Can Capitalism survive without a State?

I am gonna lay out some pretext first and then get to the big question as the title of this post suggests.

Various experts and intellectuals have this to say about Trump regime - there’s no method to its madness. This is true about day to day policy decisions of Trump regime which are based on daily whims of Trump & minions who surround him. For latest example, Trump threatened EU with 50% tariffs. But underlying this wild policy of daily chaos, there is a trend to this madness - dismantling of state. The dismantling of state is happening quite rapidly although the American courts are putting monkey wrench in the wheels.

Much of the dismantling of state happened through executive authority - the blanket EOs to cut X Y Z programs, regulatory agencies and government departments. A lot of damage was done by DOGE which is blocking payments to critical programs and agencies in name of achieving efficiency. For example, the Social Security administration is intentionally paralyzed on phony pretexts of finding waste & fraud. Then, there is installation of incompetent minions at top government agencies who are wrecking government functions in variety of ways (think what RFK Jr is doing at HHS, Noem is doing at DHS, Hegseth is doing at Pentagon). Finally, we also got to see the first impression of legislative action by Trump regime to destroy the legacy government programs like Medicaid and SNAP with draconian cuts so as to finance tax cuts.

If you think carefully, what Trump regime is doing in regards to dismantling of state, is actually a long standing agenda of Republican party and even some Democrats. Although political elites & oligarchs desire to eliminate government legacy programs, this has been difficult politically. Some may even consider it a political suicide. Tens of millions of people are dependent on these government programs and ending them will invite rebellion from electorate. Now fate brought us to Trump. Trump is a malignant narcissist and a Psychopath who has no qualms about destroying things and ruining lives of people on a grand scale. Also Trump is reality TV star, a master gas lighter with incredible ability to dupe people, and possibly even to the length of convincing them to cut their own wrists.

So in Trump, American oligarchs see tremendous opportunity. Use this madman to destroy the government - legacy welfare programs, social security, government healthcare, regulatory institutions, technocratic civil service, IRS etc etc - all are on chopping block. Privatization of social security, healthcare, education etc - this campaign has been relentlessly waged by plutocratic think tanks since decades on phony pretexts. The biggest phony pretext is their fiscal burden & threat of future solvency. What we are seeing now is all of the long standing reactionary plans put into high gears suddenly and aggressively.

Now we get back to the topic of this article

Schumpeter was a great thinker on political economy and he put forward certain scenarios on how capitalism will come to an end. Spoiler - this is not how things are playing out although in one aspect Schumpeter’s thesis has validity. And i will put forward my own thesis on how capitalism may severally rupture at least in America or perhaps how capitalist engine will be greatly weakened in America.

One of the core thesis of Schumpeter was that capitalist engine drives on inequality of wealth & income. The winners in capitalism are greatly rewarded disproportionately and the losers may end up with empty hands - the system is inherently unfair in spoils of profits. This in the long run will invite hostility of the people and the State according to Schumpeter. And since we are in a democracy, the state will strangulate capitalist engine which will be seen as source of inequality & unfairness. But this is not what happened in America & western world.

Neoliberalism (which is a late stage metamorphosis of capitalism) thrived in western world and even swept over the communist bloc. A society can tolerate incredible amount of inequality, this has been proven. Starting with policies of Reagnomics and Thatcherism, the inequality skyrocketed and society tolerated austerity while making some grumblings. The victory of right wing parties even in face of austerity shows how far inequality can be pushed. Secondly, instead of State strangulating capitalism, we discovered that State rescued capitalism on many turns. For example, the bailouts of Trillions of dollars by governments and central banks to rescue financial institutions in wake of great recession. In fact, it was the State which nurtured & protected these ‘too big to fail’ capitalist institutions. In fact, preserving these institutions is a strategic task of central banks and treasuries.

Schumpeter also said that Capitalist elites will lose their ‘capitalist drive’. They will be influenced by intellectuals into neutering their capitalist instincts. In other words (& i am inferring here), the capitalists will become more inclined to ideas of pesky intellectuals about inequality and social fairness. But this is not what happened. Instead, the malignant capitalists unite in hostile takeover of the State - a defining feature of Trump regime. The oligarchs lining up at White house and Mar-a-Lago to grab special favors is the epitome of naked corruption or ‘naked capitalism’ more accurately.

