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Science, Crisis and War: Concealed Relations, Lying on the Surface

Balatsky Evgeny

18.02.2009 another Nikitskiy Scientist and Businessmen Club sitting took place. The topic of the meeting was ’Non-economic factors of the world crisis’. The following article is an extended version of the report made by the Capital of the Country editor-in-chief at the meeting. What is the nature of the world crisis? And why current crisis is the most dangerous?

The financial crisis, that began in 2008 and developed in to a full-scale economic decline surprises with its rapid pace and force. But is it really all that surprising?

How long a crisis can last? And why we hear negative prognoses that the crisis will last for a long time? Why can't the business circles cannot cope with the situation and regroup their resources?

All these questions remain without a simple and adequate answer. We will try to establish some cause and effect relations.

1. The crisis as an absence of an effective business space for capital. What is the specificity of the contemporary crisis? How is the modern mortgage bubble, for instance, different from the internet bubble of the beginning of the century that passed quite smoothly?

As we all know, the development of economy is a step from one bubble to another. When one bubble breaks, a crisis emerges, and a search for a new economic niche, where another bubble can be inflated, begins. In the early 2000s, when the internet bubble broke, the world capitals were invested in the sphere of residential construction. The process was rapid, so the world was not plunged into a deep long-term crisis. The business spheres were aware of the fact that this was not the sphere, where another full-scale bubble could be inflated, but there was not much choice. It was necessary to regroup the world capital, and all effort was made to do so. Everyone realized that the market of residential construction was quite full, but the steps made were sufficient to hold off the crisis for a few years. As it turned out, it was sufficient for roughly six-seven years, which is even longer than could be expected. But what now?

Now, the gathered capital exhausted its potential to acquire high profits: all known markets are saturated to the limit, their growth is limited and the profit from capital in these markets becomes minimal and does not satisfy the capitalists. The capital holders are desperate: where should the multibillion funds be 'pumped' to? Where could this kind of investment prove its value? Where the profit from capital could be high, stable and lasting?

Alas, there are yet no answers to these questions. And this situation is very dangerous, for until adequate answers to these questions are given, the capital will literally go rabid in search for perspective economic spaces for further capitalization. This is where the sacrament question arises: how long the crisis will last? The answer is simple: until new niches for effective capital investments will be found. At present, these niches are nowhere in sight, the accumulates capitals cannot be 'bound' and 'overheat'. This fact can be formulated in the following way: The crisis is the effect of the absence of new economic sectors, where the capital could be 'directed to'.

2. War as means of dealing with the crisis. What is dangerous about the present situation?

The fact that persistence of the crisis is not only hard for the population, but also hard for the capital, which must 'work' instead of 'being idle'. The overfilled and over-saturated markets deprive the capital of high incomes, which is unacceptable. But what is even more damaging is inflation. If the prices rise and the capital stays 'idle' it means it is just loosing its value. An in time it can vanish entirely. But then, what's the point in capital and its accumulation at all?

In short, the stagnation of capital is unacceptable. The capital can 'wait' for some time, but not for long, for there is a limit to everything. But what should the owners of the capital do, if their patience is at its end? And the markets are still needed and should be 'extracted' from somewhere. Considering the fact, that a crisis is always entailed with the excess in the offer of goods, services and capital, the situation should be changed. But if people do not need anything else, if they already have everything they need, the situation should be changed artificially. This can be achieved by using a wonder-tool aimed at utilizing the excess of material goods - war. Its destructive effect would benefit the market, for the excess of goods would be quickly replaced by their scarcity, there would be a deficit of goods and the capital would gain the ability to 'act', filling the void. The problem is that the markets, where the capital 'acts' would be the same as before, therefore no economic innovations would occur and the production and trade spiral would just repeat itself. Moreover, human casualties and the pain that war causes speak of its undesirability.

The persistent crisis is indeed very dangerous. For instance, the Great Depression of 1929-1933, which lasted for 4 years, had its negative effects - the emergence of nationalism. Moreover, its roots lie in the most democratic country in the world - Holland. Only afterwards it found its continuation in Italy and Germany. And it is only logical: when you are out of work for a year or two, or maybe even four, the question about the need for capitalism and economic freedom arises.

