4. Capitalism: The Political Economy of Development
Modern knowledge, as organised by the universities, falls into three broad classes: the natural sciences, the social sciences and the humanities. This is to say that the academic division of labour in our day is concerned with nature, society and humanity, of which the first two are thought to be governed by objective laws, but knowledge of the last requires the exercise of subjectivity or critical judgement. Whereas nature and society may be known by means of impersonal disciplines, human experience is communicated between persons, between individual artists and their audiences.
Nature and humanity are represented conventionally through science and art, but the best way of approaching society is moot, since social science is a recent (and in my view, failed) attempt to bring the methods of the natural sciences to bear on a task that previously had fallen to religion. If science is the commitment to know the world objectively and art the means of expressing oneself subjectively, religion was and is a bridge between subject and object, a way of making meaningful connection between something inside oneself and the world outside. Now that science has driven religion from the government of modern societies, we must find new forms of religion capable of reconciling scientific laws with personal experience.
The onset of the age of machines coincided with various attempts to develop a science of society, of which British political economy (Ricardo), French sociology (Comte) and German philosophy (Hegel) all achieved a high level of definition in the years immediately following the end of the Napoleonic wars (the Congress of Vienna in 1815). [i] What interests me here is classical political economy, since it was more closely attuned to the rise of capitalism, the subject of these two chapters. Political economy was an argument about how the distribution of the value generated by an expanding market economy might best be deployed in the interest of economic growth. Smith, Ricardo and their followers identified three types of resources, each thought to be endowed with the power of increase: land, money (capital) and human creativity (labour). These in turn were represented by their respective owners: landlords, capitalists and workers (the latter rapidly taking the form of an industrial proletariat). Their interest was in specific sources of income, the distribution of which contained the key to the laws of political economy: rent, profit and wages. The main conflict was at that time seen to be between landlords and capitalists; and the policy recommendation was to ensure that the value of market sales was not diverted from the capital fund to high rents. Only later did the issue of the conflict between the interests of capitalists and workers arise.
I contend that the basic division between classes formed by an interest in land, money and human creativity persists today. Indeed, as we saw, writers as diverse as Locke and Marx have constructed visions of history in which a state of nature or society based on the land gives way to an age of money (our own) whose contradictions should lead to a just society based on fair reward for human creativity. So the question posed by our latest phase of the machine revolution, whose symbolic and practical expression is the internet, is how these broad classes of interest are manifested in the struggle for the value generated by electronic commerce. If the class alliance was first presumed to be between the owners of money and labour against the landlords (industrial capitalism) and then took the form of landlords and capitalists against the people (state capitalism), how are the classes aligned in the present phase of virtual capitalism? I will return to this question in the final section of the present chapter.
Table 4.1 The Three Classes of Political Economy
The original claims made by the classical political economists arose from a perception that the rising forces of industrial capitalism were running up against the entrenched institutions of agrarian civilisation. They found that the land was in the hands of an hereditary aristocracy who could charge what they wanted for its use; and that the price of the food eaten by their workers was similarly tied up in traditional agriculture. They sought to change both. But they soon found themselves faced with two potential antagonists, not just the traditional ruling class, but increasingly the industrial working class which the combination of money and machines called into being. In Britain, the capitalists ended up sharing power with the aristocracy in order to keep the workers tied to an unequal labour contract. This class compromise ensured that the country’s lead in the industrial revolution would soon be lost.
The moneyed class was at first in the vanguard of the struggle against agrarian hierarchy, before they eventually formed a reactionary alliance with its representatives against the people they employed. Put simply, mechanisation is the consequence of human effort being put into improving the efficiency of production rather than into controlling the distribution of whatever is produced. All agrarian civilisations were ruled by groups who owed their power to control over distribution. They cared little for the effectiveness of production and even less for the material welfare of producers, many of whom were serfs or slaves. That is why technology was broadly stagnant in such societies. Many parts of the world retain regimes which reward those with the power to grab what has been produced by others. Indeed, it can be argued that even the industrialisers have relapsed into an economic condition where distribution dominates production.
For a brief period, in Britain and a few other places, a class emerged which saw profit in cheapening the costs of production, mainly through the introduction of machines. If, as was normal before the machine revolution, producers received, let us say, a seventh of what consumers pay for commodities, there was little point in an enterprising young man busying himself with making goods; the largest slice of the action lay in distribution processes (banking, haulage, protection rackets, middle-men’s profits, taxation, theft etc). Better by far to become an agent of those who wield political power or, failing that, to become a highway robber. The middle-class revolution, with its emphasis on the autonomy of “civil society”, sought a radical reduction in rents, interest rates, transport costs and political extraction which, at least temporarily, shifted the emphasis of money-making towards improvements in the efficiency of production.
The theory of political economy held that competitive markets lowered the margins available to distributive agents and forced capitalists to reduce their production costs through innovations aimed at improving efficiency. This was achieved through economies of scale, division of labour and ultimately the introduction of machines to factories. The productivity of labour was thereby raised, allowing the resulting profits to be ploughed back into an expanded level of operations. By lowering the cost of producing basic goods like clothing, society’s manpower was freed up for more elaborate forms of commercial production. The only threat to this upward spiral was if those who controlled the land raised their rents to take advantage of these newly profitable industries. This meant that value would be diverted into wasteful consumption of imported luxuries. Worse, whereas the capital fund was inherently limitless, land was very definitely in limited supply. Economic expansion meant population growth, thereby driving up food prices and squeezing the capital fund on the other side through wages. The solution was to expose Britain’s landowners to competition with cheap overseas suppliers of food like America; and this made free trade, specifically the repeal of the corn laws, the great political issue of the mid-19th century.
Later, when capitalist power was thoroughly consolidated, the economists came up with a theory which claimed that distribution in the old sense had been replaced by competitive market exchange. [ii] The question of who gets what was now reduced to an allocative process which was both rational and fair: everyone gets what they are worth in the market; and any residual anomalies of distribution were best resolved by ensuring greater market competition. There is an underlying truth (as well as a lot of mystification) in this. The economic historian, Douglas North, has argued convincingly that a large part of America’s economic growth may be attributed to reductions in “transaction costs”, in other words, to innovations lowering the share of consumer prices accountable to distributive processes. [iii] At the same time, Jean-François Bayart has argued that all African ruling classes, precolonial and modern, have been exercised to preserve the sources of revenue they live off, what he calls “the politics of the belly”. [iv] This is undoubtedly true; but there is nothing specifically African about it.
What is abnormal is the political experiment, launched by people like Locke in 17th century Britain, to build an economy favouring production. The success of mechanisation in a few countries since then has reinforced the value of that experiment; but it is still insecure. The social forces which concentrated economic power in the state during the 20th century had a strong distributive logic, derived in part from a mission to protect the weak; and latterly the ability of virtual capitalism’s protagonists to make money with money in a circuit which is increasingly independent of production may also have shifted economic power back to those who place themselves between producers and consumers. Most of this chapter is concerned with these two phases of capitalist development and their significance for global political economy. The 20th century itself may be conceived of as having been framed by these stages in the evolving relationship between capitalism and the machine revolution: at one end, by the bureaucratic revolution and the shift from market to state capitalism; at the other, by the communications revolution and the shift from state to virtual capitalism. This in turn can be understood in terms of changing relationships of alliance and conflict between the three classes of political economy. An alliance of capitalists and workers against the landlords was replaced by an alliance of capitalists and landlords against the workers. The last section of this chapter will ask how they shape up in the struggle for the resources of the internet.
The twentieth century
Hegel’s owl has been winging it through the gathering twilight for some years now. The debacle of the Balkans has brought back memories of genocide in Europe and of events like the Spanish civil war; and Yeltsin’s resistible rise has forced us to reassess the events of 1917. But, if Hegel’s famous remark about the wisdom of hindsight has never seemed more apt than today, it is hard to avoid concluding that the dominant feature of our world has been violence on an unprecedented scale. The 20th century has been, in effect, one long war, a war to rule the world, waged by rival versions of the modern state. We would be justified in asking, as it draws to a close with yet another European war, how we might avoid repeating the experience in future. So far, Eric Hobsbawm has weighed in with a 600-page retrospective account, Age of Extremes: the Short Twentieth Century, 1914-1991. [v] He is right to see the first world war as the formative moment of the century’s dominant form of political economy, state capitalism (although he wouldn’t call it that); and the collapse of Stalinism and apartheid in the period 1989-91 was obviously a watershed of some kind, even if we don’t yet know what. The heyday of the modern state was, according to Hobsbawm, 1947-1973; and, as a former communist, he cannot resist feeling nostalgic for those “golden years”.
In order to sketch out my own version of recent history, I need to talk of the long twentieth century. Its origin was the revolutionary decade of the 1860s and it is by no means over yet, although we can but hope that the 1990s are at least the beginning of the end. All the major powers of the twentieth century took a political form conducive to state capitalism in the decade which began in 1861 with the American civil war, the completion of Italy’s risorgimento and the abolition of serfdom in Russia. It ended with German unification, the Franco-Prussian war, the Paris Commune and its successor, the French Third Republic. In between Britain passed the second Reform Act, the cornerstone of Victorian democracy, and Japan’s Meiji restoration took place. In all these cases a deal was struck between military landowners, industrial capitalists and the professional middle classes; and a deadly struggle began between this new ruling coalition and the growing mass of urban workers. The latter in turn began to organise: the First International was formed and Marx published Capital.
The transport and communications revolution of the 1860s laid the basis for a rapid expansion of the world market in subsequent decades. This in turn stimulated imperialist rivalry between the newly formed industrial states. Marx and Engels were almost alone at first in recognising that the overwhelming movement of society was towards centralisation. This had its roots in machine production and the concentration of people in cities. They believed that capitalism was undermining itself by giving working people an unprecedented opportunity to organise themselves in the new centres of mass production and consumption. But there was a corresponding mobilisation at the top of society, based on the resources of capital and machines, which gave the state, an archaic agrarian institution, a new lease of life.
The period from the 1870s to the first world war saw an economic revolution. It had several aspects. Most important was the development of mass production for an expanded mass market of consumers. Mass production entailed standardisation and an increased scale of operations. New forms of corporate enterprise dominated the economic stage, joint stock companies whose directors had limited liability for their firms’ losses (i.e. they were no longer ruined when a company they owned went bankrupt). This was the age of the first department stores, concentrating under one roof a wide range of commodities which would previously have been sold in separate shops. It was also the age of the modern office block, when bureaucracy came to dominate both commerce and government.
The shift towards more impersonal forms of economic organisation had important consequences for marketing. Bureaucracies limit the personal discretion of employees, hedging their activities around with rules which can only be broken at risk of dismissal. In the new stores, customers dealt face-to-face with assistants who had no power to negotiate. That power rested with owners and managers who were now removed from the point of sale, unlike the small shopkeeper who had retained a personal relationship with his clientele. The main imperative of management was to control subordinates; and this ethos stretched back to the production lines as well as outwards to an anonymous market of consumers whose tastes were manipulated by public advertising.
The remarkable thing is that this bureaucratic revolution passed unnoticed by the economists, who chose the same moment (the end of the 19th century) to reinvent their discipline as the study of individuals making rational decisions in competitive markets. When economics was born two centuries earlier, a new system of “natural rights” linking political citizenship to private property in production protected the interests of the small property owners who made up the new middle classes. Later, the science of political economy addressed the historical struggle between broad classes of economic agent for control of the wealth realised in production. Now the second machine revolution in Western Europe and America launched giant corporations onto the economic stage whose successors dominate the world market today. Through an extraordinary act of legal manipulation, these corporations were granted the privileges won by individual citizens in the 17th and 18th centuries, so that General Motors, for example, is in legal fiction an individual with the same rights as you and me.
At the same time, the concentration of workers in rapidly expanding cities gave impetus to their drive for political recognition; and the heirs of Marx and Engels were not slow to offer that drive a revolutionary content. The period leading up to the outbreak of the first world war was touch-and-go. Fifty million Europeans left for lands of temperate zone new settlement and the same number of Indians and Chinese were shipped to the tropical colonies. The ruling classes did not know how to cope with all the people piling up in the cities. The brilliant moment of modernism lit up the intellectual and artistic firmament. Global humanity was on the move and the scent of revolution was everywhere. The newly organised parties of the working class were wooed by promises of greater security. The middle classes prepared themselves for service in an expanded welfare state, Hegel’s recipe for containing the contradictions of capitalism; [vi] and in the process they invented the social sciences. But it could have gone either way. In the event, revolution was headed off and a massive counter-revolution reasserted the power of the few to control the behaviour of the many.