Why unfettered Capitalism is inherently unstable?

Let’s understand the basic idea why unfettered (meaning unregulated, unsupervised and uncontrolled) capitalism is inherently unstable. Capitalism is unstable in three major ways. First, because of the endemic uncertainty of world we live in. Capitalists cannot be certain whether their production will be sold, whether their investment decisions will materialize, whether there will be sufficient demand in economy, whether their expected rate of profit will be realized etc etc.

And as economy becomes more complex, this uncertainty keeps increasing. On top of that, there’s a continuous trend of creative destruction that is ever changing the nature of markets and consequently the habits of consumption. Macroeconomic security of Keynesian economics was precisely a remedy to this uncertainty and a stabilizing factor for business cycles. Later, central banks and government created more mechanisms to stabilize business cycles - all this i have discussed in previous article.

Secondly, the economic rationality of capitalists is overstated. In fact, the financial markets which are heart & lungs of late capitalism demonstrate significant degree of irrationality - some call it financial euphoria, others call it casino economy. The speculative mania of markets and its catastrophe is well known. In fact, markets are kept in check with variety of regulatory mechanisms & government institutions. In spite of that, things can turn very bad and government comes in to rescue financial markets when they are in crisis. Self regulated (meaning unregulated & unsupervised) markets are highly unstable and predatory and they don’t have a self corrective mechanism.

Thirdly, and this is something we have recognized in last few decades. The purely profit motive can be destructive to society. Think of Bangladesh textile factory fires, BP oil spill, Bhopal gas tragedy etc. Think of Oil & Gas industry which is lobbying against green transformation of economy because it will shrink profits of fossil fuel industry. Think of war profiting of defense industrial complex which can subvert to national policy of the State. Even in era of global warming when there’s existential crisis of planet, many fossil fuel corporations are putting profits over civilization’s survival.

Individualistic blind pursuit of profit can be highly destructive to collective society. That’s the reason why sensible regulations, institutions and government oversight, the system of checks and balances emerged to regulate capitalist economy. Do these regulations hinder capitalist engine? Yes, to some extent. But they are essential to keep this system running in good health. To naive capitalists especially the newly emerged ‘Tech Bros’ , they only see government as an obstacle because they don’t have historical knowledge of evolution of capitalism.

Also, the exponential growth models of neoclassical economics are nonsense. The world has finite ecological constraints and achieving economic growth by breaching these constraints can be catastrophic. Refer to Doughnut model of economy by Kate Raworth on this. Trump is reneging and repealing on Climate Change policies, allowing exploitation of forests & natural reserves, reviving the carbon intensive industries and deregulating economy in variety of ways that will destroy environment. Note that Schumpeter’s thesis on Capitalism came at a time when earth’s resources were considered plentiful. Now when earth’s natural reserves are dwindling (fresh water resources, forests etc) and ecological constraints have emerged on economy (man made global warming & pollution), the capitalism needs a new vision to incorporate current realities in its working. The days of purely individualistic & self serving capitalist thinking are over.

How Capitalism may end?

There are too many unknown unknowns in our world reality. Capitalism may continue to live forever or may die due to some reason that we can’t foresee. But a more likely possibility is that capitalism as a system won’t just universally vanish and fail everywhere. It might only be ruptured locally in a region. For example, capitalism may rupture in America while capitalism may continue to be work in China, Asia Pacific & Europe. What’s the problem in America? The problem is very basic actually.

Capitalism is built upon the State. If you dismantle the State, you will kill capitalism. A State is the base of capitalism that preserves and protects it, not just from foreign adversaries but from itself (as i mentioned the inherent instability and self destructive tendencies of unfettered capitalism). Also in a modern developed nation, the State and private sector are integrated to such length & depth that you can’t see them in isolation. You can’t disentangle & eliminate the State from private sector. Doing this will kill private sector. At basic level, the balance sheets of Government and Private sector are integrated.

