taxation, and growth policies, which impact economic culture more directly. I look forward to placing this essay in the larger context of your writings. Thanks, again!
Amen. Shareholder primacy is literally the mother of all perverse incentives.
As my namesake implies, we need to, at a minimum, restore the Glass-Steagall Act, ban stock buybacks, and restore the high (70%+) top marginal tax rates that prevailed before Reagan. Yesterday.
Very thoughtful. Your discussion of cultural evolution is solid and articulate. Your discussion of the barriers to change present in the US of the shift from SC primacy to SP primacy is spot on. Love the graphs. Especially the one on top tax rates and executive pay, something I've railed on about for years.
While initially you talk about cultural evolution as something that moves far more quickly than biological evolution, and allows rapid adaptation. Your detailed analysis of the shift from SC to SP shows you also show that there are barriers that can exist to cultural evolution.
Anthropological/archeological data tells us that humans have always resisted cultural evolution from one one form of subsistence to another. While foragers may be quick to adapt cultural changes that enhance foraging, the record tells us that foragers resisted becoming horticulturalists, and that it took massive disruptions of famine and conflict to make that shift. The archeological record shows us that humans had the knowledge and skills to cultivate crops for thousands of years before they were willing to make farming their basic means of subsistence. Moreover, we know that any groups that could continue engaging in foraging successfully did so, even though clearly having the knowledge and exposure to horticultural people. Foraging in the right environment takes far less time and human energy than farming does.
The same is true of the transition from horticulture (hand tool, low intensity farming to agriculture, plow, irrigation and high intensity farming) generally only took place due to violence and force. Again, agriculture takes farm more time and human energy for those doing it (even if it frees some members of society, i.e., those doing the forcing from subsistence labor) than horticulture does.
Modern history tells us that masses of farmers did not voluntarily become industrial workers either. That they were generally forced off their lands (by the enclosure movement in Britain, by war, by persecution, and by poverty), and became refugees whose only option was the cities and industrial work.
Moreover, both history and the archeological record are replete with many examples of societies that died out rather than adapt to major challenges (whether from invaders or climate change). Two popular books of recent decades: Brian Fagan's Floods, Famines and Emperors and Jared Diamond's Collapse collect some of that data in entertain and enlightening books.
My point is that humans are capable of rapid cultural change and adaption to changing environments and threats, but we are by no means guaranteed to do so. Especially when either powerful small groups or large influential groups have much to gain by digging in and something to lose by changing.
First - thanks for this incredible wellspring of resources which I find very interesting & useful.
In my own understanding of this, SC leads to more of a Gaussian distribution of outcomes (balance & ergodicity) while SP leads to power law distributions (imbalance & funnels). Under a Gold standard, SP ultimately leads to deflation as trade imbalances mount. The end state of this cycle of capitalism looks a lot like it’s going to be asset & currency deflation. Both drive collapsing regimes into revolution or war that can lead to system reorganisation (FDR, Bretton Woods) or attempted system stabilisation (Versailles Treaty, 2008 bailout). The problem with stabilisations is that they often allow the system to cascade to another level of collapse that is deeper & darker. Or they require extreme top down control to maintain the system state as it keeps cascading through new thresholds.
I don’t know if you read William White or Michael Hudson? William White talks about ‘small collapses’ & ‘narrow money’ as a way to create a more stable (constantly re-organising system). Hudson takes a vast historical view of economies doing lots of work on Babylonian debt jubilees etc. I think to fit Hudson into your paradigm - he would equate oligarchy with SP, against the SC of hierarchical early cultures that cancelled debt after bad harvests & redistributed. Effectively SC has a cultural & productive dimension whereas SP has only a financial dimension.
I am still reading through your work (a labyrinth!) but I also don’t see how sovereign policy change (on taxes, monetary policy) will change anything while capital can flow freely? The problem faced by the Anglo-Saxon trade deficit countries is that production is pushed out by capital flows. You could increase income tax & promote R&D with more effective corporate taxation but … if capital pours into your assets & stock markets because these supply a quicker, higher return than slow, patient investment then this can’t be solved with sovereign policy alone? IMO this is creating a gov debt ratchet whereby Anglo Saxon Govs are creating money to pay foregone wages, which is allocated to (cheaper) imports, which suppresses production while increasing bank reserves (through gov bonds) who then multiply this into assets. And the whole thing is impossible to fix with traditional democratic politics because there isn’t time, in a single election cycle, to collapse the debt, rebuild productive capacity, increase wages, raise living standards etc etc especially if foreign capitalists are pouring money into your asset markets.
I subscribed to your Substack and read your post on complexity. Deep stuff, very interesting and I can seem some parallels with process engineering which is the paradigm I work with.
Thanks. The main difference - I would say - is that I'm interested in open, organic systems where criticality can lead to emergence. Whereas engineers think about closed systems with some engineered redundancy to cover novel system states. Economies are open systems so in my view of the world, you're really trying to find a handful of variables around which a stable system can pivot sustainably for long periods. But you also need your system to incorporate enough adaptability to respond to novelty without breaking.