The modern era had been ushered in by a series of revolutions of which the French version had by far the greatest impact. Here Napoleon led the movement to restore elite rule against the popular democracy unleashed by the revolution. In England too the monarchy was restored after a period of parliamentary rule in the 17th century. This reaction has been called a counter-revolution, a term I find extremely useful in trying to understand how our 20th century world has maintained the rhetoric of freedom and equality, while instituting societies controlled from the top by state-made elites. How else can one explain a situation in which despotisms more powerful than any known to history are able to persuade their victims that they are the beneficiaries of modern freedom?
There have been two moments of general social upheaval which defined the course of the 20th century. Each spawned a major revolution and an even more decisive counter-revolution. We call them the first and second world wars. The carnage of 1914-1918 revealed state powers which no-one before had imagined could exist. Governments raised and killed off huge armies; they organised production; controlled markets and prices; discovered propaganda. The Russian revolution threatened to undermine the transfer of these powers into peacetime control of economy and society; and, for a couple of years after the war, Europe hung on the edge of revolution. Then the 1920s saw such an effective reinstatement of centralised bureaucracy (not least by Stalin) that the political question was no longer whether the people would revolt, but rather which form of state — fascist, communist, welfare state democracy — would prevail universally. The period, 1914-1945, was named by Winston Churchill “the second thirty years war” and he should know. It was an unmitigated disaster for humanity, with economic misery compounded by brutality of an unprecedented kind.
The outcome of the second world war was determined by the duel between Hitler and Stalin, pioneers in the use of state terrorism against their own people and various out-groups. Once again whole societies were set in irreversible movement around the globe. Once again a major revolution was unleashed, this time the revolt against European colonial empire in Asia and ultimately in Africa. Once again the immediate aftermath of the war was a rocky period for the governing establishments in Europe. And once again a counter-revolution was launched to preserve the power of rule from above. Its name was the United States of America. The USA used its newfound leadership to put down every popular movement it encountered and to prop up every unsavoury dictator whose support made the world safer for nation-states and capital. At the same time, the threat of communism was wildly exaggerated in order to institute the Cold War, a regime of nuclear terror lasting four decades.
This was Hobsbawm’s golden age. It is true that the co-ordination of public policy in the leading industrial states generated the biggest economic boom the world has ever seen. Moreover, I can attest to the fact that many of us found the end of empire exhilarating: students challenged the authorities in the name of Third World leaders like Fidel Castro, Kwame Nkrumah and Mao Tse Tung. Historical judgement on the political significance of the 60’s is still out. Edmund Leach argued that there was a lot of fear and conservatism beneath the brave talk of liberation then; and he may have been right. [vii] Even so, we have to make up our minds what was right and wrong about that decade, which I would place as 1964-1972, if we are thinking of a general uprising of the young in America and Western Europe.
My short answer is that patriarchy (the dominance of father-figures at all levels of society) was fatally undermined in the 1960s, with its one irrefutable legacy being the women’s movement. There was an expansion of subjectivity and consciousness, mainly among college kids who could look forward to well-remunerated careers whenever they chose to resume normal middle-class careers. But domestic life will never be the same again. What was wrong was the political analysis of the scope for change in state capitalism. The bureaucracy was never stronger than at that time, the state’s management of the economy never more legitimate. Inflation, interest rates, unemployment and taxation were all low and incomes were rising fast. Personal liberation without an adequate historical perspective on society at large usually ends in tears.
There is a watershed in post-war history and its moment is the mid-1970s. Some would point to the two OPEC oil price hikes of 1973 and 1979 as marking the end of the economic boom; others to the end of empire, the American defeat in Vietnam and the Portuguese revolution; perhaps the most important change in the long run was the invention of money markets in Chicago in 1975. In any case, soon after Richard Nixon announced in 1972 that “We are all Keynesians now”, the economic mechanism of the welfare state began to show the strain of lifting the western economies out of the Great Depression for four decades. This was manifested chiefly as general rates of inflation well above normal. In 1975 the global rate was 25% per annum, which may not seem much by some standards; but when shoppers find that supermarket prices are regularly increased by 2% a month, they get nervous. This nervousness was noticed first by the right who, through a series of national leaders such as Reagan, Thatcher and Kohl, found a winning message by the end of the 1970s: a retreat from state intervention and a return to sound money through the revival of market disciplines. These politicians heard and amplified the rumble of the tax revolt gathering momentum in western societies.
In any case, before the mid-70s the state was universally strong and the world economy was booming; afterwards the state became weaker and the world economy stagnated. Before, there was an attempt to reduce the gap between rich and poor nations; after, the gap widened rapidly. The end of the Cold War and now the communications revolution have exacerbated these trends, so that we are entitled at the millennium to ask whether state capitalism is now on its last legs and what its successor is likely to be. In recent decades it has become obvious that the promise of universal state provision cannot be fulfilled; and the revival of a Victorian faith in free markets has produced too many crooks and too many losers for most people’s liking. As Daniel Bell said, the nation-state now seems to be too big for the small things and too small for the big things. [viii] It is probable that power will leak upwards and downwards, into more inclusive political associations and to more devolved local arrangements. But there is a dearth of radical thinking about such possibilities. The left has had so much at stake in the nation-state as a means of defence against the power and mobility of capital that it leaves discussion of this terrain largely to right-wing thinkers. We will return to this question in Chapter 7.
The salient fact of society today is the communications revolution brought about by the convergence of telephones, television and computers. This also sets up a terrain for political debate in which the right currently predominates. For the first time, the machine revolution may be swinging towards decentralisation, thereby lending technological support for greater democracy. Although its contours are too close to us to be obvious, it seems likely that capitalism is also being reformed to take advantage of new global conditions. I discuss the possibility of a stage tentatively identified as “virtual capitalism” below. It is, in any case, abundantly clear that the major players in our world economy are a handful of transnational corporations and that Bill Gates deserves to be seen as the most successful monopolist since Rockefeller. We need to ask, in the aftermath of the Cold War, which forms of political association are best placed to check the powers of these corporations. I doubt if many would now say the existing nation-states.
Table 4.2 The Long Twentieth Century
Formation of leading capitalist states
Transport and communications revolution
The bureaucratic revolution
Corporations, mass production / consumption
Formation of the modern world market
Imperialism and mass migration
‘The second thirty years war’
The Russian Revolution and the rise of fascism
The counter-revolution of corporate states
Collapse of the 19th century economic system
The welfare state consensus
1945 – mid70s
The long post-war economic boom
The Cold War at its hottest
End of European empire; American hegemony
The heyday of state capitalism (‘golden age’)
The youth rebellion
Stagnation and polarisation of the world economy
Money markets and the rise of virtual capitalism
Decline of state capitalism
The market revival
Collapse of Stalinism and apartheid
End of Cold War
The communications revolution, the internet
World society as a single interactive network
There is then a universal history of the 20th century and its periodisation is summarised above. But every place and individual has their own particular trajectory through it, so that our experience of that history is highly variable. To repeat the conclusions of the last chapter, the causes of the variations are as important as the overall pattern. But we need a sense of that pattern, especially as we approach a phase in which the need for common regulation of world society and ecology is likely to take on a degree of urgency. The greatest obstacle to any such co-ordinated programme for humanity is global inequality; and it is to the 20th century sources of that inequality that we now turn.
The development of global inequality
West Africa is separated from the Mediterranean world and Europe by the Sahara desert and an inhospitable Atlantic coastline. [ix] Despite sporadic contacts with Carthaginians and Romans, the region remained largely isolated from the North until the spread of Islam in the late first millennium provided a common ideological framework for trade and migration. One reason for this isolation lies in the rich ecological diversity of West Africa itself, including rainforest and savanna, the sea and major rivers, substantial mineral deposits and a long history of interlocal trade in textiles, ironware, pottery, vegetable products, animals and slaves.
A thousand years ago, the gold-rich West African state of Awdaghust produced traders with bills of credit larger than any known to Islamic civilisation. When the Malian king Mansa Musah went on a pilgrimage to Mecca in the middle ages, his expenditures in Egypt caused runaway inflation there for thirty years. For more than three centuries after they reached West Africa around 1500, European trading settlements on the coast exchanged manufactures for slaves on terms of rough political equality with African societies (such as Ashanti and Dahomey) which themselves grew strong as a result of the trade. The Atlantic slave trade may have been bad for West Africa’s economic development; but, if so, it was because it reinforced the wrong indigenous elements, predatory aristocracies who were full partners in the trade. It was only in the late 19th century that the Europeans were emboldened by their new industrial power (specifically, the machine gun) to establish colonies inland.
The last century (roughly 60 years of colonial rule and 40 years of independence) has seen a rapidly widening gap between West Africa and Europe. The former’s governments have been reduced to economic and strategic impotence, leaving them prey to any policy the rich countries wish to impose. This uneven pattern of development cannot be explained in terms of a colonial exploitation model alone. West Africa did not have to suffer a settler class nor an extensive mining industry and, as we saw in the last chapter, generated an indigenous export sector of capitalist and peasant production. The highest rates of wealth extraction have been as a result of international debts incurred long after the region became nominally independent. There was an indigenous pattern of urbanisation, especially in Western Nigeria; [x] and in the course of the 20th century this has now grown to levels of 30-40%. The main reason West Africans have slipped so far behind is that they have failed to mechanise production to any significant extent. Their countries have acquired modern states, but these have not lifted the productivity of at least some sectors of their economies to a level capable of sustaining such a superstructure. Is it any wonder then that West Africans are leaving their home region in droves to find work where the prospects are better, if necessary as illegal migrants?
The postwar population boom in the Third World has, for the most part, spawned an urban revolution without that rate of mechanisation which accompanied the rise of cities in Europe and America during the 19th century. [xi] This means that the economies of these cities must sustain proliferating numbers of people living by their own efforts at a very low standard of living (“the informal economy”). The poverty of the inhabitants of large modern cities has always provoked more anxiety in their rulers than the plight of the peasantry, since the city mob is closer to home and less easily controlled. Moreover, these cities contain in microcosm all the pathologies of global economic inequality exaggerated to tragi-comic effect. Gilded palaces protected by bars, dogs and guns look down on squalid slums familiar to middle-class readers since the publication of Oliver Twist. A poem I wrote while spending a couple of years in Jamaica in the 1980s expresses something of this contrast. You might say it is a considered reaction to the encounter with Alvin (see the epigraph).
View From a Balcony
The evening sky parades its wonders just for me:
Here towering columns, residue of rainclouds,
Boiling black smoke, hellfire of blast furnaces;
There thin purple islands, feathered archipelago
Floating in an unmapped, turquoise lake.
Encircling hills, reduced to pristine dormant shapes,
Stretch out familiar fingers to the golden sea.
A forest city spreads its winking lights beneath my feet.
This surge of elevated power intoxicates,
Brings on wild fantasies of flight,
Makes all things possible from here.
We clasp cold Red Stripe in the still warm air,
Hands slipping on the bottles’ icy dew,
Our senses captive to the evanescent spell
Of sunset’s lurid melodrama,
Brief recapitulation, daytime’s curtain call.
But Herman was uneasy. “It isn’t right
To be up here when they are all down there.”
The godlike seeming was dissolved
And cooling beer now mixed with clammy sweat.
My home’s a hillside fastness, garden paradise,
Container walls like fortress ramparts,
Far more lovely, twice as safe as any bank.
Here yelping curs outnumber people,
Harrass dark strangers night and day.
White mansions show the world a surly shuttered face.
Grim burglar bars, sham rococo,
Cannot disguise the prisons that they make.
Guns guard the inmates, rich inviolate,
From unseen dangers, bleak reminder of their wealth.
The restful cool of breezy night
Is shattered by rounds of canine choirs,
Redundant drone of airconditioners
And TV movies broadcast for the world to hear.
Then daylight brings the peaceful sun
To light this magical profusion –
Royal palms, wild ferns and clinging vines,
Banana’s crazy leaves, cascading banks of flowers –
And then at last to lull abandoned dogs to sleep.
