Cost of Living Crisis — A Crisis of Capitalism

Inflation is running amok. Food and energy prices are devastating to consumers. In the UK, they are referring to this as the “Cost of Living Crisis”. The term ‘crisis’ is correct. It is a crisis.

However, this is not just a cost-of-living crisis, it is a crisis of capitalism. The cost of living crisis is merely a microcosm of a bigger crisis. Capitalism is inherently unstable. This inherent instability has been explained by Hyman Minsky in the financial money manager sense but can be extended to the whole economic apparatus.

The current cost-of-living crisis is being attributed to two macro-economic shocks: Covid and the war in Europe. Whilst this is a fair and correct diagnosis, it fails to fully reveal that the crisis has always been here. The cost of living has been going up for decades. Wages have not been able to catch up with the cost of living since the late 70s. This crisis of low real wages is what I term the “Living Wage Crisis” which also informs the Angry Women Crisis and the Side-Hustling pandemic.

The crisis has always been there. It was simply not affecting certain people in the economy. Now that it is affecting food and energy, it affects everyone and is deemed a crisis. Asset Price Inflation has been a dominant feature of this century.

House prices have been inflating at a ridiculous pace, over 10% per annum in Cape Town, South Africa. Boomers were happy with this type of inflation. It was framed with endearing terms such as “property gains”, “capital gains”, “property investments always go up” etc. To the fellas that wanted to get into the housing market, they could not get in, because the price was inflating at a pace that was faster than inflation. Housing (a basic need) was financialized and treated like a financial investment.

As housing prices went up, they took rentals along with them to the lofty heights to maintain yields. The crisis of affordable rent was largely ignored because it was affecting the rentier class.

Education has been inflating by over 10% per year in some areas, affecting those who want to be educated now, benefiting those who were educated already as many failed to get in or got in at a huge cost of carrying a heavy student debt burden.

Healthcare has been inflating at a ridiculous pace, but then again, the gains go to the oligopolistic big pharma. The point is, the crisis has always been there, in many areas other than food and energy. We can call everything else the “living wage crisis” and call the current crisis a “cost of living crisis”. It's one and the same thing but let's give it different names.

How is the current crisis a crisis of capitalism?

Capitalism emphasizes profit maximization, which when taken to the extremes strips redundancies, buffers, and robs the system of any stability. The system becomes inherently unstable and prone to a crash or a crisis at the slightest poke.

The global capitalistic system could not stand a war between neighboring countries in Europe. Ask yourself why the system is so brittle. The tiniest of pokes can trigger a crisis.

There are several problems with the core tenets of capitalism. We can look at only two.

  1. Ruthless Profit Maximisation
  2. Naive Assumption of Perfectly Free Market conditions persisting perpetuity

The ruthless pursuit of profit maximization tends to ignore any other relevant factor that should be considered when looking at the global economic system. Surely it should make sense that the production of a certain good or service should be distributed across different areas of the globe. Profit maximization says otherwise. It says production should be concentrated at the lowest cost producer.

We now get to know that a lot of agricultural commodities such as sunflowers were concentrated around Russia and Ukraine. These two countries were making up close to 70% of sunflower oil exports. In retrospect, we can ask, but why so much concentration? Why couldn't we grow these sunflowers in many other parts of the world and not be heavily reliant on two neighboring countries who are always at each other's throats? The answer is that we could not diversify supply because these two countries happened to be the lowest cost producers. If you grow your own sunflowers at a cost higher than theirs you would not be able to sell that oil to anyone other than yourself. Even if you sell it to yourself, you will be doing yourself a disservice by consuming more costly sunflower oil instead of simply importing from Ukriane.

I have always argued against the current dispensation of having China as the sole factory in the world. Surely, we should have another manufacturing hub in either Africa or Latin America. If anything happens in China that pokes the system, we could easily be in a position where the world cannot get 60–70% of the items we buy. At that point, it will be difficult to ramp our own supply outside China, just as it is not easy to ramp up the farming sunflower oil outside of Ukraine now.

If you are to respond to the cooking oil crisis by increasing production outside of Russia and Ukraine, how would you do it? You would think of assembling the right farming experts, oh you don't have any, it's all concentrated around Ukraine. Let's say you are able to get the experts to leave the war and join you in farming, you would still need to be convinced of the long-term viability of the project. And if it's viable, you would still not be able to instantly bring the product to the market. It takes months and sometimes years. Therein lies the fallacy in the belief that the free market will be able to find a solution quickly as soon as a problem sets in.