Incidentally, the Great Depression accounts for the emergence of world-scale communism. For example, when the western engineers starved out of work, the soviet Russia carried out the constructions of the century and could easily lure the working force because it could, naturally, feed the people. Later on, many secret service people turned to the soviet cause, not because of the money, but because the honestly believed that the future belongs to the Soviet Union. The result of this 'support' was the World War 2 and all its consequences. The bastion of communism (Soviet Union) and the bastion of Nazism (Germany) collided but their emergence is rooted in the Great Depression. Later on, after the war, Soviet Union could steal the secrets of nuclear weapons from the USA through the sympathizing American scientists. Thus, the psychological shock from the crisis of the 30s lasted for 20 years, demonstrating the force of the effects of depression.

The long term effects of the Great Depression were very intense, and, indeed, frightening. The reason is the same - the absence of new markets and the excess of material goods. The present situation is very similar to the described dramatic events of the past. Summary: The longer is the search for new markets, the longer is the crisis, and the higher is the probability of war.

It would be logical to stress the point, which is often stressed in modern economic discussions. This point is the virtuality of money and finances, the gap between the symbols and real economy. This is indeed so, but we should keep in mind the fact that the capital is a real force, nothing can oppose. We can deny its power, we can think that all this capital is not real and the economy is virtual, but when we speak about the consequences of the crisis, and what happens in the absence of the 'reservoirs', able to contain this so-called fictional capital, it proves its power and effectiveness quite swiftly, leaving nothing in its wake. And war is only one of the tools of 'binding' capitals. It is obviously, the last resort, but it is nonetheless a real tool, a channel that ensures the functionality of capital.

Besides the danger from big capital, there is also a danger coming from below. It is associated with the search for earning possibilities by the regular economic agents. In the circumstances of total unemployment and the absence of legal and sensible sources of income, different kinds of criminal activity emerge. This includes weapons and drugs dealing, military activity in sovereign countries. The most recent and, perhaps, the most dramatic display of this activity is the atomization ad effectiveness of Somali piracy. This sort of activity creates a favorable background for more global military actions.

3. Inflation and capital: the problems of profound connection. As strange as it may seem, there are little to none mentioning of the fatal connection between inflation and capital. In the mean time, this connection is very simple and utterly fundamental. But what is its nature and how can it be deciphered?

Let's start with a couple of important factors. First of all, the modern world functions in the circumstances of a positive inflation. There are almost no countries with apparent deflation or, so to say, the decrease in prices, within the circumstances of economic stability. We can talk about slow inflation, we can talk about super inflation, but it is present almost at all times. Secondly, a degree of decrease in prices is present during the periods of crises. However, this tendency is often broken: the deflation was typical for classic crises of the past, and can be witnessed only in developed countries nowadays and even there it is not a frequent occurrence. Thirdly, a high degree of inflation can be quite destructive for real economy.

These facts lead us to a simple question: who needs inflation and why, and where does it come from?

The answer to the posed question is rather subjective, but is nonetheless topical. The inflation is a locomotive for economy for it keeps the world capital 'turning'. If the capital is frozen, hoarded or attempted to be saved by storing, for instance, in a bank cell or at home, the 10% annual inflation will insure that it would cost 10% less next year. If this idle period is prolonged, the effects would be even more severe. In other words, the passive capital simply vanishes, which is unacceptable by definition. That's why inflation stimulates the owner of the capital to undertake active steps aimed at investing actives, and furthermore, the profit should be high enough to beat the inflation. Only by meeting these conditions the growth and expansion of the capital could be ensured. In this case the flow of time would actually benefit the holder of the capital, rather than having a negative effect on him, as it would have in the case of 'storing' capital.

Thus, inflation does not give the holder of the capital any opportunities to sit back and relax. This is the utter point of inflation - the devaluation of capital. In the case of a crisis, when there are no apparent ways to apply capital, deflation, or the crash of prices, sometimes occurs. It is also apparent from the previously described scheme: if there is no way for the capital to go and it is forced to stay 'idle', high inflation rate will basically eliminate it, which is unacceptable. That means, that deflation benefits capital during this period, because it means that even the 'storing' of capital ensures its growth due to the growth of its buying ability. Deflation could be seen as a mechanism that allows the capital to take a break.

It should be mentioned that the deflation mechanism is rarely seen lately. Essentially, it means that the requirements for the pace of the capital are increased and it should constantly stay in motion even during the period of crisis. This is one of the features of modern economy.