Each morning sleek new German cars,
Evading potholes and debris of rainstorms,
Carry the masters down the winding, unkept road,
Past servants trudging slowly up that steep incline,
Eyes averted from their rulers and the sun,
Their unpaid journey almost done,
An hour or more from Kingston slum
To bright, fantastic cages on the hill.
For all their fortifying bulk
This colony’s foundations are not firm.
The fluid earth escapes the shoring walls
And leaks away in swift corrosive streams.
The race threat grasps them by the throat.
The sound of distant jungle drums
Drifts up to fill the owners’ restless dreams
Of dread invasions, crime and death.
Subversive nightmares are transformed
In frantic talk of hurricanes and land slides,
Elemental cataclysms, nature’s revolutions,
Displaced symbols of a deeper terror,
Monstrous fear of fellow men.
This fragile platform on the edge of empty space
Suspends me over chasms of despair,
Until the evening sky parades its wonders once again
And idle torment shifts to fantasies of flight
Where contradiction’s black and white,
Made gaudy by the dying sun’s strange light,
Fade into nothing and the night.
The beleaguered elites are afraid of the poor majority whom they only see from afar or in threatening circumstances on the streets. Should they anticipate an explosion or can the cracks in the social facade be papered over? In the 19th century, the journalist Henry Mayhew ventured into the vast unknown desert of London’s East End to report on London Labour and the London Poor for the benefit of his readers’ curiosity. [xii] His conclusion was that they were extraordinarily busy and enterprising. Even so, the incorporation of what Gareth Steadman Jones calls Outcast London into mainstream 20th century society has itself been an uneven process and was never completed. [xiii] The crisis of America’s inner city ghettos is as acute today as at any time before. The contradictions of massive inequality are intrinsic to the huge urban agglomerations growing everywhere from Lagos to Los Angeles.
In the Great Depression of the 1930s, Maynard Keynes offered a solution to national elites concerned that their ability to govern would be overwhelmed by the mass of poor and unemployed generated by the economic system they supervised. [xiv] The rich countries today are similarly cast adrift in a sea of human misery which includes most people alive, but especially the inhabitants of Africa and South Asia. Marx used to say that “the social relations of production act as so many fetters on the development of the productive forces”, by which he meant that capitalist markets could not organise machine production for the benefit of society as a whole. At the most inclusive level the main fetter on human development today is a United Nations world order (dominated by the USA) which prevents the evolution of new forms of economic life more appropriate to the conditions of mechanisation and global integration into which we have so recently stumbled. It also, of course, prevents the implementation of a Keynesian programme aimed at alleviating world poverty by means of redistribution of purchasing power.
In the film Annie Hall, Woody Allen says that he doesn’t feel like eating out tonight because of all those starving millions in the Third World. [xv] The audience laughs, uneasily. The gesture rings false: why tonight and not every night?. No-one could live consistently with that proposition — could they? We might well ask how people live with economic inequality. And the short answer is that they don’t, not if they can help it. Most human beings like to think of themselves as good. This normally involves being compassionate in the face of others’ suffering. The worst thing would be to imagine that we are responsible for that suffering in some way. Better to explain it away as having some other cause: perhaps the people deserve to suffer or are just pretending to be poor. Better still not to have to think about it in the first place. In the last resort it is possible to ignore them by defining them as less than fully human (not like us). Distance (in every sense — physical, social, intellectual, emotional) is the answer to the unwelcome conflict between inequality and human compassion. And, while each of us engages in thousands of voluntary acts distancing ourselves from the suffering of others, the task is performed more reliably, at the communal level, by institutions.
An institution is an established practice in the life of a community or it is the organisation that carries it out.  What they have in common is the idea of a place to stay, in opposition to the movement, flux and process of life itself. Institutions and agriculture go together. The conflict between fixing society in the ground and reinventing it on the move underlies our contemporary global crisis. The maintenance of inequality depends on controlling the movement of people. If the poor are to be kept at a proper distance, it would not do to have them invade the protected zones of privilege established by the rich. Better by far that they should know their place and stay there.
The two principal institutions for upholding inequality, therefore, are formal political organisation (laws administered by states) and informal customary practices widely shared by members of a community (culture). The most important task of both is to separate and divide people in the interest of maintaining rule by the privileged few. Classifying people is as old as language and society themselves; and, as Durkheim and Mauss pointed out, it can be constructive in defining solidarity within and between groups. [xvi] But, it is equally well-known that labelling people differently is a means of preventing them from combining. One of the main ways that modern ruling elites everywhere have come to terms with the anonymous masses they wish to govern is to pigeon-hole them through systems of classification. The intellectuals have devoted their efforts overwhelmingly to devising and maintaining such categories. Social science itself would be impossible if individuals were not subordinated to these impersonal systems of thought and enumeration.
To the extent that society has become a depersonalised interaction between strangers, an important class of categories rests on overt signs which can be recognised without prior knowledge of the persons involved. These are usually visual — physical and cultural characteristics like colour or dress; speech styles may also sometimes be taken as revealing social identity. Modern states are, of course, addicted to documentation, identity cards, preferably with a photograph of the bearer.  By a standard symbolic logic, these sign systems are often taken to reveal underlying causes of behaviour — trustworthiness, ability and much besides. On this arbitrary basis,
• personal destinies are decided,
• people are routinely included and excluded from society’s benefits,
• inequality is both made legitimate and policed,
• the world is divided into an endless series of “us” and “them”,
• monstrous crimes against humanity (like genocide) are carried out.
After the second world war, South Africa’s ruling National Party set out to institute what they called apartheid. Despite the close integration of people of European and African origin in the country’s economic system, they decided to separate the “races”, by allocating to “blacks” a series of homelands (themselves fragmented according to “tribal” origin) and denying them the right to reside in the cities, where the “whites” mainly lived, except with a pass (work permit). Within the cities, black and white areas were kept apart and were very unequally endowed with resources. Establishing and maintaining such a system required the systematic use of force, although collaborators were, as usual, not hard to find. Internal resistance built up gradually and the rest of the world expressed variable degrees of outrage, eventually translated into an intermittent boycott. The release of Nelson Mandela in 1990 signalled a retreat from this policy which culminated quite soon in African majority rule. An end to apartheid perhaps? Or perhaps not.
The South African experiment was ugly, but not the most extreme form of inhumanity known to the 20th century. Stalin and Hitler between them were responsible for much worse; and even as the ANC was being peacefully elected, a million people lost their lives in Rwanda, while Bosnia revealed that genocide was alive and kicking in Europe. Yet the Afrikaners managed to provoke the most co-ordinated international opposition since the second world war. Why? What they did was obnoxious, but was it so exceptional?
Perhaps their main crime was to be explicit, even boastful about their method of maintaining inequality. For the same method could be said to operate everywhere, without being acknowledged so openly or practised so violently. I believe that South Africa became a symbol of a universal institution which people were feeling generally uneasy about. It offered a limited target, outside the societies of its international critics, which could be vilified and rejected as an alternative to more painful introspection. For do not people like to think of themselves as good? Opposing evil elsewhere is a way of displacing our ambivalence over how we handle inequality closer to home. Whether this analysis holds true or not, it is indisputable that, after the official demise of apartheid in South Africa, something similar to it is the ruling principle of organisation by which the inequalities of world society are managed today.
This principle can be stated briefly as follows. Inequality is intrinsic to the functioning of the modern economy at all levels from the global to the local. The rich and poor are separated physically, kept apart in areas which differ greatly in their standards of living. It is impossible to prevent movement between the two areas in any absolute sense, if only for the fact that the rich need the poor to perform certain tasks for them on the spot (especially personal services and dirty work of all kinds). But movement of this sort is severely restricted, by the use of formal administrative procedures (state law) or by a variety of informal institutions based on cultural prejudice. These rest on systems of classification of which racism is the prototype and still the single most important means of inclusion and exclusion in our world.
There is a great lie at the heart of modern politics. We live in self-proclaimed democracies where all are equally free; and we are committed to these principles on a universal basis. Yet we must justify granting some people inferior rights; otherwise functional economic inequalities would be threatened. This double-think is enshrined at the heart of the modern nation-state. Nationalism is racism without the pretension to being as systematic or global. So-called nations, themselves often the outcome of centuries of unequal struggle, link cultural difference to birth and define citizens’ rights in opposition to allcomers. The resulting national consciousness, built on territorial segmentation and regulation of movement across borders, justifies the unfair treatment of non-citizens and makes people blind to the common interests of humanity.
There are other ways of classifying the poor, of course, besides visible signs of “natural” difference encoded as race. Nationality, ethnicity, religion, region and class can be signalled in many other ways. But the pervasive dualism of modern economies derives from the need to keep apart people whose life-chances are profoundly unequal. Engels noticed it when he came to Manchester in the 1840s. [xvii] In medieval cities, the rich and poor lived together. Here the rich lived in the suburbs and worked in the city centre; and they rode to and from their businesses along avenues whose facades of shops concealed the terrible housing conditions of the slums which lay behind. Post-apartheid Johannesburg takes this to a latterday extreme, with its rich white Northern suburbs policed by private security firms and poor blacks still crowded in monochrome townships like Soweto.
The apartheid principle is to be found everywhere in local systems of discrimination, more or less blatant. But there are also grounds for asserting that 20th century world society has been constructed along the same lines. Arthur Lewis makes a plausible case for this as follows. [xviii] In the period from the 1880s to the first world war, as we have seen, 50 mn Europeans left home to go to the lands of temperate zone new settlement (37 mn to the USA, the rest to Australia, Argentina etc). A similar number of Indians and Chinese (“coolies”) were shipped to the tropical colonies as plantation and transport workers, indentured labourers who signed away their freedom for a sea passage. These two streams of migrants had to be kept separate since, although their work was often similar, the first was paid on average 9 shillings a day, the second 1 shilling a day. And in the areas where Asian workers were allowed to settle, the price of local wage labour was driven down to the same level. Seen in this light, the paranoid fear of Asian immigration which was commonplace then among Australian workers of European origin makes a lot of sense.
Lewis goes on to argue that this division of the world by western imperialism into countries of dear and cheap labour had profound consequences for their subsequent economic development. For high wage economies sustain higher levels of demand than their low-wage counterparts. Moreover, world trade has been organised ever since in the interests of the better-paid, with tax-rich states subsidising their farmers to dump cheap food overseas at the expense of agricultural development there and preventing the imported manufactures of poor countries from undermining the wages of home industrial workers. South Africa and the United States were two countries which allowed heavy immigration of working class Europeans, while seeking to retain a reserve of poorly paid, mainly black labour. The resulting dualism is inscribed on their shared 20th century history of racist urbanisation. That is not hard to see. Lewis’s feat was to show how we might think of contemporary world society as a whole in similar terms.
The unequal world made by Victorian imperialism was sustained by a cultural theory based on presumed biological difference. Our late 20th century world is more unequal. Underlying this process is the uneven development of mechanisation and money-making (capitalism). The boundaries between rich and poor in this world are not static: some Asian countries have begun to challenge western hegemony, for example. The cultural theory is now more overtly nationalist than racist, but the coercion and prejudice exercised in its name are much the same. They maintain economic inequality at the local level and block any appropriate response to human misery on a world scale. People may be less triumphalist about their sense of superiority these days; but it is their culture, with its curious mix of self-congratulation and indifference, of rationalism and mystification, that enables them to sleep at night.
How can a world which has seen the end of formal colonial empire maintain racial inequality at the heart of its economy? The answers lie in the failure of post-colonial development. Kwame Nkrumah, leader of Africa’s first state to win independence from colonial rule (Ghana in 1957), told his followers, “Seek ye first the political kingdom”. [xix] If the anti-colonial revolution posed the main threat to the prevailing world order in the second half of the 20th century, it was also widely assumed that political emancipation would be a source of economic liberation for the impoverished masses of the Third World. Quite the opposite has been the case; and now, four or five decades after independence, the gap between rich and poor countries has grown wider. Many parts of Africa are in real terms worse off now than in 1960. [xx] At the same time, the world economy, which boomed in the decades immediately after the second world war, has been stagnating for over two decades now, since the turning point of the mid-70s identified above.
