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Reduction of the efficient scale size as the origin of financial crisis

In a time when technologies have drastically reduced the efficient scale of production, capital, instead of adapting itself to this reality, has fled towards the opacity of securitization and large-scale short selling. As long as risk preferences do not change, permitting the reintegration of capital in real production (increasingly of smaller scale), the root cause of the crisis will continue to operate. However, those bundles of capital have a better option in the short term: relying on the capture of the state by macrocorporations or debt… inciting the decomposition and destruction of productive capacities.

Starting in the 1990s, new technologies began to have a direct impact in production: the development of small-scale productivity became dramatic. The appearance of the internet and the relaxation of trade barriers joined in the breaking up of the chains of value: the large companies that had grown on the basis of integrating the chains of production, began to externalise segments and processes onto much smaller companies, distributed throughout an increasingly larger geographic sphere. It was the age of delocalization and no-logo. But soon, many of those “small peripherics” began to integrate productive chains by themselves. The center faced competition from the periphery precisely in the high value-added sectors. The phenomenon manifested itself in a sustained increment in international trade and aggregated itself under the form of the emergence of the BRICs (UNCTAD statistics also disaggregation by regions).

Evolución del comercio mundial

From the production organization point of view, what happens is that technological change is drastically reducing the efficient scale size. But this presents a real problem for capital: the closer we are to individualised production, the less necessary capital becomes. It begins to accumulate in a great bundle of financial capital that cannot integrate itself directly onto production. Capital has less grand projects in which to invest and begins to move increasingly faster, more sensitive to changes in opportunities, as we can see in the historical illustration of the international fluctuations of capital:

PIB global

If we were to describe it graphically, we could say that the mechanism that linked production and capital like sprockets in a bicycle, is changing its proportions. To small changes in productive opportunities, capital responds to great movements of funds… even if these are not necessary because the scale of production no longer requires it. If the experience of the nineties left any doubts, the bubble and later dotcom crisis (first peak in the above graphic) made it evident, and the U.S. mortgage bubble (second peak) made it devastating: those masses of idle capital generate speculative bubbles by themselves… with serious social consequences when they are directed towards markets such as the food futures market.

The necessity of financial innovation to transform the structure of global capital to the new industrial conditions, to the change in the efficient scales of production, then, becomes evident. But, as Juan Urrutia pointed out in 2005, the incentives go in a different direction: securitization and opaque assets that mask the divorce between capital and the productive system and prepare the mechanisms of the present crisis.

But the crisis has not put into question the fundamental mechanisms and problems. The examples of this fill the press pages: just this past Friday a revision in Chinese growth from 8.3% to 8.1% put investment analysts and the specialized press in a state of shock. Could this be considered a bad statistic? Absolutely, but small percentual variations are very significant to that mass of financial capital that moves through the global markets.

The corrections

After the fall of the Pound in 92, the Thai Bath crisis in 94, its Mexican equivalent and the following «tequila effect», the destabilizing and destructive character of the rapid movements of masses of speculative capital -a novelty back then- became evident. A debate over the Tobin tax began, but the idea of generating «contention dikes» revealed itself as completely inefficient.

The bottom line is that financial capital requires a new wave of innovation that reintegrates it into the productive system. For this to happen it is fundamental that it modifies its risk preferences in order to serve great infrastructure projects in the long term and small-scale projects, which are the ones that sustain innovation, employment, and development.

In this second vector, the experience of microcredit and innovation in the forms of remuneration of capital point to efficient ways of aggregating risks and institutional transformation. And certainly they will suffice as the basis for an endogenous transformation… but it is clear that a spontaneous change will not occur as long as the capture of the state by means of macrocorporations or debt is not put under discussion, and the development of decomposition -with its consequent destruction of productive capacity- is seen simply as collateral damage and not as a direct consequence of this capture.

Translated by Etienne Figueroa from the original (in Spanish)

«Reduction of the efficient scale size as the origin of financial crisis» recibió 11 desde que se publicó el Sábado 14 de Abril de 2012 . Si te ha gustado este post quizá te gusten otros posts escritos por David de Ugarte.

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