Tbh, I came to all this when I was researching organisational methods. I discovered the Toyota Production System and W E Deming. I realised that Deming's ideas had injected adaptability into the rigid system of assembly lines and industrial production. The human - or more importantly, group of humans - uses creativity (an emergent property) to attend to an unexpected system state. This had a huge effect on me. I stopped believing in simple extrapolation and predictability (from my old corporate consultant days) and started to see that adaptability is the key to any complex system.
I like your work because you look at long cycles, not just what's happening today. I think you're also trying to identify the core variables that determine system state. I would guess that currently the variables that 'make' the system are things like globalisation, monopolisation and neoliberal ideology. The (amplifying) feedback loops are things like central bank behaviour, SP, taxation policy, 'deep state' actors e.g. MIC and finance landscape, especially toxic VC/PE. Stressors on the system would be things like energy / resource scarcity, debt, geopolitical competition. In the absence of stabilisers such as unions, anti-trust, effective elections, community organising etc; we are now seeing full-on populism. This is an entirely obvious reaction to a system that is out of control. The problem is that new system states may well emerge that are stable but pretty antithetical to what we've become used to in the West. We could easily transition to a system of hierarchy, loyalty, conformity, tribalism etc; All the things that Harvey Whitehouse talks about.
Anyway, sorry for the long reply. I have a lot of reading to do on your stuff. I have found it very interesting!
I’m a process engineer. In my social science thinking I use cliodynamics, the study of historical dynamics. It treats history as a process that can, in theory, be described as a system of differential equations in time. It seeks to describe aspects or “portions” of the historical “system” in terms of a small set of differential equations that are tractable. Even simply system show a wide variety of behavior, convergence to a steady state equilibrium (fixed attractor) cycles (convergence to a limit cycle attractor), chaotic (chaotic attractor) or runaway behavior.
In the first two cases one can make predicts of future behavior, in the third case you can’t predict behavior but you can manage the chaos (it’s like weather, fundamentally unpredictable). In the final case the system blows up, this is just bad. You can prevent blowups by running intrinsically safe. Run your process so that there is never sufficient reactants in a vessel that were they all the react at once (explode) the tank would not rupture. Or you can run an intrinsically unsafe process with redundant control systems to prevent an explosive situation from arise. Finally you can choose to run a risky system and hope you lucky.
A human system example is financial crises. The 1929-33 crisis was traumatic. Policy makers decided no more and put “governors” (high tax rates, bans on stock buybacks & financial regulations) in the financial system to make it intrinsically safe. Enough “financial fuel” was never present that when ignited with “speculative juices” would cause the system to blow up. And for 75 years we did not have panics. But with the governors present it was a lot harder to get superrich, resulting in rich people who were less rich that they were before or after the governors were present. My financial stress indicator (FSI) is designed to show times when “Minsky moments” are possible.
https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F2af55f28-1c9e-45d9-ab3d-45b0e3ac9bee_630x268.gif
There is an opportunity to test this idea. Back in the day when we had panics that were spaced 9-22 years apart with an average of 18 years. Next year it will be 18 years since 2008 and it will be 22 years in 2030. So if this model is right and the timing if the “panic cycle” is still the same we should get another financial crisis between now and 2030.
Do you follow Steve Keen? He built some software he calls Minsky (maybe this is what you are using?) that allows him to model stocks and flows in the economy. He looks at credit creation & stabilisers. He's about 90% pro MMT: https://open.substack.com/pub/profstevekeen/p/chapter-04-endogenous-money-of-money?r=1qaoqd&utm_campaign=post&utm_medium=web
I’ve read some of his stuff. I mention some of his work in my post on financial crisis.
https://mikealexander.substack.com/p/how-sp-culture-produces-financial#:~:text=4.2.3%20Mathematical%20modeling%20of%20FIH
Thank you! The actual SC we once had featured high marginal tax rates, dividends taxes an ordinary income (and so subjected to these rates), illegal stock buybacks and balanced government budgets.
With balanced budgets, government bonds are not available for investment of foreigner-held dollars. With stock buybacks illegal and dividend highly taxed there is a disincentive for sticking profits into the stock market as happens under SP. This removes a major source of upward bias for the stock market. See this post
https://mikealexander.substack.com/p/looking-at-the-stock-market-in-terms
The stock market returns to the Stock Cycle that governed its operation for the two centuries before 2000, which I wrote about in 2000.
https://www.mauldineconomics.com/frontlinethoughts/understanding-stock-market-behavior-mwo041703
In our modern SP world there is a US government with a bottomless appetite for debt, and a stock market than simply goes up all the time because it is continuously being stimulated by built-in inflows of profits. So there are lots of places for investor money to go. But under the SC world there are not attractive returns from government debt, and the stock market is in bear mode half the time. Financial investments simply are not as attractive and foreign holders of dollars will have a lot less interest in dollars meaning the value of the dollar will fall until the trade deficit is eliminated. As this point there is no net flow of dollars out of the country that would need to be invested in financial assets back in the US.
