In a critical retort to (and rephrasing of) the well-known neoliberal dictum,1 political economist Jonathan Nitzan once theorized that “inflation is always and everywhere a phenomenon of structural change”. Living as we are in the midst of the first persistent global surge in inflation that has occurred in decades, this is a hypothesis that may well be put to the test.
With massive sell-offs in stock markets and recurring plunges in the value of a number of speculative assets in the crypto sphere, the financial press is full of various prognostications on the crisis. The causes of the current wave of inflation seem to be multifaceted – from unresolved disruptions in supply chains owing to the pandemic and current geopolitical conflicts, to recent spells of enhanced government spending and cynical price-gouging by monopolistic corporations. How the world overcomes it will likely depend on many factors.
The current crisis also marks the tempering of a speculative frenzy that had pushed asset valuations to unprecedented heights, particularly in the tech space – ranging from private-market fund-raising rounds, to public stocks, to the many assets linked to blockchain technologies. This article reflects on the potential ramifications of these headwinds, particularly with respect to those dynamics linked to the digital economy.
The wealth destruction that has occurred over the course of 2022 in the tech stocks and crypto sphere has been substantial. As reports indicate, the six behemoths of Big Tech – Google (Alphabet), Apple, Facebook (Meta), Amazon, Microsoft, and Netflix – have in this period shed nearly USD 3.3 trillion collectively in value, a number greater than the yearly GDPs of many countries. At the broader index level, the S&P 500 posted its worst first half of the year since 1970, and the tech-centered Nasdaq has reported its worst start to a year ever. When it comes to crypto, things are as bad if not worse. Recent estimates show that the global market capitalization for cryptocurrencies has plummeted from USD 3 trillion to approximately USD 900 billion, a reduction of around USD 2.1 trillion. Moreover, the space has been mired in chaos in recent months. One of the ecosystem’s largest ‘stablecoins’ in Terra-Luna collapsed, major exchanges like Block Fi, Three Arrows, and Voyager are resorting to freezing transactions or closing down altogether, and a vast array of illicit activity and frauds are also being unearthed across the board.
Unpacking a Faltering Wave
To grasp the repercussions of these issues, it is worth examining the factors that have led to the rise of these assets and valuations. Undeniably, part of this has been driven by the powerful mythology of revolutionary potential around tech technologies. Tesla is a case in point. Last year, the company’s market capitalization rocketed to over USD 1 trillion, making Elon Musk the richest man alive. However, as recent critical analysis points out, this valuation is not tied to the company’s actual performance. A well-established competitor like Volkswagen produced nearly 20 times as many cars, and earned almost five times as much sales revenue as Tesla did in 2021, yet managed to net a market capitalization of only USD 167 billion. The surfeit of investment in Tesla is then only explained by its strong narrative branding about data/AI, self-driving cars, the supposed maverick-genius personality of Elon Musk, the coming hegemony of electric vehicles, and so forth.
The causes of the current wave of inflation seem to be multifaceted – from unresolved disruptions in supply chains owing to the pandemic and current geopolitical conflicts, to recent spells of enhanced government spending and cynical price-gouging by monopolistic corporations.
That said, this symbolic dimension does not work on its own. While it can capture investor imagination, it is only able to do so when there are already large sums of money in play. To account for this, we must understand two key trends underpinning this recent speculative surge.
First, there is the steep rise of retail investors (non-institutional everyday individuals participating in the stock market) that has been enabled by the rise of digitalized trading, and particularly the zero-commission model of platforms like Robinhood. The number of retail investors grew rapidly during the pandemic. Stuck at home and encouraged by success stories like the GameStop saga, they have been a significant force in markets, rallying up stocks to new levels. This investor class was also particularly susceptible to the hype around Web3 and cryptocurrencies. Many of them did not have access to adequate social security and lacked necessary stability to opt for safer investments such as housing. Thus, they bet on riskier endeavors like crypto in the hopes of quick and plentiful capital gains. Now, it is these “mom-and-pop investors” who have faced the most brutal losses from the recent meltdown, with many having lost a significant chunk of their savings. As Farwa Sial, a political economist affiliated with the University of Manchester puts it, “Admittedly, this crash has had a profound effect on individual investors; falling back down to earth from the heady yields of 2021, as well as on workers and employees in the crypto space, made redundant following the crash.”2
Second, there is the speculation-friendly environment created by central banks – particularly those in the developed world such as the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan – after the last financial crisis. This involved maintaining low interest rates and quantitative easing. The latter was an unconventional monetary policy devised after the 2008 recession that involved central banks around the world injecting (essentially, newly printed) money into the economy through the purchase of government bonds and other assets. As some economists have warned for years, and recent studies and analyses in the pandemic era serve to corroborate, this generation of huge quantities of liquidity has contributed to rising speculation in asset prices instead of stimulating productive investment.
