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years, their incomes (grey line) rocket once free-market economics are unleashed in the late 1980s. There is no more graphic example of who wins and who loses³⁹ within developed countries once the cycle turns downwards.

1. Financialization⁴⁰

This graph shows US finance sector profits as a total of all business profits. During the long boom, financial sector profits in the USA are small. The change picks up pace in the mid-1980s, and in the years before Lehman Brothers collapses we see banks, hedge funds and insurance companies making over 40 per cent of all corporate profit. This is clear evidence for the idea that more of the profits raked in by financialized capitalism are generated by our borrowing and consumption, and less from employing us. On the eve of the crisis, financial profits made up four out of every ten dollars of corporate profit.

1. Global investment flows

This graph shows in one striking image the reality of globalization. The top line is the total amount of foreign direct investment (FDI) in the world, between 1970 and 2012 (in millions of US dollars at current prices and exchange rates). The middle line shows the amount flowing into developing countries; the bottom line into former communist countries. The gap between the top and middle lines represents the amount of foreign investment flowing between advanced countries.⁴¹

Globalization begins the moment the Keynesian paradigm is abandoned. There is a surge of cross-border investments between the advanced countries, mirrored by a steady flow of investment into what we called the ‘Third World’. Capital flows into Russia and its satellites are significant given the size of their economies, but not significant in terms of the bigger picture.

GDP per person is a way of illustrating human progress: how much growth is shared among how many people? The top line shows global GDP per person rising by 162 per cent across the whole world between 1989 and 2012. The former communist countries achieve about the same – albeit via twelve years of catastrophic decline and then a growth surge spurred by Euro entry for the satellites and oil money for Russia itself. But the most spectacular thing is what happens to the bottom line – the developing world. It grows by 404 per cent after 1989.

It is this that prompted the British economist Douglas McWilliams, in his Gresham lectures, to nominate the last twenty-five years as the ‘greatest economic event in human history’. World GDP rose by 33 per cent in the 100 years after the discovery of the Americas, and GDP per person by 5 per cent. In the fifty years after 1820, with the Industrial Revolution underway in Europe and the Americas only, world GDP grew by 60 per cent, and GDP per person by 30 per cent. But between 1989 and 2012 world GDP grew from \$20 trillion to \$71 trillion – 272 per cent – and, as we’ve seen,

GDP per person increased by 162 per cent. On both measures, the period after 1989 outpaces the long post-war boom.

1. Globalization’s winners

During the post-war boom, capitalism suppressed the development of the global south. The means by which it did so are clear and well documented.⁴⁴ Unequal trade relationships forced much of Latin America, all of Africa and most of Asia to adopt development models that led to super-profits for Western companies and poverty at home. Countries that tried to reject these models, such as Chile or Guyana, had their governments overthrown by CIA coups or, as with Grenada, by invasion. Many found their economies destroyed by debt and by the ‘structural adjustment programmes’ the IMF dictated in return for debt write-offs. With little domestic industry, their growth models relied on the export of raw materials, and the incomes of the poor stagnated.

Globalization changed all that. Between 1988 and 2008 – as the chart shows – the real incomes of two-thirds of the world’s people grew significantly. That’s what the hump on the left-hand side of the graph proves.

Now move to the right-hand side of the graph: the top 1 per cent also see their incomes rise, by 60 per cent. But for everybody in between the superrich and the developing world – that is for the workers and lower-middle classes of the West – there is a U-shaped hole indicating little or no real increase. That hole tells the story of the majority of people in America, Japan and Europe – they gained almost nothing from capitalism in the past twenty years. In fact, some of them lost out. That dip below zero is likely to include black America, poor white Britain and much of the workforce of southern Europe.

Branko Milanovic, the economist who prepared these figures for the World Bank, called this ‘probably the profoundest global reshuffle of people’s economic positions since the industrial revolution’.⁴⁵

1. Doubling the world’s workforce

The Harvard economist Richard Freeman calculated that between 1980 and 2000, the world’s workforce doubled in absolute numbers, halving the ratio of capital to labour.⁴⁶ Population growth and foreign investment boosted the workforce of the developing world, urbanization created a 250-millionstrong working class in China, while the former Comecon countries’ workforces were suddenly available to the global market.