The financial crisis of 1929 triggered off a general slump (the Great Depression) which was felt acutely in the West, but affected the whole world. The discovery of demand management by governments (welfare state capitalism) and the boost to production provided by the second world war ended the slump. After the war, America pumped aid into a shattered Europe (the Marshall plan), but economic growth was slow and only took off in the early 1950s under the stimulus of the Korean war. Now, with the world in thrall to a potentially terminal conflict between the western and eastern blocs, the global economy enjoyed two continuous decades of expansion. This was the context both for the anti-colonial revolution and for the youth rebellion in the West, with its links to the civil rights and women’s movements, especially in America. It should be remembered that, until well into the 1970s, many intellectuals believed that the communist experiment would prove to be economically superior to the “free enterprise” system.
Under these circumstances the essence of political economy everywhere came to be known as “development”. At one level, this meant the relationship between rich and poor countries, a new contract sponsored by the United Nations world order whereby the richer countries agreed to help the newly independent Third World to close the gap between them. This involved the transfer of money, technology and skills (“aid”) which people imagined could be afforded out of an economic growth many thought of as permanent. At first, the recipe for development offered by the Americans was called “modernisation”. [xxi] Societies considered to be traditionally backward needed an infusion of what I have called “the middle-class package”: cities, capital, technology, democracy, education and the rule of law. There was some optimism in the 1960s that prosperity could be diffused in this fashion.
But by around 1970, it was clear that something was wrong. Most poor countries was not getting any richer and for some the situation was deteriorating. This provided the context for a critical analysis, rooted in Marxism, the other side’s ideology in the Cold War, which was known variously as underdevelopment or dependency theory, eventually as “world systems” theory. [xxii] The common core of these approaches was the idea that the poor were poor because their economies had been structured by western capitalism in the interests of accumulation which effectively transferred wealth to the rich countries from the Third World. It followed that involvement with the West in the hope of becoming modern was the problem, not the solution. The latter required some form of isolationism or withdrawal from the capitalist system. This theory was associated at first with certain Middle Eastern and Latin American writers. [xxiii]
Cracks were already beginning to show in the West’s postwar boom by 1970. The Vietnam war introduced financial instability to world markets, as well as indicating that American pretensions to global hegemony had clay feet. The oil price hike of 1973 then threw the world economy into a depression from which it has never recovered. The OPEC countries were a cartel dominated by a group of small countries in the Persian Gulf with a lot of sand and next to no people, led by the Saudis. Oil production was organised by American and one or two European companies (“the seven sisters”). It is not for this book to investigate how an economic disaster of this magnitude could be pulled off by a few Arab sheiks sheltering under the military umbrella of the United States. Let us infer that the collusion of the oil companies and of the US government implies that their interests were also served by what transpired. [xxiv]
The consequence of the oil price rise was an immediate reduction in aggregate demand within the industrial economies, as consumers were forced to pay substantially more for energy. The oil producers received a windfall surplus which most of them could not spend, since their populations were too small and there is a limit to how many fancy weapons they could buy. They made huge transfers to the US government, their patron, in the form of purchasing Treasury bonds;  which meant that US citizens were indirectly financing additional government expenditures by paying more for gas, a tax hike by the back door. There was still a lot of money left over which was deposited by the producers in the banking system, much of it the new off-shore Eurodollar circuit which offered higher interest rates. In order to pay the interest the banks had to lend on the money. There were few takers in the West, since the sharp reduction in demand discouraged investment there. The communist bloc at this time was not considered to be reliable and had little to sell that the rest of the world wanted. So the bankers turned to the Third World. [xxv]
If the oil price rise was bad for the industrial countries, it was a full-scale disaster for the non-oil producing Third World countries. These had been encouraged by the World Bank and other international agencies to concentrate on exporting a few primary products. The resulting oversupply kept prices down, while rapid urbanisation in their countries raised demand for the manufacturing exports of the industrial countries. As a result the terms of trade between the two blocs were worsening from the perspective of the poor agricultural economies. The oil shock depressed demand in the rich countries for Third World exports; yet when the latter were faced with increased energy bills, all they could do was try to sell more of their traditional exports, thereby driving world prices even further downwards.
Into this desperate situation came the western banks looking for ways of lending on the oil surplus. They found takers, of course, usually corrupt leaders of bankrupt governments who were prepared to sign any piece of paper to get their hands on some money. The premise of the loans was that they would be invested in productive projects out of whose yields the interest and capital repayments would be made. But more often than not, the money went into private Swiss bank accounts or the projects failed, as most “development” projects did at the time. [xxvi] By the end of the 1970s there was a huge banking crisis, since Third World debtors were in no position to pay off the loans. This was exacerbated by the second oil price hike in 1979. The gains of 1973 had been eroded in the meanwhile; so the producers tried to claw some of them back. This time, the dollar was undermined and the Federal Reserve responded by raising interest rates to 20%. The subsequent regime of high interest rates coincided with the shift from postwar Keynesian demand management to the “monetarist” (sound money = deflationary) policies identified with Reagan and Thatcher.
The 1980s and afterwards saw a massive transfer of money from the Third World to the West in the form of interest repayments which often amounted to as much as a third of government revenues in any given year. [xxvii] This drain of income from the poor countries was greater than any extracted under previous colonial and neo-colonial arrangements. At the same time, the International Monetary Fund and World Bank imposed draconian measures known as “structural adjustment”, designed to reduce each government’s financial obligations. The threat to the western banking system was averted by a combination of rescheduling agreements (which only increased Third World liabilities) and covert support to the most vulnerable banks. The governments of poor countries were caught without any alternative to playing along. In any case they had long ago abandoned any sense of responsibility towards their own people in exchange for dependency on their foreign creditors.
In the process of this catastrophe, which is the specific context for escalating impoverishment in much of Africa, Asia and Latin America, the idea of “development” was quietly dropped. The international agencies now have just one goal, the survival of governments whose task is to supervise passively the international flow of money into the coffers of western banks and corporations. Aid levels have been much reduced since the 1960s; indeed non-governmental organisations of a bewildering number and variety have stepped in to perform functions which neither Third World states nor their international sponsors are prepared to undertake any more. But the obscene transfer of wealth from the poor to the rich, honouring debts contracted under highly dubious circumstances, reveals how far world society has degenerated from the high ideals generated by the defeat of fascism and colonial empire in mid-century.
A brief note should be added on the communist bloc.  That great statesman, Richard Nixon, made a sort of peace with Brezhnev’s Soviet Union, as well as with China, at the beginning of the 1970s. This opened up the possibility of trade between East and West. Nixon’s solution was the so-called “vodka-cola” strategy; the point being that there was no way that Americans could drink enough vodka to pay for all the Coke that Russians would want to buy. What was it that the communists had plenty of? Docile, reasonably skilled, cheap labour. They could buy western goods with the proceeds from selling that labour to western corporations. Consequently, the World Bank and other institutions lent money to the Poles, Hungarians etc to go in for joint sponsoring deals with these companies, setting up factories there, for example making up clothes for sale in the West. The hard currency earned by repressing their own labour force was spent by the political elites in special shops for whisky and Marlboro cigarettes which served to mark off their status from that of the masses, who ate bread and potatoes, if they were lucky.
There was a snag. World trade was rigged to prevent countries with cheap labour, like Taiwan or Poland, undermining their high-cost western competitors. North America and Western Europe erected tariff barriers against such competition which were potentially prohibitive for the trade initiated under the auspices of the vodka-cola strategy. A solution was found. When West Germany signed the Treaty of Rome, to join the European Common Market, it signed in the name of Germany as a whole; so that East Germany was in theory a member of the western trading circle. Manufactures from the communist bloc were shipped into the West through East Germany acting as a sort of port-of-trade. When the Berlin Wall fell, several Eastern European countries had accumulated billions of dollars in debts to finance this scheme. The resulting popular governments then embarked on a privatisation programme which ruined their economies; and the attention of the western powers shifted to doing what they could to protect their trade and investment there. It may eventually dawn on them that having participated actively in the economic ruin of the second and third blocs of postwar humanity (which is to say, the great majority), they are merely preparing the way for their own downfall. Certainly, there are fewer triumphalists around today ready to claim that the West “won” the Cold War. The shadow of the 1930s presses closer in on us all.
In the meantime, whether they actively sought it or not, many countries have effectively been ejected from the movement of world trade. At the time of the first world war, when Lenin claimed that accumulation through the colonies was the main concern of western capitalism, [xxviii] these accounted for something like a third of world trade. It was still the heyday of a world market based on exchange of raw materials for simple manufactures. By the end of the 1970s, the Third World’s share of international trade had fallen to 10% and, in the last two decades, this has fallen sharply even further. Increasingly, world trade is dominated by exchange between a few countries capable of entering the sophisticated system of money, information services and hi-tech manufactures which constitutes “virtual capitalism”. If the underdevelopment theorists once advocated withdrawal from the world system as a positive strategy, most non-western governments are now desperate to keep a toe-hold in a market which threatens to exclude them for good. The priorities of ordinary people in these countries may be somewhat different, however. They at least, unlike their governments, have the option of leaving home and trying their luck in the centres of world economy.
State capitalism and the informal economy
In the twentieth century capitalism took the specific form of being organised through the state. Three world wars were fought to determine which form of state would predominate; but in the end it was the state itself which lost. Now there is not a popular government in the world and people everywhere are looking for ways of getting the state off their backs, especially by reducing their obligations to pay taxes. The antithesis of state capitalism is the so-called “informal economy”, a term which originated in the early 70s. Beginning as a way of conceptualising the unregulated activities of the marginal poor in Third World cities, “the informal sector” has become recognised as a universal feature of the modern economy. [xxix] Evasion of the state’s rules unites practices as diverse as home brewing, street trade, the drugs traffic, political corruption and offshore banking. The issue of informal economic activities is thus intimately tied up with the crisis of state capitalism in our times. [xxx]
In 19th century Britain, the “nightwatchman state” was content to provide the conditions in which market capitalism could flourish. This included putting down workers’ riots, when necessary. The Germans and later the Japanese pioneered a national system of closer co-operation between government, the banks and industry. But no-one then dreamed of the state being able to regulate the workings of the economy in fine detail, down to fixing prices and taking on responsibility for boosting the number of jobs. A capitalism whose principal organ of reproduction was the state itself arose out of the conditions of the first world war. During the “Great War” of 1914-18 millions of working people were killed in the trenches, which solved the problem of popular pressure for change in one way. But the greatest discovery of their rulers lay in the powers of intervention unleashed by the bureaucratic revolution of recent decades.
For a century or more, intellectuals had been grappling with the problem of how to rule the anonymous masses of the new industrial cities. Statistics, classification and professional specialisation were part of the answer. Hegel proposed, around the end of the Napoleonic wars, a state-made “universal class” of bureaucrats trained in universities to administer the common good. Not long afterwards, Marx and Engels argued that, if there was to be a universal class taking responsibility for the guidance of society, it would be the mass of ordinary working people themselves. [xxxi] This set the stage for a gigantic struggle to determine the locus of power in modern society. The industrial working classes flirted with revolutionary politics, but eventually settled for a welfare state administered by professionals – an army of doctors, teachers, lawyers, social workers and, eventually, economists. In other words, it was Hegel’s vision which won out in our century, not Marx’s.
This was obscured by the revolutionary consequences of the first world war which exploded in Russia and for a time (1917-19) threatened everywhere to overturn the system of rule in the interests of big money (capital). Less noticeably, however, the rulers of the industrial countries acquired massive powers of direction and mobilisation in the course of the war. Faced with the possibility of universal insurrection afterwards, they deployed these new powers to launch a counter-revolution, a reassertion of the state’s right to rule, if necessary by taking on its own people. This was true even of Russia which, after Lenin’s death in 1923, was ruled by Stalin as a totalitarian bureaucracy only nominally committed to world revolution. From the 1920s to the end of the 1980s, there was one system of political economy in the world and several variants bent on winning overall control.
After 1945, the rhetoric of the Cold War did not disguise the convergence of the American and Russian systems towards a common model of accumulation. C.L.R. James pointed out that both sides organised workers in factories to produce surpluses which were ultimately managed by the state. [xxxii] The difference between public and private ownership of the means of production was more important in ideology than in practice. A similar conclusion was reached by Clark Kerr and his associates writing from the perspective of life in postwar California (the “logic of industrialism” thesis of the 1950s). [xxxiii] Many people thought that the Russian economy was more robust than the American and would soon overtake the West. It turned out otherwise and Stalinism faded away after 1989 with much less turmoil than anyone would have expected.