Such policies were conducive to conditions of very low inflation and correspondingly, very low interest rates. Now, as inflation has become a widespread problem once again, and interest rates are being raised in order to counter it, it is not clear whether quantitative easing (QE) can also continue. Indeed, the federal reserve has already announced that it plans to engage in “quantitative tightening” soon, a policy aimed at essentially reversing QE by starting to pull this money out of the economy and shrinking liquidity.
Of course, much remains uncertain at this point. If there is respite from inflation, a rectification of supply chain issues, and more stability in the stock markets within the medium term, the rollout of such a policy of tightening may well be tempered. Also, many analysts predict that given its particular characteristics, the crash in areas like crypto is not likely to spill over into a wider financial crisis. Indeed, as Sial notes: “I expect digital asset markets to cool down and stabilize to 2020 levels (BTC going to around the USD 10k mark), with little effect on the wider economy. The current state seems like a relatively orderly deflation in aggregate, rather than any particular bubble bursting and resulting in wider crisis and contagion.”
Even if this is the case and we are not looking down the barrel of an acute crisis, it is evident that the conditions that enabled current market dynamics, and the hyper-investments that were fueling the breakneck pace of expansion of digital platforms has come to a halt, and will not be able to regain the same pace for quite some time.
A Shifting Financial Terrain for Platform Businesses
So, what can be said about the future of the digital economy?
For one, we could see a curtailment of the ‘growth-first’ expansionary model that has characterized the platform era, where companies endlessly burn venture capital and absorb losses for years, destroying competition and consolidating a monopoly in the process. There is already evidence that such an approach is no longer seen as entirely sustainable. VCs are saying as much to start-ups, and huge investors like Tiger Global and Softbank are scaling back. We are also witnessing hiring freezes and layoffs among the largest platforms. Even Uber, one of the great mascots of the growth-first approach, has recently changed stance and is moving towards greater profitability.
“Admittedly, this crash has had a profound effect on individual investors; falling back down to earth from the heady yields of 2021, as well as on workers and employees in the crypto space, made redundant following the crash.”
Another dynamic that may unfold is a drive towards even greater concentration within the tech space. A financially austere investment climate with a smaller circulation of capital going around, will redirect a bulk of flows towards the largest and most valuable/profitable business, thus providing the conditions for large players to further consolidate their power. Small and unproven start-ups will end up bearing the brunt of this financial drought. Additionally, when a large swathe of tech businesses find that they no longer see a path to growth or profitability in this changed economic landscape, their only option may be to become cheaply acquired by Big Tech giants. There are historical precedents for such a series of events: after the 2008 recession, for instance, it was a small set of actors that were able to capitalize on the recessionary environment, and what resulted was a rapid centralization of market power.
Apart from this, such a shift in paradigms could also have serious operational consequences for platforms in, for instance, the gig economy. Indeed, across sectors – from transport, to home-services, to beauty to food-delivery – the main selling point of these platforms was the convenience and extremely low prices they were able to offer, subsidized by mountains of venture capital. Recent reports have shown this is becoming increasingly harder to sustain, and platforms are fast having to confront the choice of either raising commissions on workers, or steeply raising prices for consumers.
Labor on the Ropes
It seems unavoidable that some part of these costs will have to be passed on to consumers, but the majority of this burden is likely to fall most severely on labor. Indeed, ignited by the energy crises and supply chain shortfalls caused by heightened demand emerging in the post-pandemic era, the effects of the 2022 inflation are ultimately being felt by the working class the most. With a surge in food production costs, as well as Russia and Ukraine being blotted out of global food systems, workers are struggling to keep up with rising food prices, which are now 75% higher than they were in 2020. Workers, particularly of the Global South, are now forced to supplement their income with gig work in order to make ends meet, all while being subject to its ever-increasing precarity. Many tech companies have already found ways to outsource vulnerabilities caused by the inflation to its lowest rung of workers. With financial pressures from multiple ends, gig workers and those looking to supplement their income through platform work are stuck in a vicious cycle – they work longer to offset their drop in real income, but continue to remain in debt, or enter new trails of debt caused by high fuel prices, a necessity for them to remain gainfully employed.