The economists claim that a new epoch is coming when deflation in developed countries will be mirrored by inflation in developing world. This phenomenon is considered a very important issue and its study by future generations of economists and researcher is predicted. However, it is important to mention that a shift to heterogeneous inflation world is contemplated. But why does such exfoliation of the world occur?

Setting aside the high theory, the explanation could be given in terms of large capital interests. The centers of the capitalist world (developed countries), where the world's capital is concentrated, should save themselves from inflation and they benefit from forming a deflation development system. The periphery of capitalism (developing countries), where foreign capital is functioning, does not suffer from capital over-saturation, so no special deflation system is required. Essentially, the centers of capitalism could be seen as havens, where the world's capital can settle down for a period of time in the event of crisis in world economy. That's why a deflation system is required there. Even if the capital 'does not feel good' in developing countries, it can move towards the center and wait until the hard times are over. It is hard to say, how stable this model can be, but its configuration is quite sensible from the perspective of safeguarding large capitals.

Moving on, the next question is why the world can not function in the circumstances of deflation. It would be reasonable to suggest that central banks are able to maintain a rather strict monetary and credit policy, where offer of money is lower than the demand, which stimulates the lowering of prices. In practice, however, this policy leads to the suppression of economic activity. The injection of money in to economy should pass ahead of the process of commodity weight creation, for it serves as a stimulating element for production activity. Yet, even the slightest funds injection advancing leads to temporary excess of money, and causes inflation.

Universally speaking, money is fuel for economy, as petrol is for a car. Clearly, you can put petrol in and not go anywhere, but you can not ride your car and expect to put more petrol in as required if your fuel tank runs dry. This logic can be seen on all levels of economy. For instance, in order to start producing something, you need to invest capital, and only than you can start manufacturing your goods; the system does not work the other way around. The failure of the manufacturing process means that the invested money did not meet an adequate commodity equivalent, which sooner or later will lead to inflation. Considering the fact that failure is a norm in capitalist business, the illegitimate injections of money are always present.

4. Science crisis as a threshold for financial crisis.  So far we clarified a few points. First of all, capital can not stop expanding, therefore channels for its investment should be available. Secondly, if a problem with finding these channels arises, a threat of war, as means of launching new traditional markets, is building up. Thirdly, the channels for investments are not transparent at present.

Now we will focus on third aspect of the problem more thoroughly: why channels for world's capital are not being found, whose fault is it and what should be done?

Answering this question we should consider the fact that the investor and the business owner as holders of the capital are quite powerful, but not almighty. They can set up new manufacture, new markets, they can even create a new brand. If needed, they can come to an agreement with officials, hire new personnel, stock up on the most advanced equipment. But all this can only be done when an opportunity for investment is apparent. But finding these opportunities turns out to be impossible for holders of the capital, for they don't know the technological potential of the modern world. So who is to show them the right course of development?

The answer is obvious: someone who works with new technology. It is a society of innovators, which originates from the depths of science. It is science that opens up new horizons for development; it is the scientists who offer new technology and management systems. They are precisely the people who should set the course for business, when traditional routes are unavailable.

But why they would not do what the whole world is expecting from them?

This is where we approach a crucial moment, a claim that long before the financial crisis of 2008 science itself was plunged into a crisis where it remains ever since. What does it mean?

Investments in science are a very specific application of capital, but they should be efficient nonetheless. Even if the investor is the government, the invested money are taken from the population in the form of taxes. Government normally plays a role of a strategic investor. This means three things. First - it takes high risks, which are unacceptable for private investors in most cases. Second - the government is satisfied with low incomes; this sort of outcome would hardly satisfy private capital holders. Third - the government's range of planning is quite large, which allows it to be satisfied with longer cover of expenditure periods; private investors cannot submit to such terms. However, despite the outlined specificity the government is the investor and expects to have income from its investments.

The outcome of the investments is the generation of new business offers by the science sector. The problem is that science became unprofitable, which means that it cannot offer anything truly interesting to government and business owners. It produces a number of theoretical developments, but cannot provide any practical recommendations. In terms of economy it means that science offer exceeds the demand for it. Scientific product of such quality is not needed. This does not mean that modern science is useless. This only means that its uses are limited in relation to the accumulated world's capital. Thus, as the economic crisis is a result of the excessive offer of goods and services, the scientific crisis is the result of the excessive offer of scientific (theoretic) products. As it is difficult to sell the produced goods on the regular market in the circumstances of a crisis, it is not easy to find application for the excessive offer of scientific work.