The key to SC-promoting policy is the placing of roadblocks towards financial investment. This culture was implemented in the aftermath of the stock crash and subsequent Great Depression. This economically traumatic experience made a whole generation take a very dim view on financial speculation. My gut feeling is the only way you could ever implement SC is in the wake of a similar economic catastrophe that would allow the government to pass the necessary tax hikes and make stock buybacks illegal. Not only that but we would need an inflation scare before this in order to put a fear of deficits back into the minds of policymakers.
If this set of circumstances were to arise, then policymakers would need to establish a dispensation which gives them 12 years, rather than four, to enact the changes.
https://mikealexander.substack.com/p/the-importance-of-a-political-dispensation
Last cycle this is how the Democrats did it
https://mikealexander.substack.com/p/how-the-new-dealers-gained-the-ability
Very nice walkthrough of your cultural assessment of capitalism based on structural incentives. Cultural economics flows from the societal rules that pertain to law and property.
I’m wondering if you see a need to innovate the legal system that supports and attaches to capitalism, either SC or SP.
Your post also calls out the financialization process that can drive inequality. How does the monetary system choice underpin SC vs SP? What rules should govern who can create money? What if a country left income taxes behind entirely and moved to transaction taxes and land (property) taxes to balance state and private fund flows?
Again, I appreciate your thoughtful essay.
Thanks!
I don’t see how the monetary system would impact of culture. Culture affects the objective of capitalism. I define capitalism as an economic system in which capital plays the dominant role, in which specialist businessmen called capitalists seek to grow the stock of either “real” or productive capital, or financial capital (market capitalization). SC culture maximizes the former and SP the latter. It is unclear to me how the monetary system might affect what sort of capital growth is maximized (SC or SP. I note that SC capitalism flourished under the Bretton Woods gold standard, and I believe gold played an important role in its collapse see here https://mikealexander.substack.com/p/nixon-gore-the-paths-not-taken
We may have had something resembling SP culture in the 1920’s, it’s hard to say for certain since I do not have data on stock buybacks or similar operations back then. Inequality was high which is consistent with SP, and I treat it as SP.
We used the gold exchange system then so I conclude that SP can operate under a gold standard. An the SP capitalism we have now is operating under a fiat system. So I think SP operates in different kinds of monetary systems. I am not sure that SC would be stable under a fiat system, however.
As for the alternate tax systems, SP capitalism would be the one selected. These all have the property that executive income has no upper bound. Since option compensation is the lowest choice for the company it seems that without an income tax with high top marginal rates you will always have an environment selecting for SP capitalism.
I appreciate your answer. Sometimes a discussion of overlapping frameworks creates fuzzy edges. The care you take to articulate SC vs SP structural forces is evident.
I agree that the monetary system is not a direct driver of culture. In my opinion, it can influence incentives that drive investment, taxation, and growth policies, which impact economic culture more directly. I look forward to placing this essay in the larger context of your writings. Thanks, again!
Amen. Shareholder primacy is literally the mother of all perverse incentives.
As my namesake implies, we need to, at a minimum, restore the Glass-Steagall Act, ban stock buybacks, and restore the high (70%+) top marginal tax rates that prevailed before Reagan. Yesterday.
Very thoughtful. Your discussion of cultural evolution is solid and articulate. Your discussion of the barriers to change present in the US of the shift from SC primacy to SP primacy is spot on. Love the graphs. Especially the one on top tax rates and executive pay, something I've railed on about for years.
While initially you talk about cultural evolution as something that moves far more quickly than biological evolution, and allows rapid adaptation. Your detailed analysis of the shift from SC to SP shows you also show that there are barriers that can exist to cultural evolution.
Anthropological/archeological data tells us that humans have always resisted cultural evolution from one one form of subsistence to another. While foragers may be quick to adapt cultural changes that enhance foraging, the record tells us that foragers resisted becoming horticulturalists, and that it took massive disruptions of famine and conflict to make that shift. The archeological record shows us that humans had the knowledge and skills to cultivate crops for thousands of years before they were willing to make farming their basic means of subsistence. Moreover, we know that any groups that could continue engaging in foraging successfully did so, even though clearly having the knowledge and exposure to horticultural people. Foraging in the right environment takes far less time and human energy than farming does.
The same is true of the transition from horticulture (hand tool, low intensity farming to agriculture, plow, irrigation and high intensity farming) generally only took place due to violence and force. Again, agriculture takes farm more time and human energy for those doing it (even if it frees some members of society, i.e., those doing the forcing from subsistence labor) than horticulture does.
Modern history tells us that masses of farmers did not voluntarily become industrial workers either. That they were generally forced off their lands (by the enclosure movement in Britain, by war, by persecution, and by poverty), and became refugees whose only option was the cities and industrial work.
Moreover, both history and the archeological record are replete with many examples of societies that died out rather than adapt to major challenges (whether from invaders or climate change). Two popular books of recent decades: Brian Fagan's Floods, Famines and Emperors and Jared Diamond's Collapse collect some of that data in entertain and enlightening books.
My point is that humans are capable of rapid cultural change and adaption to changing environments and threats, but we are by no means guaranteed to do so. Especially when either powerful small groups or large influential groups have much to gain by digging in and something to lose by changing.