What is even more treacherous is that the conventional macroeconomic arsenal to tackle inflation often involves measures that further aggravate the worsening conditions of the working masses. Central banks across the world have responded to the inflation through a series of interest rate hikes aimed at shrinking the supply of money. A rather drastic version of this move was seen in 1979, aptly titled ‘The Volcker Shock’. This exercise of monetary tightening left interest rates at double digits, triggering mass unemployment across the world and inducing one of the worst periods of recession in history, ultimately ending inflation through brute force. This monetary policy saddled the workers with the responsibility of resolving inflation by contracting wages to limit the need for contracting profits, a path that we have begun to tread again. In the absence of a safety net of strong social protections, moving in this direction may fix inflation at the cost of creating a recession, and devastating the working class.
Possibilities for Change and Regulatory Impulses
Such a grim outlook is not preordained and there may indeed be an opportunity to capitalize on these circumstances to push for progressive reform. As Sial explains, “Capitalist economies follow a pattern whereby financial regulations tend to follow the market rather than vice-versa and financial regulatory history suggests that it is often in the aftermath of a bubble bursting or other similar crisis that the regulators deign to act.” She argues, therefore, that the devastation in the crypto markets is particularly likely to bring about significant regulatory oversight. Rodrigo Fernandez from The Centre for Research on Multinational Corporations (SOMO) also believes that the future of crypto maybe more mediated by public authorities. “One of the fallouts in the current context may be to speed up public (central bank) digital money. This digital currency will probably be able to expand more rapidly now that market participants are not interested in speculation but simply in finding a stable digital store of value experienced substantial losses,” he suggests.2
Ignited by the energy crises and supply chain shortfalls caused by heightened demand emerging in the post-pandemic era, the effects of the 2022 inflation are ultimately being felt by the working class the most.
However, beyond the crypto sphere there is room to build on top of significant efforts and achievements across the digital economy. For instance, recent years have seen gig workers’ struggles gaining ground on the legal front, these gains are now threatened as current economic trends create the conditions to make enhanced precarity a bargaining chip and subdue worker power. Those looking to challenge the status quo of Big Tech power must fight to ensure that this does not occur. In addition, it is vital that burgeoning attempts at Big Tech regulation and labor reform for the platform economy are both safeguarded and expanded, as also attempts to challenge the status quo through fostering local digital ecosystems.
The shocks of financial volatility could induce new emergencies around debt, and they could lead to measures of austerity that would unleash new political dynamics on their own. All of these developments threaten to shift focus away from the struggles in the digital economy, and provide cover for Big Tech to sabotage these regulatory efforts. In the recessionary climate that looms on the horizon, developing countries in particular, will have to weather a treacherous set of conditions. Moreover, as the recent ‘Uber files’ have shown, the lobbying apparatus of Big Tech is strong and extensive; so, protecting and building on these prior efforts will not be easy.
However, the potential exists for us to learn from the financial and economic upheavals of recent memory and work towards a different outcome. Whilst the most powerful actors are usually well-placed to make the most of a crisis, it is also then that their vulnerabilities tend to manifest. Moreover, such moments are also rare occasions when mystifying narratives can no longer be held together, and there is a rupture in the ideological consensus that opens up the space for alternative ideas and frameworks.
As responses in popular culture and discourse to both the 2008 recession and the pandemic have shown, there is a strong appetite for an imagination untethered to the confines of today’s capitalism and its variety of dogmas. Unfortunately, there are scarce avenues available for these impulses to find an outlet, and over the last decade, they have been deftly appropriated by technologists to masquerade their own profiteering as forms of subversion. Perhaps this crisis, even if transitory, will at least do some real damage to this elaborate fiction, and set free these same impulses to pursue more genuine alternatives.
1.Milton Friedman’s “Inflation is always and everywhere a monetary phenomenon”.
2.Inputs by Farwa Sial and Rodrigo Fernandez were obtained by the authors through personal correspondence via email.