Let's clarify, what is being argued here. The modern world is in need for gas and oil, but no new methods of taping these resources are offered, which leads to a crisis in the energy sector. Meanwhile, the physicists are developing the theory of superstrings, which, despite its complexity and fundamentality, does not offer any practical applications. Enormous financial and human resources are involved in the development of this exotic field of science nowadays, while the problems of energy sector remain unnoticed.

Considering this situation, some of the recent events seem to be extremely odd. For example, because of Ukraine's manipulations with Russian gas pipelines, Europe found itself in a very complicated situation. It was as bad as a matter of life and death for the population in the circumstances of a harsh winter. In practice, Europe turned out to be dependant on Russian energy resources due to humongous researches of unproductive science spheres. The building of Big Collider, which would hardly be able to give humanity any kind of new knowledge, and, most importantly, would not be able to heat Europe, looks extremely odd in these circumstances.

Let's stress the fact that ineffective investments are not the only cause of science crisis. After all, any losses can be written off, but that's not the point. Science was expected to provide new developments, and did not live up to these expectations - this is a crucial moment. Science 'sights' were inaccurate and natural priorities in research were broken, so to speak. The theory of strings can wait but the energy sector can't be ignored any longer. It may not get to the point where the theory of strings can be at all useful if the financial crisis progresses to become an energy crisis, which will inevitably lead to war.

Twenty years ago science brought personal computers, internet and mobile communications to the world. It was enough to inflate a huge investment bubble, create a whole new segment of world economy and alter the face of the planet. At present, there is nothing similar on the horizon.

The above stated is only one side of the matter, but there is also another. The thing is that science broke away from business; a very weak communication is seen between the two, which is supplemented by the lack of understanding. A typical feedback dysfunction is at work here. Thus, the decreased outcome from science leads to a decrease in its financing and a proportionate decrease in researchers profits. The outcome of this is that most of them become not too wealthy, if not poor. Business owners can't trust people like that with their capital nor can they take up risks under guidance of these researchers. The feeling is mutual, for the researches, in turn, do not trust the business owners, thinking them to be either not too honest or not too smart. Under the circumstances of this kind of mutual dislike the dialogue becomes problematic if not at all impossible. The researches become passive and don't offer any new ideas to the business owners, who in turn lock themselves in their self-sufficiency and don't ask the researchers for scientific insights. In a system like this, even if something interesting even comes up in the scientific fields, it would most likely go unnoticed by the business circles. (What is being discussed here is not the researches chasing businessmen, but a constructive dialogue between the two camps. Nicola Tesla can serve as an example here, for he always had sponsors investing in his fundamental projects. Thomas Edison behaved in a similar fashion, but with lesser degree of scientific fundamentality.)

Thus, the excess of theoretic studies in science as a first stage of a crisis has already transformed into the next stage - the mutual distrust of key economic agents (researchers and investors). Obviously, the search for new economic zones for effective investments is problematic.

Now we can return to a question posed earlier: how long will the crisis last? The answer can be concretized: until scientific sector will come up with a new technological path of social development. And the longer the researchers will take to come up with this path, the longer will the crisis last, and the higher is the probability of global war.

5. Cycles of thinking rationality.  The disturbance of the business-science link is determined by the fact that both spheres are subjects to mystification. For instance, science insists on broadening of fundamental researches, defining everything as such. Business often points at its social responsibilities, which more often than not include its needs. However, in reality all this is way more complicated than it sounds. Let's look at this matter in application to science.

What's the difference between fundamental and applied science? Nowadays both concepts are shrouded. For example, mass media amuses us with messages that a black hole exists in our galaxy. And this discovery is presented as fundamental. But is it really fundamental? It is possible that this question does not even have an answer.

But what do string theory supporters do? There is a point of view that the result of their activity is the emergence of a complex net of neutron chains in the head of the scientist, which represent the connections in the physical world. Thus, there is a limited use to the theory of strings, but it only affects the researcher himself, not influencing the wide social layers of the population. Can this kind of activity be seen as fundamental science? Again, the question remains open.