The government is not a private enterprise and it doesn’t operate on simple profit-loss equations. Government is ultimate stabilizer of economy because of its sovereign power of money & credit creation (undoubtedly, this power has to be used diligently). Government spending creates demand in economy. Spending on healthcare, defense, infrastructure, public services, welfare programs etc etc - all this spending by government translates into income in private sector. People like Elon Musk claim that they can cut Trillions of dollars of ‘wasteful & fraud’ government spending. There’s no waste & fraud and all the rhetoric of Musk is nonsense. But mindlessly cutting government spending will create a loss of income on other side of ledger - the private sector. Similarly, shutting down government programs, mass firing of government employees and strangulating government functions will reduce economic demand and decrease private sector income.

The government employees and institutions do meaningful functions. The scientists at HHS, the air traffic controllers, the inspector generals, the food inspectors, engineers at DoD, the financial regulators (FDIC, CFPB etc), IRS officials, Nuclear security workers etc - all have an essential and meaningful function. Would you buy a car which doesn’t have Air Bags & seat belt, reinforced structure or which doesn’t have ABS system? A car without these features will be cheaper but would you want it? A government which doesn’t have essential workforce and institutions will be smaller and operate on lower budget but that doesn’t mean it will be better.

What would an economy look like without government? To give some examples. We are already seeing the dangers of fatal accidents due to scarcity of air traffic controllers. Without public health safety programs, we will have disease outbreaks. Even an epidemic is possible if government shuts down on infectious disease monitoring. Recent Covid pandemic has shown how devastating it can be for economy. Government grants in Science, R&D are critical driver of innovation. Ending these grants will paralyze a critical part of capitalist engine which produces innovation & technological advancement.

Financial sector is inherently unstable in terms of speculative tendencies as well as predatory practices. Financial regulators (FDIC, CFPB etc) keep these problems in check. Complexity of financial system is increasing and so is potential of crisis & fraud due to unregulated areas like Crypto currency which is a hotbed of illegal activities (drugs, extortion, money laundering etc). Here, another point deserves mention about changing nature of capitalism. The current form of capitalism is very different from old industrial capitalism.

With rise of finance and cloud capital, current capitalism is increasingly driven by rent seeking and financial parasitism while productive power & distributional aspect of capitalism is shrinking in post industrial nations (refer to Varoufakis’s concept of Technofeudalism). An example of parasitical rentier activity is the giant US healthcare & insurance industry where cost of healthcare is extremely high while standards of healthcare is far lagging compared to other developed nations.

The ‘tech bros’, the newly emerged oligarchs, have no understanding of State. They believe that all State institutions can be replaced by private startups (1, 2). To these naive oligarchs, public education & healthcare, legacy news media, public utilities & infrastructure and even national currency - all can be replaced with private start ups and private digital currency. The privatization of State and liquidation of public institutions will give great opportunities for tech bros to increase their rent seeking fiefs in the economy. The rise of rentierism, parasitical finance & unfettered predatory practices will strangulate industrial capitalism, innovation and scientific advancement which is the tangible material benefit of capitalist engine.

Another phenomenon which is not recognized by economists is the social impact of unfettered capitalism. This social impact will in turn produce nationally destructive political regimes - the kind of what we are seeing today in US. These nationally destructive regimes will be so incompetent & fanatical that they will wreck national economies and the very social fabric of society. Falling standards of living, long term unemployment, social insecurity, downgrading of social classes etc create collective anxiety and populist anger, and this anxiety & anger can create dangerous political phenomenon.

One of the critical flaws of Schumpeter’s thesis is that he believed that markets are self correcting and he failed to see the political consequences of economic crisis. When economic crisis is great enough, it can upend the political system. And out of such political instability, demagogues and dictatorships emerge. This we have seen in Europe in wake of economic turmoils of 1920s and 30s. The roots of Trumpian politics actually goes into capitalization on social anxiety and populist anger of communities which were devastated by globalization, migration of industries overseas and workers of many types of jobs that simply disappeared. Of course, Trump never had any real sympathy for these people but he used their sentiments masterfully.