The economic theory which underpinned the welfare state democracies was called “macro-economics” and its inventor in the Great Depression was Maynard Keynes. This theory (along with the economic stimulus of rearmament) rescued the western societies from a severe decline manifested as high levels of unemployment. It rested on the assumption that only the state could regenerate a damaged market economy, mainly by spending money it did not have in order to reflate consumer demand. After the second world war, the strongest economic boom in history depended in no little part on the co-ordinated efforts of the leading industrial states to expand their own public sectors. When Richard Nixon said “We are all Keynesians now”, he meant that western voters were unanimous in expecting their governments to intervene in the economy for the general good. It all began to unravel soon afterwards. The neo-liberal conservative politicians who dominated the 1980s claimed to be opposed to state control of the market economy; but their policies often combined “privatisation” with a strengthening of state power. Even so, it was the end of the 20th century consensus which I have called “state capitalism”.
The idea of an “informal economy” has run as a submerged commentary on these developments during the last quarter century. If state capitalism is now in crisis, it is because it failed to deliver economic democracy in adequate measure; and because its negation, the activities of ordinary people making their own daily life, contains the seeds of a more humane alternative. Moreover, although the informal economy is acknowledged to be a universal phenomenon, the idea came out of the lives of Third World people whose lack of money makes them about as conventionally poor as it is possible to be in our mechanised world. The way they each set about redressing their personal situation, hedged around with insuperable difficulties as they often were, is the concrete experience of economic life on which this book is founded. [xxxiv]
By the 1970s, it was becoming clear that development in the accepted sense was a pipedream for Third World countries. Populations had exploded; cities were growing rapidly; mechanisation was weak; and productivity in predominantly agricultural economies remained low; the gap between rich and poor was widening. Even so, there was a consensus that the only institution capable of mobilising economic resources on an appropriate scale was the state. Marxists and Keynesians agreed on this; free market liberals had no effective voice at this time. The malaise was conceived of as “urban unemployment”. Third World economies were supposed to deliver jobs, but, in the absence of machine-based industry, employment creation was left largely to the only economic agent of any significance in most of these countries, state bureaucracy. The number of corporate firms offering jobs was embarrassingly small. What then could all the other new inhabitants of the major cities be up to? They must be unemployed. Figures of 50% unemployment and more were conjured up by economists. The spectre of the 1930s — broken men huddling on street corners (“Buddy, can you spare a dime?”), the rise of fascism and ultimately war — dominated the discourse of interested western intellectuals.
Anyone who visited, not to mention lived in, these sprawling cities would, of course, get a rather different picture. Their streets were teeming with life, a constantly shifting crowd of hawkers, porters, taxidrivers, beggars, pimps, pickpockets, hustlers — all of them doing their best to get by without the benefit of a real job of the sort found in national economic statistics. There was no shortage of names and descriptions for this kind of early modern street economy. Terms like “underground”, “unregulated”, “hidden”, “black” and “second” economies abounded. But the antithesis of the state-made modern economy had not yet found its academic name. This came about through a paper, based on my Accra fieldwork, which I presented at a Sussex conference on “Urban employment in Africa” in 1971.  [xxxv]
The main message of the paper was that Accra’s poor were not “unemployed”. They worked, often casually, for erratic and generally low returns; but they were definitely working. What distinguished these self-employed earnings from wage employment was the degree of rationalisation of working conditions. Following Weber (and Geertz  [xxxvi] ), I argued that the ability to stabilise economic activity within a bureaucratic form made returns more calculable and regular. That stability was in turn guaranteed by the state’s laws and rules which only extended so far into the depths of Ghana’s economy. The “formal” sector consisted of regulated economic activities and the “informal” sector of all those lying beyond the scope of regulation, both legal and illegal. I did not identify the informal sector with a place or a class or even whole persons. Everyone in Accra, but especially the inhabitants of slums like Nima, tried to combine the two sources of income. Informal opportunities ranged from market gardening and brewing through every kind of trade to gambling, theft and political corruption. What makes this concept of interest here is its roots in what people generate out of the circumstances of their everyday life. They do this despite being apparently confined to choosing between the scarce opportunities offered by an impersonal system and the meagre pickings left in the cracks of that system. The laws and offices of state bureaucracy served only to make their efforts at self-preservation and even improvement more difficult.
The idea of an informal economy was taken up quickly by some economists, so quickly indeed that a report by the International Labour Office applying the concept to Kenya came out in 1972 before my own article had been published. [xxxvii] The ILO Report suggested that self-employed or “informal” incomes might be able to reduce the gap between those with and without jobs and might even be a means to achieving a more equitable income distribution. Following the “growth or bust” policies of the 1960s, which had often had very unequal results, they advocated “growth with redistribution”, that is, helping the poor out of the proceeds of economic expansion. This reflected a shift in World Bank policy announced by its President, Robert MacNamara, a year later. By now the international economic authorities were worried about potential explosions and they felt that more attention should be paid to the peasants and to the urban poor. A vogue for promoting the “informal sector” as a device for employment creation fitted in with this shift.
Of course no-one could agree on what the term meant. Most economists saw it in quantitative terms as a sector of small-scale, low productivity, low income activities without benefit of advanced machines; whereas my notion stressed the reliability of income generated by work, the presence or absence of bureaucratic form. The problem with trying to use the bureaucracy to promote the informal sector — by providing credit, government buildings or new technologies, for example — was that these initiatives killed off the informality of the enterprises concerned and, moreover, exposed participants to the very thing they wanted to avoid, taxation. The association with the sprawling slums of Third World cities was very strong; but the “commanding heights” of the informal economy lie at the centres of political power itself, in the corrupt fortunes of state officials who often own the taxis or the rented accommodation which are operated by the small fry. The Marxists rejected the concept (which they preferred to call “petty commodity production”), [xxxviii] since they believed that it put a positive gloss on exploitation, the poor subsidising capital accumulation with their cheap goods and services.
That was the 1970s. The following decade saw another major shift in world economic policy following the lead of Reagan and Thatcher. Now the state was no longer seen as the great provider; “the market”, freed of as many encumbrances as possible, was the only engine of growth. The informal economy took on a new lease of life with institutions like the World Bank as a zone of free commerce, competitive because unregulated. This coincided with the imposition of structural adjustment policies which reduced public expenditures and threw the responsibility onto the invisible self-help schemes of the citizens themselves. By now, even the rhetoric of development had been abandoned as the Third World suffered the largest income drain to the rich countries in its history, in the form of repayment of debts incurred during the wild banking boom of the 1970s.
So is it possible to assess the part played by the informal economy in Third World development? Many parts of the Third World have undergone an urban revolution since 1945 linked to the concentration of state economic power (and expenditure) in a few cities, often just one, the national capital. [xxxix] Rural-urban migration has vastly exceeded the growth of a bureaucratic or modern sector of employment. Even those who have jobs often must supplement them with extra earnings. The growth of cities has not stimulated local agriculture as much as it should, since cheap food imports have been available from the subsidised farmers of the rich countries. This has only encouraged more of a stagnating peasantry to leave home for the city. The informal economy has in some cases been a source of economic dynamism, even capital accumulation. At the very least, as the following story shows, it has allowed people to maintain themselves in the urban areas.
Atinga lived in the same house as me in Nima; in return for occasional loans, he allowed me to keep records of his economic transactions. He was given a medical discharge from the army at Christmas 1965. He was 28 years old, had been in Southern Ghana for nine years and now lived with his wife and a brother’s teenage son. He was without work and had not yet been paid any gratuity or pension; but he had £10 from his last pay packet. At first he thought of going home to farm in the remote Northeast of the country; but the prospect of getting another job in Accra was more attractive. This meant he had to finance the period of his unemployment and he decided to set up as a retailer of crude gin (akpeteshi).
First he converted his room (for which he paid £3 a month in rent) into a bar-cum-living quarters by the simple expedient of hanging a cloth down the centre and piling his possessions on both sides. Chairs and a table, bought for 15s. (20 shillings to the pound), occupied the public section. For next to nothing he got hold of some small plastic glasses, an assortment of used bottles and an old, rusting funnel. These were placed on the table. Atinga then went to a distiller nearby and bought a four-gallon drum of akpeteshi for £5.10s. He handed over what was left (just under £4) to his wife for food, borrowed £4 from me to help pay the rent and opened up his business on New Year’s Eve.
The retail price of gin was fixed throughout Nima at 6s. a bottle and smaller quantities in proportion. Allowing for wastage, receipts from a drum ought to have come to £8 or a bit less. Profit margins could be increased by buying the gin for as cheaply as £4 a drum, depending on quality and method of payment (cash or credit). Atinga bought the best gin at first, in order to attract a clientele and because he knew that high turnover compensated for reduced profit.
His main problem was with extending credit. Because his customers were poor and improvident, he could only keep up sales by offering generous credit facilities. But he also needed cash to replenish his stock and feed his family. His average daily expenditure was 7s.- 8s. or £14-15 a month, including rent. So he had to sell a lot of gin. He also tried to diversify; but his wife’s attempt to sell sugar lumps foundered under a saturation of local competition and his own Coca Cola business failed for lack of a refrigerator.
After a few weeks Atinga faced a major crisis. He had overextended credit to the tune of £14 (a third of total sales) in order to keep up a turnover of one gallon a day. Some of his customers were clearly out to take him for a ride before they moved on to the next inexperienced operator. Others simply did not have the money to pay. His gin supply ran out just before January payday and he lacked the means of replenishing it. He weathered this crisis by borrowing again; otherwise his clients would have taken their custom and their debts away. He secured enough repayment of credit to go on with and started insisting more often on cash from his customers. This naturally slowed down business, but he was able to keep a small, regular clientele (mostly young men from his home village) who came to him whatever the quality of his gin. This enabled him to economise by buying gin at £4 a drum.
By now Atinga saw that his bar could only ever be a sideline, a supplement to a more substantial source of income, in other words, a job. Moreover, his wife was pregnant. He tried to get back into the army, leaving his wife to look after the bar. Attempts to diversify in trade failed for lack of capital and expertise. When things were bad, his landlord’s wives helped out with food. Meanwhile he lent and borrowed money to roughly equal effect, in the hope that he could pass on his creditors to his debtors. A backlog of rent was his greatest debt. After his narrow escape, turnover steadied out at four or five drums a month, giving him a monthly income of between £10 and £12, rather more than the minimum wage. Moreover, this income was being eventually realised as cash, since he was only owed £12 in April (of which some £5 had been written off as bad debts).
The remainder of 1966 saw a gradual decline in the fortunes of Atinga’s bar, if not in his total income. In September he took a job as a watchman at 8s. a day, leaving his wife to look after their customers. Turnover, however, slowed to a trickle and his wife consumed most of the gin. Occasionally trade was boosted by a once-off enterprise, like the purchase of a stray dog for sale as meat and soup. At times like this the bar did roaring business for a brief spell. More often, it was empty at night because he had no gin to sell or his customers no money or, more likely, both.
In December Atinga’s wife gave birth to a son. In February 1967 the military bureaucracy got round to paying him £40 as an advance on his gratuity. The bar took on a new lease of life, £20 being spent on wood for a counter, partition, door and shelves. Atinga even bought a gin-seller’s licence. He did not, however, pay off any of his accumulated debts. For a few weeks he used the remainder of his capital to keep up an artificial rate of business; but he was soon back in the vicious circle of credit and turnover.
In May he lost his job as a watchman, but was lucky to be accepted almost immediately for training as an escort policeman (a colonial hangover distinguished by wearing a red fez and khaki puttees). This took him in June off to Winneba and he could only visit his wife and child at weekends. On one of these visits, in August 1967, his landlord threw him out of the house on suspicion that he had been the informer behind a police raid on the premises. The room and all its wooden fittings were seized in partial compensation for over £32 owed in rent.
Atinga left Nima with his family and the gin bar enterprise was at an end. His landlord’s wife took it over, but she was unsuccessful since she offered no credit whatsoever. Some twenty months of unemployment and intermittent wage employment had been negotiated by means of an informal operation which was always rickety, but which had been the main basis of Atinga’s family’s survival in the city. His story shows that being “out of work” in a society entirely devoid of social security benefits need not lead to destitution or dependence on others. As it happens, Atinga was extremely unimaginative, well-suited to the lower orders of an army or police force. Even so, he showed some economic initiative in the face of adversity. As we saw in the last chapter, there were more spectacular examples of Frafra enterprise, but this one was more typical of the general run.