At the same time, the problems of the energy sector are thrown to the periphery of the fundamental science. It is more likely to be applied science. But is it indeed so? For instance, there is still disagreement on the nature of the ball lightning. However, many scientists claim that precisely this phenomenon can be a breakthrough in the building of alternative energy system. How many physicists are concerned with studying of ball lightning nowadays? Not many. But why? Because this branch of science lies aside from the main road of fundamental research. But is it really that simple?

If we turn to history we will see that all of the great researchers of the past studied ball lightning at some point. Even Mikhail Lomonosov studied it. Later, it drew the attention of Nikola Tesla, and than Robert Wood, the father of modern optical physics paid his attention to the subject. It cant be that all these great researches studied a mere small applied problem. It is likely that the case of ball lightning shows that the division of fundamental and applied studies is no longer topical and we need to come up with a more solid science system.

However, the main question still remains unanswered: why does theoretical thought prevail over applied science?

We think that the answer is hidden within the nature of human thinking itself. The essential trait of human consciousness is its rationality; however this trait is not constant, defined once and for all. It pulses: the rational component can become stronger or weaker. The weakening of rationality can take the form of non-rationality or even irrationality. It seems that the dynamic of these pulsations is characterized by civilization and is not studied enough. The rational beginning prevails at certain stages of humanity's development. At these times, the pragmatic approach in science triumphs and the scientific studies are characterized by constructive nature with positive practical results. At some point, the pragmatism leads the consciousness in to a dead end; it comes to a point where it is necessary to rise above pressing matters and turn to theory. At this period, the abstract knowledge, that can take the form of irrational theories, which do not have anything to do with real life, is accumulated. However, at some point, the theoretical thought also finds itself in a dead end, and cannot any longer answer important questions. That's when the return to the initial pragmatism occurs.

Thus, we can talk about the existence of irregular cycles on the level of human rational thinking. The cycles of scientific research pragmatism levels can serve as an example of such system. It seems that the world has reached the peak of theoretic research and is in need for more concrete and constructive knowledge. This fact probably is the reason for modern scientific and financial crises.

6. What should be done? The considered dynamic in the world's economic system leads us to the sacramental question: what should be done and how can local and global conflicts be prevented?

A detailed answer to this question would take up a lot of space, so we will pinpoint only the main theses.

First of all, the scientific sector should be reorganized and aimed at finding real and perspective ways of production technology development. To make this possible, the structure of the sector itself should be changed; the science-business link should be activated, which could be done by finding a way for scientific sector to understand the business sector and for them to communicate in the same language. It is quite likely that some theoretical studies would have to be put on hold and the resources pumped in to some of the more pressing matters.

Secondly, the science-business dialogue mechanism should be improved. It seems that business sector should have people able to communicate with scientific sector at its disposal. Business sector should open towards science, rather than retreat into itself.

Thirdly, these transformations should be carried out as fast as it is possible. It is apparent from the above said that a crisis should not last for longer than two years, because if it does, the probability of war rises dramatically and the possibility of its prevention would be very doubtful. Therefore, all the reforms should be carried out within a year-a year and a half. A lot, if not all, would depend on how quick these reforms are undertaken.

7. Cycle or end of story.  All the above said is based on one simple hypothesis: the modern crisis is only a part of the cycle of past and future crises. Therefore, after the crisis, the humanity will continue on its way forward. However, this position is not the only one, and there is an alternative view, that this crisis would be the last one, for humanity enters the post-singular branch of history, where the exterior evolution ends, and something completely different begins.

We are now in front of a serious methodological dilemma: which version of history should we consider?

In our opinion, no 'end of history' is imminent, even though it is useless to deny the exceptionality of the present situation. It is possible to use an important analogy here. For roughly 150 years the share of government sector followed a similar pattern of growth in the whole world. However, at some point (at different time in different countries) this tendency was replaced by a cycle pattern, where the government share increases and decreases. In other words, a certain stage in government development came to an end and a new stage started, a stage associated with a more flexible mechanism of government-private economy sector relations. We imagine that something similar is going to happen after the present crisis: there may be frequent, but low-scale crises that would initiate the correction of the economic development. That is, if the world would be able to avoid war with its unpredictable consequences.

Considering the above said we can claim that liberal model of economy, which undermined its authority, would keep its position. The role of government sector, as it normally happens during crises, would increase for a certain period of time, and when the economy would stabilize, a large-scale privatization flight will start, and the whole capitalist cycle would repeat itself.

19.05.2010     Balatsky Evgeny Views: 5220 Comments: 0

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