The next two graphs show the limits to what can be achieved simply by employing large numbers of low-wage, poor-country workers.

First, above, here’s what has happened to the incomes of the workforce in the developing world since globalization began.

Strikingly, the graph shows the group earning between \$4 and \$13 a day growing the most rapidly: from 600 million to 1.4 billion.⁴⁷ (Though the demographers call them the ‘developing middle class’, the \$13-a-day mark corresponds roughly to the poverty line in the USA.) These people are mainly workers. They have access to banking and insurance, are likely to own a TV, and usually live in small family groups, not the multigenerational families of the slum, or the solitude of the dormitory. Three-quarters of them work in service industries. The growth of service sector jobs in the developing world reflects both the natural evolution of the job mix under modern capitalism and a second round of offshoring, focused on call centres, IT departments and back-office functions. In short, the graph shows the limits of what offshoring can achieve. That growing wedge of \$13-a-day workers is nudging into the income bracket of the poorest American workers.

This means that the days of easy wins for firms offshoring their production are drawing to a close. For the last twenty-five years, large parts of industry in the global south have used ‘extensive’, rather than intensive, methods to boost production. Meaning, if you want to make double the number of trainers, you build an extra factory rather than work on more efficient production methods. But that option is closed down once you have to start paying your most skilled workers the same as a poor person in America. In fact, the impact of rising wages in the developing world is apparent once we look at the second graph, opposite. This stark calculation shows that the initial boost to productivity from the offshoring of hundreds of millions of jobs is over.

Look at the three lines. Dashed, for the developed world, declines to zero. Its workers are making almost no contribution to productivity in the world. Solid, for the developing world, shows a massive contribution in the first years of globalization, petering out to almost nothing in the last few years. It’s evident from this that much of the productivity boost from globalizing the workforce is over, and that the slowdown in growth in the emerging markets – from China to Brazil – is about to turn into a strategic problem. It is clear from these graphs that the normal wave pattern has been utterly disrupted.

When the upswing runs out of steam, in the 1960s, it does so for a reason that would not have surprised Kondratieff: the exhaustion of the regime that promoted high productivity alongside wage growth. This led to the famous stop-go crises of the 1960s, when the global system forced governments to rein in growth, and then a breakdown of the global economic order, high inflation and a war in Vietnam so hubristic that the American psyche has still not recovered from the shock of losing it.

Here is the critical difference: in all three previous cycles, workers had resisted the cheap and nasty solution to the crisis – wage cuts, de-skilling and a reduction in the social wage. In the fourth wave, for reasons we will explore in chapter 7, their resistance failed. It was this failure that enabled the entire global economy to be rebalanced in favour of capital.

For about twenty years, this rebalancing worked – and worked so well that it convinced many rational people that a new age had dawned. What the Kondratieff theory had indicated should lead to downturn and depression led instead to two exhilarating decades in which an upswing in profits coexisted with social breakdown, military conflict, the return of abject poverty and criminality to communities in the West – and spectacular riches for the 1 per cent.

But this is not a social order, it is a disorder; it is what you get when you combine the move from production to finance (which Kondratieff would have expected) with a defeated and atomized workforce, and a super-rich elite living off financial profits.

We have listed the factors that allowed neoliberalism to happen: fiat money, financialization, the doubling of the workforce, the global imbalances, including the deflationary effect of cheap labour, plus the cheapening of everything else as a result of information technology. Each seemed like a ‘Get Out of Jail Free’ card, allowing the ordinary karma of economics to be suspended. But as we have seen – and as most of us have experienced in some way – there has been a huge price to pay.

What emerges from this shattered dream? The new technical and economic system will have to be built from the materials to hand. We know

HOW IS THE PATTERN BROKEN?

it will involve networks, knowledge work, the application of science and a
large amount of green technology investment. The question is: can it be capitalism?