The idea of the informal economy was wedded from the beginning to the heyday of state capitalism. It could almost be described as the conceptual negation of Keynesian macro-economics, the decentralised activities of ordinary people as opposed to the economic policies of governments. There is widespread agreement that the powers of nation-states have been in decline since at least the mid-1970s. Many commentators attribute this to globalisation, [xl] the rapid integration of world markets for goods and services, money, information and even people themselves. The market for money is the most important of these in view of the traditional association of currency with states. So powerful have “the markets” become that it is no longer an option for governments to implement policies disapproved of by those who buy and sell the national currency. [xli] We will take up this topic in the next section.
Another way of pointing to this relative decline of state economic power is to focus on the informalisation of the world economy in recent decades. By far the most valuable commodity traded internationally is drugs, a predominantly illegal traffic. Finance has been slipping its political shackles, for example by relocating offshore where money transactions can hardly be monitored or taxed. The armaments industry is a sea of corruption reaching, as we know thanks to Irangate, Iraqgate and all the other scandals, to the core of western governments. Then there are the so-called “grey markets” for goods imitating well-known brands and the outright criminal duplication of videos, CDs and tapes. The irrational borders of nation-states are often principally sites for smuggling. These are just the commanding heights of an informalised world economy, much of it illegal, all of it defying state regulation. The term has become widely used in the industrialised countries. Raymond Pahl has explored just how much economic activity in Britain might be said to be informal, from allotments and do-it-yourself to the more criminalised economy of disaffected youth. [xlii] Even before the collapse of Stalinist bureaucracy in the Soviet Union and its satellites, it was clear that collectivisation had spawned a flourishing “black market”, antecedent of the criminal mafias which now dominate much of the Russian economy. In Europe, the dissident left has long had a slogan: “Think red, work black, vote green”.
Meanwhile, the collapse of any orderly version of the state in many Third World countries has led to the informal economy becoming the whole economy, a contradiction of terms. One only has to think of Zaire [xliii] which, before Kabila’s revolution, President Mobutu reduced to a shambles where soldiers looted at will and many hangers-on had a large foreign bank account. The amount of paved road fell from 62,000 kms at independence from Belgium (not one of the world’s most enlightened colonial powers) to less than 8,000 kms three decades later; Mobutu boasted of being one of the richest men in the world and once hired a train for a lavish party in New York. Or take Jamaica, which in the 1970s was a model “middle-income” developing economy. Not long ago the value of illegal marijuana sales (ganja) was higher than the country’s three leading legitimate industries (tourism, bauxite, garments) taken together. No wonder that politics often seemed to be carried out by armed gangsters and that youths left school in droves to learn hustling on the street.
When so much of the economy is “informal”, we are entitled to ask whether the term has outgrown its usefulness. Certainly there is some point in looking for positive ways of identifying social forces which may be concealed beneath the formal/informal label. The poetry underlying the term’s longevity may perhaps be attributed to the stand-off of the Cold War. The opposition between state socialism and the free market was frozen by the unthinkable prospect of a nuclear resolution to the conflict. At the same time, the universality of state capitalism had taken on a timeless quality by the early 1970s. The activities of little people in the interstices of a state-dominated economy were at best a defensive reaction to exclusion and a possible bulwark against destitution, surely not the basis for any serious alternative. In consequence, it did not seem likely that the dialectic of informality contained much movement. The last decades have exposed the limitations of such a perspective.
The popularity of the label “informal” may derive from its being negative. It says what people are not doing — not wearing conventional dress, not being regulated by the state — but it does not point to any active principles they may have for doing it. In this sense it is a passive and conservative concept which acknowledges a world outside the bureaucracy, but endows it with no positive identity. The informal sector allowed academics and bureaucrats to incorporate the teeeming street life of exotic cities into their models without having to confront the specificity of what the people were really up to. In sacrificing my own ethnographic encounter with real persons to the generalising jargon of development economics, I played my own part in this process of rationalisation and cover-up.
We can see all this now thanks to the “velvet revolution” of eastern Europe and the Soviet Union which demonstrated that ordinary people could get rid of the most awesome bureaucratic states with remarkably little violence. Who can now think of the state as eternal when Stalin’s successors were dispensed with so completely and quickly? Nor are the conclusions to be drawn from this cataclysmic event all that straightforward. We may want to romanticise the informal economy as a little people’s alternative; but would we want to live in a Moscow run by gangsters?
West Africa’s former colonies were among the last admitted to state capitalism and among the first to leave. Ghana was already in an advanced condition of political and economic decay in the mid-1960s when I did my fieldwork. Seen in that light, Nima may be thought of as a harbinger of state capitalism’s decline. After much of the Third World dropped out of the movement of the world economy, the Communist bloc followed suit, leaving America, Western Europe and a resurgent East Asia to contemplate the consequences for their own societies of a comparable decline. The informal economy was nothing less than the self-organised energies of people, biding their time to escape from the strictures of state rule. The question remains whether those energies might take on a more constructive dynamic under the conditions unleashed by the communications revolution.
Virtual reality: “the experience of a computer simulation in real time” [xliv]
When I was 12 years old, I took stock of my situation. I did not want a job like my father’s when I grew up. He worked for wages in a public bureaucracy; and every night we were silent witnesses as he told his wife about his frustrations: how he knew his job better than his superiors, but had to suffer their interventions and obstruction anyway. One alternative seemed to be entailed in my career at Manchester Grammar School: I would pass enough examinations to join the free professions, jobs which allowed people a lot of say in making the conditions of their own work; I imagined academic life to be like that. But this option filled me with dread. What if I failed to pass the exams? Looking around for something else to fall back on, I could only think of making money with money and, at the time, that meant betting. I set out to make money by betting on horses; but I did not have any money. So, for the first three years, I used my grandmother’s Daily Express (tipsters The Scout and Peter O’Sullevan) to keep a record of bets made only in a notebook, restricting myself, we might now say, to virtual betting.
At the end of that period, I was making a regular profit on paper and I also had a part-time job delivering newspapers. I managed to save out of the money I was given for lunch and bus fares. Later I took better-paid jobs in factories and warehouses during the holidays. So I had the means of making real bets. By the time I arrived in Cambridge at the age of 18, I had six years knowledge of the horses under my belt and a small income from winnings. But I never had enough money to bet with. When I received my first advance from the education authority for a whole term’s subsistence, I realised that I was now the owner of capital. This opened the way to scientific gambling and I devised a statistical method (of which more below) that eventually produced highly predictable earnings, when combined with the expertise I had accumulated on the world of horse-racing. In my years as an undergraduate student, I lived quite well without ever working for wages or taking any money from my parents. I calculate that I more or less doubled my grant by betting. (I also won consistently at card games, especially bridge for high-stakes). I eventually gave it up, after two years in Africa interrupted my knowledge of the horse-racing scene. I decided that I was better off trying to finish my PhD thesis than spending all my afternoons in the betting shops. And so the examination passer took over from the gambler.
Later, during an eight-year stay in America, I adapted my betting strategy to gambling on cocoa-futures and money markets. In this time I developed a more abstract understanding of the process which I suppose has informed the writing of this book. Let me begin by outlining my horse-racing methods. I started from the binomial theorem. If two outcomes have equal probability (0.5 each), then the chance of repeating a sequence of such outcomes is the probability raised to the power of the number of tries. If you toss a coin ten times, the chance that it will come out ten successive heads is ? to the power of 10 or 1 in 1024. Assuming that a bet has an evens chance, I calculated that the probability of my losing ten successive evens bets was just over 1000 to 1. This meant that I had to have a fund 1000 times larger than the size of the initial bet, £1000 for every evens bet of £1, and that would allow me to double up bets to cover my losses. So that, if the first bet lost, the second bet would be £2 to recover the first stake and still win £1 net; if the second bet lost, the third would be £4, the fourth £8 and so on until the tenth bet was £1024 to recover what I had lost and still make £1.
I restricted my bets to favourites starting at odds of between evens and 2 to 1. The fact that their odds were on average better than evens provided a margin with which to pay a 10% betting tax. Odds on (less than evens) carried too great a risk of escalating the sum I had to lay out if they lost. The crucial variable in this system was to maintain the highest possible turnover of bets. Favourites tended to win 1 in 3 races, so that my average run before I won was three. I made bets automatically until I had lost four times, so that I did not have to waste effort selecting a horse after reviewing the form of all runners. In the bulk of cases, therefore, I was limited only by the frequency of races, every half hour over three hours in an afternoon or evening, usually at two or more meetings with starts, if I was lucky, staggered on the quarter hour. If the fourth bet lost, I slowed down subsequent bets, taking time to exercise critical judgement, picking horses I really thought would win. This is where memory, experience and skill came in, improving the purely statistical odds in my favour. The longest betting sequence I ever suffered was seven, meaning that I had to spend over £100 to win £1; even so this was a lot less than 1000 to 1 and I began to make bets assuming a much lower margin of risk that I might lose everything.
On average I laid out £5-10 to win £1, with 20 wins out of 50-70 bets a week (many more chances to bet on Saturdays, especially in the summer). A profit rate of £20 a week from a stake of £1000 doubles the fund in a year for the time it takes to make those bets. My earnings increased as I took higher risks of exhausting my betting fund. Working from home with a telephone and a credit account involves much less effort than sitting in a betting shop all afternoon. In any case, my income from betting stabilised at a very predictable level. I had established three principles. What matters is:
1. the size of your initial fund;
2. the risk you will take of losing the lot; and
3. the speed with which you can place the bets
Since my fund was small and my life depended on keeping it, the third factor was paramount. There was a fourth factor. Access to making bets is regulated by gatekeepers (bookmakers or, in other gambling pursuits, casinos) who have the legal right to refuse a bet for whatever reason. If they realise that the punter is using a statistical method which puts the odds on his side rather than theirs, they simply close him down (an example would be card counters at blackjack). So that it is not enough to overcome generations of superstition and learn to gamble scientifically; you also have to get past the gatekeepers. I found that, by switching bets at random between three betting shops, I came across as a high volume punter who seemed to break even. If they had seen the regularity of my positive returns, that would have been the end of my enterprise.
Later, in America, I applied this method to cocoa futures in New York.  But it was only when I took the method to money markets in their home town, Chicago, that I realised its potential under the conditions of the communications revolution. The principles I had first worked out clumsily in an unfavourable medium and with inadequate resources are central to the workings of virtual capitalism. On both occasions, my capital fund was very much greater than it had been at first ($25,000); and I ran a risk of losing my fund near to 100 than 1000 to 1. In order to maintain a high turnover of bets, I had to identify a range of fluctuations in prices which occurred frequently in a day’s trading. I was not betting on the long-run trend in cocoa prices or the exchange rate between dollars and deutschmarks; rather a win or loss was when the price deviated up or down by a predetermined amount from my purchasing price. Making bets by telephone via a computer screen, in the case of money markets up to 24 hours a day (thanks to the London, New York and Tokyo exchanges), is certainly more efficient than waiting for a few horses to run a race. There were also barriers to overcome: fees, minimum purchases, club rules of various sorts designed to keep the small punter out. But the main deterrent in the end was boredom.
Gambling for most people is an opportunity to win a lot with a little occasionally. This means that they must normally lose. And in a way, they want to lose, treating the “flutter” as a form of consumption, a chance for a rare buzz of excitement. I loved to go to Newmarket racecourse for an afternoon of this kind of gambling, always making sure that I set a limit to how much I was prepared to lose. Betting under these circumstances is like taking a holiday. It is nice while it lasts, but real life consists of the daily grind. Scientific gambling depends on making the opportunity to win a little with a lot often. This means in most cases sacrificing the pleasure even of exercising judgement, following strict statistical rules. Nowadays, computers are programmed to invest money in equities and derivatives on a basis similar to that which I laboriously evolved.  [xlv] It is mind-bogglingly tedious to sit in front of a computer screen for hours on end making mechanical decisions. That is why I always took up the offer of an academic job rather than devote myself to money-making full-time. Believe it or not, it was more fun. I was glad to have mastered, in a small way, something of how to make money in our world; but I would rather study money than make it.