Late stage capitalism along with dysfunctional political system created a ‘psychotic society’ - an insecure society lacking in rational thinking, comprehending simple logic and even losing connection with objective reality. That’s what elected Trump and resulted in victory of Brexit on other side of Atlantic. Why is that? Because the inequalities and abuses of large section of nation traumatized and adversely affected the psychological faculties of people (1, 2). The problem was further aggravated by culture of lies & falsehoods where government denied the existence of problems. This social dynamics has upended the politics of today whose seeds were sown several decades ago.

However, one aspect of Schumpeter’s thesis and his warning holds validity. Schumpeter understood that Capitalists need a protector outside its class. That protector is the State. And State cannot be operated purely on capitalist principles - meaning State cannot be run like a private enterprise or a business (like Tech Bros wish it to be). The roles & dynamics of State are vastly greater & more complex than mechanics of a capitalist business. Although, Schumpeter doesn’t fully elaborate this, he heeded a warning to Capitalists to not invade the State directly and try to run it like a capitalist operation. In present context, this serves as a timely warning to capitalists to divorce from Trump regime and maintain a safe distance from politics.

A regime that will kill American State and capitalism with it

American liberal economists and Neoliberal pundits always fear that a lefty socialistic regime is a recipe for disaster. A regime created by oligarchs & plutocrats is not so bad for economy. After all, the oligarchs, the business elites, the entrepreneurs are believed to be really smart people who understand capitalism & how it works. So a regime backed by oligarchs is not much cause of concern. However, the destruction of American economy and its capitalist engine is not being done by some lefty socialistic politician (like that grumpy socialist Bernie Sanders) or some military dictator as feared by Acemoglu.

American liberal economists fear that socialists create burdensome welfare programs that explode the budget deficit, crowd out private sector investment, raise taxes on wealthy and strangulate capitalism. But the political regime that is doing all the destruction to economy right now is not socialist by any means. Rather it’s a purely capitalist creation - financed, nurtured & propped by American oligarchs - the same ones who lined up at inauguration of Donald Trump and continuously pay pilgrimages at Mar-a-Lago. Though some of these elites may now be starting to wonder if they created a Frankenstein’s monster. Trump regime is not an exogenous shock to American politics. It is an endogenous outcome of American political & economic system and fully sanctioned by Capitalists.

Now we live in era of globalization. Another shock to American capitalism will come when world realizes that America has become a rogue State and there’s no method to its policy making. Phenomenon of Rogue State is common in world. Autocratic, illiberal and military dictatorships are seen as rogue State regimes by rest of the civilized world. Nations like North Korea, Putin’s Russia are current examples. Such regimes lose access to global capital markets and credit. But status of rogue regime is too far gone scenario and State governments can lose access to global capital and credit even more easily.

If capital markets and foreign nations believe that a regime is on unsustainable economic path which will collapse its national income, raise its domestic & foreign debt and high inflation is coming down the road, then capital markets lose confidence in such regimes and capital embargo is imposed on them. Such scenarios have played out in many emerging market nations, most notably it played out in debt crisis of 1980s & 90s in global south, eastern Europe and South East Asia.

Paul Krugman refers to Trumpian policies as Voodoo economics - these economic policies have no internal logic, they are not created by any meaningful deliberation or process and they are one way road to national disasters. Mindless tariffs & trade wars that will create inflation & supply shortages, savage cuts to legacy social programs to fund giant tax cuts will only raise deficits, mass firing of government employees including the most critical regulators etc will paralyze the State. These policy decisions have no rational basis yet they are pursued aggressively.

US is the leading capital importer of the world and US Dollar is global reserve currency. US has been the prime attraction of global investors and dollar is overwhelmingly used in international trade. What will happen if foreign nations and global capital markets realize that US is now running on Voodoo economics? To be honest, capital markets are not the best barometer of economic reality. And also foreign nations don’t like to change long standing international economic relationships. There’s a lot of inertia built into the system. But what if the Voodoo economics is so bad and persistent that it cannot be ignored? And Trump is precisely making everything so bad that it may become impossible to ignore.