In a global free market system, whereby Ukraine can produce sunflower oil at the lowest cost, you would dare to quickly set up your own mega farm in Uruguay. Why? Because if the war suddenly ends and Ukraine starts growing sunflowers again, you could be stuck with sunflower oil that's more expensive than many would be willing to pay. There is no incentive for a purchasing manager to keep a robust list of diverse suppliers. Profit maximization via cost minimization reigns supreme overall.

Think of a buyer in a clothing chain that wants to press an order for a million plain t-shirts. Shenzhen, China can supply this at 90 cents whilst Addis Abba, Ethiopia can supply this at $1.10. The buyer could choose to split the order and place an order for 500,000 t-shirts from Shenzhen and a half from Addis Ababa. This allows the buyer to keep links with two different suppliers in two different clothing hubs. By doing so, the hubs in both Shenzhen and Addis Ababa survive, and the entire system has some stability. If anything happens in Shenzhen, Addis Ababa can ramp up production immediately and vice versa. The system is inherently stable.

This is exactly what does not happen. The buyer places the full order of a million t-shirts from Shenzhen, leaving Addis Ababa with nothing. Every other buyer does this, and Addis Ababa cannot keep the lights on and have to shut shop, leaving the world with one hub. Can you blame the buyer? System stability and having diverse suppliers are not rewarded instantly. The rewards accrue over time (because over enough time surely something is bound to go wrong in one of the hubs). Profit maximization is rewarded instantly. By placing the full order to Shenzhen, the buyer immediately saves the company $100,000 and so it goes for the next order and the next after the next.

What you see here is a system “trading-in” long-term stability for short-term profits (quarterly profits). This is an inherent feature of the global capitalistic economic setup. It is a crisis that is inherently baked-into capitalism via the goal of the firm. The goal of the firm is to maximize value for shareholders and this value is always looked at from a short-termism perspective because they say in the long run we will all be dead so we shouldn't worry much about the long run.

It doesn't really matter what triggers the actual crisis. It can be anything. But a crisis is always on the horizon because the system is inherently very unstable.

The system might appear stable and relaxed, but it is inherently unstable

Anything can trigger a crisis. A bat in Wuhan. An egomaniac warmonger in Europe. A drought in Brazil. A foot and mouth disease for cattle in Texas. Anything. A better global system would be able to withstand these triggers without triggering an economic crisis.

This leads us to the second point of the Naive Assumption that perfectly Free Market conditions will persist in perpetuity. I have often stressed that many countries have lost the capacity to manufacture their own light bulbs, plugs and sockets because we all import them cheap from China. What if China decides to put a ban on the export of these things one day. Some countries have lost all expertise and it could take months before they are able to produce bulbs on their own.

The fault here is to assume perfectly free market conditions will persist forever. In response to the war in Ukraine and wheat shortages, India has now banned all wheat exports. Net importer countries who cannot get wheat out of Ukraine assumed there will be another country to import from such as India because “it's a free market” are now in for a shock when they realize that perfectly free market conditions do not exist in perpetuity. Food security should be duly regarded as a national issue that threatens the stability of any country. Food security is often ignored because of the naive extrapolation of free market conditions.

Universal peace has not yet been achieved, so it should not be a surprise to see a war breaking out in Europe. War has always been the norm and peace is an anomaly of the post-1945 world. Yes, the world is more peaceful than ever before and there is reason to believe in humanity and extrapolate peaceful free market conditions. But there are plenty of reasons why peace is under threat. Universal peace cannot be achieved under the current settings of extremely high levels of inequality between citizens in a country, between countries, and between regions.

Thus, even though the blame for the cost-of-living crisis can be placed on the triggering events (it’s Covid, it’s Putin), a sizeable part of the blame can be placed on the faulty design of the global capitalistic system, which is pregnant whit short-termism and ruthless profit maximization at the expense of stability.

Economic growth via profit maximization should come at a reasonable cost, not any cost. The current system wants “growth-at-any-cost”. The cost we have to pay is these periodic crises. Though it has to be noted that these periodic “cost-of-living” crises are part of a multi-decade crisis of a living wage.

Ciao!

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Financial Analyst, Cloud Accountant, Citizen Data Scientist, FPL Boss

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Ryan Gosha

Ryan Gosha

Financial Analyst, Cloud Accountant, Citizen Data Scientist, FPL Boss

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