I have mentioned that not long ago I wrote a text book on economic anthropology which I didn’t publish because it seemed to contain so little of what I actually knew about the economy. The account I have just given is not based on academic research. Many people would say it is impossible or a fiction. But I believe that I learned more about capitalism in this way than by any other method. For the formula for making money with money, “win a little with a lot often”, making as little contact as possible with events in the real world, is driving the latest phase of capitalist development. If you were the treasurer of a multi-national corporation or the governor of a central bank or a very rich speculator, what would you put your money in, remembering that your potential fund for rectifying mistakes is huge? Surely making things and persuading people to part with their cash for them is much too onerous. Better to play the money markets at calculable odds. That is why capitalism in our day is a vast river of money flooding around the world at high speed. Markets for the goods that most people need are stagnant because they do not have the money to buy and capitalists have more reliable ways of increasing their money than by making them.
In 1975, Milton Friedman, favourite economist of Ronald Reagan and Margaret Thatcher, set out, with a partner from the Chicago Mercantile Exchange, to prove that the age of Keynesian macro-economics was over. [xlvi] He was outraged by the pretension of governments that they could determine the rates at which their currencies were exchanged and could intervene in markets in the national interest. As a free trader and sound money fundamentalist in the tradition of John Locke, he took heart from the financial crises which affected international exchange in the early 70s and from the persistent inflation caused by governments trying to spend themselves out of trouble. The instrument he devised was intended to alleviate the uncertainties inflicted on mid-western farmers by wide fluctuations in exchange rates. If you sell your porkbellies to Germany six months ahead of delivery time, the dollar/deutschmark exchange rate may deteriorate in the meantime and your actual earnings will be less than anticipated. A futures market in money allows you to determine that exchange rate six months in advance and to stabilise your expectations as a result. Others can speculate for the sake of making money (as I did); but the farmer gets paid reliably for his porkbellies.
From this unremarkable beginning, a new phase of capitalism emerged. In the mid-70s, almost all currency exchanges were to finance the international purchase of goods and services (like porkbellies or tourist vacations). Today less than 0.1% of international money transactions are for that purpose; the rest is just money, in a bewildering variety of instruments and forms, being exchanged for money. It is now possible to buy futures in anything, such as the likely level to be reached by the index of a major stock exchange. [xlvii] This was how a Singapore trader broke the British bank, Barings, by betting on the Tokyo Nikkei Index at a time when an earthquake depressed prices unpredictably. Of course, not all investment in these money markets is scientific. There is plenty of scope for the “animal spirits” (Keynes) involved in speculating on a hunch, especially when the backing funds are large. There is a magical and a rational side to this development and it is by no means obvious which will win out.
Virtual means “as good as”. I have already claimed that the communications revolution is driven by the desire to replicate at distance or by means of computers experiences which we normally associate with face-to-face encounters. All communication, whether the exchange of words or money, has a virtual aspect in that symbols and their media of circulation stand for what people really do for each other. It usually involves the exercise of imagination, an ability to construct meanings across the gap between symbol and reality. The power of the book for so long depended on sustaining that leap of faith in the possibility of human communication. In that sense, capitalism was always virtual. Indeed Marx’s intellectual effort was devoted to revealing how the power of money was mystified through its appearance as things (coins, products, machinery) rather than as relations between living men. [xlviii] Both Marx and Weber were at pains to show how capitalists sought to detach their money-making activities, as far as possible, from real conditions obstructing their purposes. Money-lending, the practice of charging interest on loans without any intervening act of production or exchange, is one of the oldest forms of capitalism. So the idea of the money circuit becoming separated from reality is hardly new. Yet there are changes taking place which deserve a distinctive label and, for the time being, “virtual capitalism” will have to do.
The point of virtualism [xlix] is abstraction and this in turn is a function of the shift to ever more inclusive levels of exchange, to the world market as principal point of reference for economic activity, rather than the nation-state. But, as I insist throughout this book, reliance on more abstract forms of communication carries with it the potential for real persons to be involved with each other at a distance in very concrete ways. The idea of “virtual reality” expresses this double movement: on the one hand machines whose complexity their users cannot possibly understand, on the other live experiences “as good as” real. It is the same with money. Capitalism has become virtual in two main senses: the shift from material production (agriculture and manufacturing) to information services; and the corresponding detachment of the circulation of money from production and trade. This in turn is an aspect of the latest stage of mechanisation, the communications revolution of the late 20th century. The question is whether the same developments which have been responsible for the recent integration of world society are also the cause of its increasing polarisation. My provisional answer is almost certainly yes.
Long-distance trade in information services requires a substantial technical infrastructure. The internet, as we have seen, has its origins in scientific collaboration between America and Europe during the Cold War. Its main language is English. Every stage of mechanisation has been initially concentrated in a narrow enclave of world society; and this one is no different. Equally, diffusion of new techniques has often been quite rapid. Satellite and cellular telephony, as well as videotape, have brought telecommunications to many parts of the world where the old infrastructure of electric power was underdeveloped. There is even talk of the western market for the means of communication (telephones, computers, television) being saturated or nearly, leading to a new version of the scramble for Africa, this time for shares in a largely untapped telecommunications market. But, for all this talk, the short conclusion is that many poorer regions appear to be stuck in phases of production which have been marginalised by this latest round of uneven development.
The most problematic issue concerns the spiralling markets for money in countless notional forms which have injected a new instability into global capitalism. The East Asian bubble of endlessly rising stock markets has recently burst, precipitating unprecedented upheavals on Wall St. and launching the Japanese banking system on a downslide that has given American capital its first real opportunity to penetrate that country’s economy. Billions of paper assets have been wiped out overnight. Mismanagement by the banks has reached colossal proportions. (Credit Lyonnais made “errors of judgement” which amounted to losses equal to the French national debt in respect of all social services!) This apotheosis of capital, its effective detachment from what real people do, has made many huge fortunes, often for individuals controlling billions of dollars, more than the annual budgets of some Third World countries. Here is certainly one of the motors of global inequality, money being made with money.
The situation is comparable to that between the first and second world wars in America, especially, and also in Europe. A stock market boom ended with the Wall Street crash of 1929. The resulting depression lasted a decade. This was the opportunity for states to assert their own dominance over a capitalism that was then still more national than international. The subsequent period of about four decades was the heyday of state capitalism. What political forces are adequate to regulate the present money madness in the interest of people in general? The world organisation of money has now reached a social scale and technical form which make it impossible for states to control it. This may be good news for democrats and anarchists in the long run; but in the meantime Hegel’s recipe for state moderation of capitalism has been subverted, with inevitable results: rampant inequality at all levels and appalling human distress without any apparent remedy.
We are obviously at a turning-point in human affairs. The present situation cannot continue indefinitely. It is no longer self-evident that being inside the virtual economy is a privilege. If the balloon goes up, people sitting on little plots of land in the countryside will count themselves lucky to have missed the bonanza. In another sense, development is no longer conceivable of as a linear process describing unequivocal winners and losers in the global economy, advanced and backward producers. The rules of the game are being rewritten so fast and with such uncertain consequences that it is no longer apparent who is best placed to benefit from them. The populations of America and Europe which have grown passively dependent on the impersonal institutions of state capitalism may be less well-placed than many West Africans who have never known the relatively painless security of a welfare state.
The political economy of the internet
Now that the internet is no longer primarily a research tool, it is becoming increasingly an electronic marketplace. The point about electricity is that it travels at the speed of light and the passage of information itself is virtually costless. This then is a market with unusual time and space co-ordinates, where the personal and impersonal dimensions of economic life meet on new terms. Most of us will take some time to get used to the implications of such developments; in the meantime, the pioneers of cyberspace are making the most of these new opportunities. [l] Is the analysis of classical political economy appropriate to these circumstances? There are broad and narrow answers to that question. In the former case, we need to talk about the distribution of value in the global economy as a whole; in the latter only of the internet conceived of as a contested site of virtual capitalism or the world market. It is easy to conflate the two, as Marx and Engels did when they chose to interpret a few Lancashire factories as the vanguard of capitalist development. I have suggested that the three classes of political economy may even have represented the divisions of our worldly knowledge (ecology, economy, anthropology) or the overlapping stages of history in which land, money and human creativity are respectively dominant. 
So where are the three classes today? The landlord class has by no means rolled over and died, at least in Britain where politics retain a distinctly feudal tone.  But if one thing can be said with confidence about the internet it is that it offers a means of escape from land shortage, indeed from spatial constraints in all their forms. The part originally played by the landed aristocracy in maintaining the right to control people by virtue of occupation of territory has largely now passed to national governments. Territorial states are able to extract taxes and rents from all those economic activities involving money which take place inside or across the boundaries of their jurisdiction. Their ability to do so has been greatly facilitated by the advances made in bureaucracy during this century. But this becomes more difficult when the source of value shifts from car factories and downtown shopping centres to transactions of money and commodities conducted at the speed of light without regard to borders. The system of involuntary transfers could once be justified as a source of economic security for all. But that principle has been under attack from the right for at least two decades now; and the governments of rich countries are now more likely to legitimate their activities in terms of keeping the poor majority out.
The capitalists have come a long way too. Having formed an alliance with the traditional rulers from the 1860s onwards, they absorbed and ultimately defeated the challenge posed by the working class. It is not hard to see in the recent revival of free market liberalism triumphal evidence of that victory. But the relationship of capital to the state has become increasingly moot. Money has always had an international dimension and the corporations which dominate world capitalism today are less obviously tied to their nations of origin than they once were. There are today some 34 firms with an annual turnover of $30-50 bn, larger than the Gross Domestic Product of all but eight countries in the world (the same countries being the home base of these corporations).  Moreover, despite an apparent trend in the 80s for Asian countries to challenge western hegemony, by the end of the 90s half of the world’s 500 largest firms were American (244, up 22 on the previous year), more than a third were European and the rest of the world’s representatives shrank in numbers and influence as a result of the financial upheavals of 1998.  [li] In other words the evidence is that an ever larger proportion of the world economy is controlled by a few firms of western origin but dubious national loyalties.
The relationship between capital and the nation-state has always been one of conflict and co-operation. The wave of anti-trust legislation that accompanied the rise of monopolists like John D. Rockefeller at the beginning of the century is matched today by the feebler efforts of governments at various levels (mostly in America) to contain the economic power of Microsoft and a few companies like it. A lot rides on whether bureaucracies and legislatures can impede Bill Gates’s dream of extracting payment for use of his internet software worldwide. The idea of profit as a form of rent (income from property) is confirmed, even if the burden has shifted from workers to consumers. The state competes for a share of the value of commodities in the form of taxes. But both rent and tax depend on a system of legal coercion, on a realistic threat of punishment, to make people pay up. This remains a shared concern of governments and corporations alike.
So where does that leave the rest of us, allowing for the fact that many ordinary people would side with the big players for quite mundane reasons? If Marx could identify the general interest with a growing body of factory workers tied to machines owned by capitalists, it has been true for some time now that the majority of us enter the economic process mainly in the role of consumers. Economic agency is for most of us a matter of spending money. Despite the collapse of traditional industries in recent decades, there are still those who argue that workers associations, unions, remain the best hope for organised resistance to big business. It was an achievement of state capitalism to make people believe in society as a place with one fixed point. But this is giving way to a more plural and shifting terrain in which the internet may well be breaking new ground. The mass of ordinary users have a common interest, as individuals and pressure groups of various kinds, in avoiding unreasonable regulation of their activities and in retaining the economic benefits of their exchanges (conducted on an equal basis). In this formulation, we may provisionally accord to the wired, netties, internauts or what have you a class identity in opposition to governments and corporations. But this has to be demonstrated rather than assumed.
To summarise then, the main players in the political economy of the internet are governments, corporations and the rest of us, the people (in this case the small minority who are wired). The landed interest, following a class alliance between landlords and capitalists in the 19th century, now takes the principal form of territorial power, the coercive capacity of states to extract taxes and rents on threat of punishment or by right of eminent domain. Capitalist profit is now concentrated in a handful of huge transnational corporations whose interest is not only in keeping up the price of commodities, but often in deriving rent (income from property) in the face of resistance to payment. It is problematic to identify the class which represents the general human interest in retaining the benefits of our own creativity; but, on an analogy with the workers who tended the factory machines (themselves initially a very small minority), we could start by looking at the wired, the ordinary people who exchange services as equals on the internet.
Table 4.3 The three classes today
Tax / rent
Profit / rent
Governments and corporations need each other, for sure, but their interests are far from coincident. Both maybe vulnerable to self-conscious use of internet resources by a democratic movement, which is the premise of this book. How does this triadic classification relate to historical periodisation of the age of money? I have argued that two revolutions in transport and communications, belonging to the 1860s and the 1990s respectively, mark the beginning and end of state capitalism. Each was a decisive stage in the formation of the world market. If this present phase of opening up to the world goes the same way as the previous one, towards ruinous conflict, the 21st century could well be our last.