Conclusion

So now we can put all of the above thesis into a summary. The American capitalists financed & nurtured a regime that will destroy American State or perhaps severally cripple it. Capitalism is built upon a State, capitalists profits are stabilized by government spending (which maintains demand in economy) and American capitalism is sustained upon technocratic Weberian institutions of State. When you dismantle the State, you will eventually kill capitalism or severally rupture it. It’s like cutting the branch of tree which you’re sitting on. Also, we live in a globalized economy. When the world realizes that America is running on Voodoo economics or worse America has become a rogue State without any rule of law, the crisis of American capitalism will greatly accelerate. The capital will start to flee and a ‘dollar crisis’ may emerge.

If stars get aligned and everything sets into motion, it will be too difficult to stop the decline of America. It takes long time to build functional political systems, a healthy economy and international relations based on trust & credibility. But it takes short time to destroy everything. All it needs is a regime which has no competence, no understanding and no empathy about national affairs.

Truly speaking, the above mentioned hypothesis looks improbable. There’re two reasons for that. First, inertia is a strong force. The longer we are living in a particular system, the lesser we are convinced that the system can fail & break so spectacularly. We are convinced of the continuity of system due to its inertia. After all, we have seen how malignant capitalism and bad economic policies can survive in defiance of rationality.

Think of vast reaching political and academic influence of Neoliberalism even when it’s an unscientific economic doctrine. The economic system we have is already riddled with contradictions and inconsistencies. Regardless, the system maintained continuity for long time and even still it’s better to reform the system & preserving some status quo instead of taking a plunge into the abyss and destroying everything entirely.

Secondly, if the dangers to America & its capitalist ecosystem are so grave, i am strongly anticipating a fightback. Fightback will come from three directions. First is from American electorate. Trump regime is breaking everything so badly that it will paralyze America in very short time. The public which made mistake of electing Trump twice will finally wake up and dispose MAGA Republican party into dustbin of politics. A landslide defeat of MAGA GOP & Trump is possible and this is also reflecting in piling negative sentiments on public polls.

Secondly, the American capitalists may realize that they created Frankenstein’s monster and it must now be disposed off. The insane tariff policy & trade wars, Trumpian uncertainty, paralysis of State, foreign policy blunders etc are greatly damaging the economic interests of American capitalists, and at some point they may become fed up with Trump regime. The media & social media empires of American capitalist elites will withdraw their support to Trump. The financing spigots to MAGA GOP may also close. The truth washing & sane washing of Trump regime may come to an end. Without this support, Trump regime will quickly falter.

Thirdly, the global capital markets will put America on short notice. Why would the world continue to do business as usual with a nation which cannot be relied upon to hold international agreements & bilateral treaties? The foreign nations & especially American allies will realize that America is no longer a trusted ally & strategic partner and America is no longer a nation of rule of law. The foreign nations & global capital markets, allies & adversaries alike, will build pressure to bring regime change in America. This external pressure may create isolation of American capitalists and force them to withdraw support to Trump regime.

Conclusion to all three scenarios is that Trump regime will create so many enemies for itself that it shall be stopped in its path. The capitalists will likely wake up to reality and withdraw their support to this destructive regime. Capitalism in its status quo will survive for time being and MAGA GOP will be disposed off in dustbin of American politics by the people. Restoring status quo of capitalism is not a permanent solution but it will at least give a chance to reform it in a sensible way.

Suggested readings

Capitalism, Socialism and Democracy by Schumpeter

The Triumph of Broken Promises by Fritz Bartel

Doughnut Economics by Kate Raworth

The Great Transformation by Karl Polanyi

Technofeudalism by Yanis Varoufakis

The Dangerous Case of Donald Trump (revised 2019 ed.) by Bandy X Lee

The Affluent Society by John Kenneth Galbraith

The Deficit Myth by Stephanie Kelton

Musical coda

Ben-Hur (1959) Love theme