The institutional enemy of humanity is the jealous concentration of state and corporate power, the retention of agrarian hierarchy to block humanity’s potential to build a just society capable of exercising our collective responsibility for life on this planet. We could do worse then than return to Ricardo and focus attention on the means through which wealth is distributed in human society, in particular on the contradiction between the unequal and coercive imposition of tax and rent demands and the formation of a market in which people, reflecting the plurality of their associations as equals, freely exchange services using money instruments of their own devising. This means separating capitalism conceptually and practically from the market.
Guide to further reading
If you read only one book on 20th century economic development, it should be the West Indian Nobel Laureate, Arthur Lewis’s Evolution of the International Economic Order (note 18), for its theoretical insight, grasp of history, subdued passion and lucid brevity. A good short guide to the principles and categories of classical political economy and to the contrast with modern economics is the opening section of Robinson and Eatwell’s Introduction (2). There are few competitors as yet with Hobsbawm’s one-volume history of the 20th century and it is well-regarded (5). The anguish of Angola, where a million people have died in thirty years, sums up the horrors of the contemporary “world economic order” and is captured vividly in Why Angola Matters (15).
The 1999 edition of the United Nations Human Development Report contains the most wide-ranging critique yet of escalating global inequality from an official body, as well as a lot of interesting tables compiled from a broader perspective on the human condition than the economic statistics provided by the World Bank in its annual Development Report. [lii] The ideological extremes of development theory at the peak of the Cold War are well illustrated by Gunder Frank’s devastating critique (23) of Rostow’s megalomaniac The Stages of Growth (21). Wallerstein’s The Modern World System (22) has been influential, but I find its historical vision rather mechanical.
“State capitalism” is a Trotskyist notion from the time when it was necessary to point out that there was nothing very socialist about the Soviet Union. The 1950 book (32) put out by the Johnson Forest Tendency was prescient, but limited in its scope. I prefer to cite my own occasional writings on the informal economy (30, 34, 35, 39) to the many volumes published on the topic. Bromley and Gery (38) offer a critical and varied selection of papers on Third World urban poverty. Janet MacGaffey’s exemplary ethnography of enterprise and the “real economy” in Zaire (43) should soon be complemented by a major study of the illegal trade linking West Africa to Paris.
The literature on globalisation, virtual capitalism and fin-de-siecle money madness is breaking so fast that I have not been able to work out what is classical yet. Roland Robertson has managed to get his name associated with the term “globalisation” (40). George Soros, as predator-turned-critic, personifies the capitalism of the era (41). Two recent books on Wall Street, by Frank Partnoy and by Doug Henwood, caught my fancy (45). In anthropology, James Carrier and Daniel Miller are pioneering the post-capitalist term, Virtualism (49). It is debatable whether capitalism has yet reached its apogee. The best bet for keeping up with the latest developments is to read the Financial Times and surf the internet. The only way to find out about the political economy of the internet is to be there.
 Notice the root sta- (stand, set up) which “institution” shares with “establish” and, of course, with the “state”, the institution which secures all others in society.
 It is hard to credit, given their universality today, that passports were only introduced after the first world war.
 The Saudis bought some $20 billions of these in 1974, according to my memory. Soon afterwards, the advent of the Carter government and the appointment of a Trilateral Commission which, in revealing the close connections between that government and the Rockefellers, lent support to those who saw a growing identity of interest between the U.S. Federal Government and the energy corporations.
 The evidence for statements in this section is even more flimsy than usual. I include the story because its point of view is not often expressed in public and there might be some truth to it.
 My paper was called “Informal income opportunities and urban employment in Ghana”, later published under the same title in the Journal of Modern African Studies (1973). This is new commonly cited as a classical source.
 Clifford Geertz divided the economy of an Indonesian town into “firm” and “bazaar” sectors, according to the presence and absence of that form lent to calculation of money profits by bureaucracy.
 I had spent three years as a journalist for the Economist Intelligence Unit reporting on West African export commodities, 1972-75.
 If we are to believe Frank Partnoy, such staid methods, which ought to favour holders of large investment funds, have been abandoned in favour of wild gambling on derivatives which often leads to major losses, but always generates large fees for the bankers.
 The capacity of our categories to move between universal and particular applications may irritate positivist readers, but it is a style that I borrow from Marx. This admission is unlikely to make the irritation less.
 Land reform, sometimes represented as “putting an end to feudalism”, was high on the agenda of all parties contesting seats in the new Scottish parliament of 1999. Scotland had one of the highest concentrations of land ownership in the industrial world and a set of laws to match.
 My source is Alexandra Ouroussoff, speaking at the annual conference of the Association of Social Anthropologists on “Elites: anthropological perspectives” in March 1999. I could have looked it up, but I like to sustain the oral tradition.
 According to the FT 500 survey of the world’s largest firms in 1998, 49% or 244 were American (up 22 on the previous year) and 35% were from Western Europe (with Britain represented by more firms than France and Germany combined). Only 46 Japanese firms made the list, compared with 71 in 1997. Hong Kong, Singapore, Taiwan and Malaysia went from 25 to 10 of the top firms in one year. Countries like Russia, Brazil and South Africa experienced a similar drop. All of this reflected financial instability in these places and a radical revaluation of the dollar against their currencies.
[i] G.W.F. Hegel The Philosophy of Right, Oxford U.P., London, 1952 (1821); A. Comte Cours de philosophie positive, Hermann, Paris, 1975 (1830-42); D. Ricardo Principles of Political Economy and Taxation, Penguin, Harmondsworth, 1971 (1817)
[ii] J. Robinson and J. Eatwell An Introduction to Economics, McGraw Hill, New York, 1973, book 1
[iii] D. North Structure and Change in Economic History, Norton, New York, 1981
[iv] J.-F. Bayart The State in Africa: politics of the belly, Longman, London, 1993
[v] E.Hobsbawm Age of Extremes: the short twentieth century, 1914-1991, Michael Joseph, London, 1994
[vi] See Hegel in note 1
[vii] E. Leach A Runaway World? The 1967 Reith Lectures , BBC, London, 1968
[viii] D. Bell The Cultural Contradictions of Capitalism, Basic Books, New York, 1975
[ix] K. Hart The Political Economy of West African Agriculture, Cambridge U.P., Cambridge, 1982, chapter 2
[x] P. Wheatley The Pivot of the Four Quarters: a preliminary inquiry into the origins and character of the ancient Chinese city, Edinburgh University Press, Edinburgh, 1971
[xi] A.F. Weber The Growth of Cities in the Nineteenth Century, Cornell U.P., Ithaca NY, 1965 (1899)
[xii] H. Mayhew London Labour and the London Poor (4 vols), Dover, London, 1968 (1861-62)
[xiii] G.S. Jones Outcast London: a study in the relationship between classes in Victorian society, Penguin, Harmondsworth, 1984 (1973)
[xiv] J.M. Keynes The General Theory of Employment, Interest and Money, Macmillan, London, 1936
[xv] K. Hart “Angola and the world order: the political economy of integration and division in K. Hart and J. Lewis eds Why Angola Matters, James Currey, London, 1995
[xvi] E. Durkeim and M. Mauss Primitive Classification. Cohen and West, London, 1970 (1905)
[xvii] F. Engels The Condition of the Working Class in England in 1844, Lovell, New York, 1887
[xviii] W. A. Lewis The Evolution of the International Economic Order, Princeton U.P., Princeton, 1978
[xix] K. Nkrumah Africa Must Unite, Heineman, London, 1963
[xx] D. Sparks “Economic trends in Africa South of the Sahara, 1998” in Africa South of the Sahara 1999 (28th edition), Europa, London, 1999
[xxi] W. Rostow The Stages of Growth: a non-communist manifesto, Cambridge University Press, Cambridge, 1960
[xxii] I. Wallerstein The Modern World System: capitalist agriculture and the origins of the European world economy in the sixteenth-century, Academic Press, New York, 1974
[xxiii] S. Amin Unequal Development: an essay on the social formations of peripheral capitalism, Harvester Press, Hassocks, 1976 (Le developpement inegal, Minuit, Paris, 1973); A.G. Frank Latin America Underdevelopment or Revolution: essays on the development of underdevelopment and the immediate enemy, Monthly Review Press, New York, 1969, chapter 2 “The sociology of development and the underdevelopment of sociology”
[xxiv] A. Samson The Seven Sisters: the great oil companies and the world they made, Coronet Books, London, 1976
[xxv] A. Samson The Money-lenders, Hodder and Stoughton, London, 1981
[xxvi] K. Hart The Political Economy of West African Agriculture, Cambridge U.P., Cambridge, 1982, chapter 4 “The state in agricultural development”
[xxvii] S. George A Fate Worse Than Debt, Penguin, London, 1990
[xxviii] V.I.Lenin Imperialism the Highest Stage of Capitalism: a popular outline, Lawrence and Wishart, London, 1948 (1916)
[xxix] A. Portes, M. Castells and L. Benton eds The Informal Economy: studies in advanced and less developed countries, Johns Hopkins U.P., Baltimore, 1989
[xxx] K. Hart “The informal economy” in J. Eatwell, M. Milgate and P. Newman eds New Palgrave Dictionary of Economic Theory and Doctrine, Macmillan, London, 1987; “The informal economy”, Cambridge Anthropology, 1986
[xxxi] K.Marx and F. Engels The German Ideology, Lawrence and Wishart, London, 1974 (1846-7)
[xxxii] C.L.R. James and associates State Capitalism and World Revolution, Charles Kerr, Chicago, 1986 (1950)
[xxxiii] C. Kerr et al Industrialism and Industrial Man: the problems of labor and management in economic growth, Harvard U.P., Cambridge, 1960
[xxxiv] K. Hart “Market and state after the Cold War: the informal economy reconsidered” in R.Dilley ed Contesting Markets, Edinburgh U.P., Edinburgh, 1993
[xxxv] K. Hart “Informal income opportunities and urban employment in Ghana”, Journal of Modern African Studies, Sept. 1973
[xxxvi] C. Geertz Peddlers and Princes, Chicago U.P., Chicago, 1963
[xxxvii] International Labour Office Incomes, Employment and Equality in Kenya, ILO, Geneva, 1972
[xxxviii] R. Bromley and C. Gery eds Casual Work and Poverty in Third World Cities, Wiley, Chichester, 1979
[xxxix] K. Hart “Rural-urban migration in West Africa” in J. Eades ed Migrants, Workers and Social Order, Tavistock, London, 1988
[xl] R. Robertson Globalization: social theory and global culture, Sage, London, 1992
[xli] G. Soros The Crisis of Global Capitalism: open society endangered, Little, Brown, London, 1998
[xlii] R. Pahl Divisions of Labour, Blackwell, Oxford, 1984
[xliii] J. MacGaffey Entrepreneurs and Parasites: the struggle for indigenous capitalism in Zaire, Cambridge University Press, Cambridge, 1987; The Real Economy of Zaire: the contribution of smuggling and other unofficial activities to national wealth, James Currey, London, 1991
[xliv] American Heritage Dictionary (3rd edition), 1993
[xlv] F. Partnoy F.I.A.S.C.O : blood in the water on Wall Street, Profile Books, London, 1997
[xlvi] A. Hirsch and N. de Marchi Milton Friedman: economics in theory and practice, Harvester Wheatsheaf, London, 1990
[xlvii] See note 44 and D. Henwood Wall Street: how it works and for whom, Verso, London, 1997
[xlviii] K. Marx Capital Vol.1: a critique of political economy, Lawrence and Wishart, London, 1970, “The fetishism of commodities and the secret thereof”, pp. 71-83
[xlix] J. Carrier and D. Miller eds Virtualism: a new political economy, Berg, Oxford, 1998
[l] P. Uimonen “Transnational Networks of Internet Pioneers. A Study of Technology,
Modernity and Globalization”, in Antropologiska Studier, special issue on culture and technology, January 1999
[li] Financial Times, 28th January 1999
[lii] United Nations Development Program Human Development Report 1998, UNDP, New York, 1998; The World Bank World Development Report 1996: From Plan to Market, Oxford U.P., New York, 1996 (both annual publications; see also the latest).