Appendix

Measuring the rate of profit

by Michael Roberts

Marx’s law of profitability suggests a cyclical and a secular process combined.  The causes of both the cyclical and secular movements in profitability are broadly two-fold.  The first is driven by the change in the organic composition of capital.  This change is brought about through crisis and the destruction of the value of accumulated capital.

The second is driven by the change in the share of unproductive to productive labour and a long term tendency for the organic composition of capital to rise.  A rising organic composition of capital will eventually lead to a fall in the rate of profit and vice versa.  A rising share of unproductive to productive labour will lead to a fall in the rate of profit and vice versa[i].

This is displayed by the following graphics, measured by both current and historic costs.  In the first graphic, the secular decline in profitability is exposed, whichever way you measure it.  The cyclical movement in profitability is revealed clearly in the second graphic (measured by replacement or current costs) and its inverse relationship with the organic composition of capital. 

                       

 

The cause of a crisis like the Great Recession must lie with the key laws of motion of capitalism.  The most important law of motion of capitalism, Marx argued, was the law of the tendency of the rate of profit to fall.  So it must be relevant to a Marxist explanation.

Marx was clear on what his definition of the rate of profit (ROP) was – the general or overall rate of profit in an economy was the surplus value generated by the labour force divided by the cost of employing that labour force and the cost of physical or tangible capital:  P = S/C +V, where P is the rate of profit; S is surplus value; C is constant capital (means of production) and V is the cost of the labour power.

Marx is clear that the ROP applies to the whole economy.  It is a general rate of profit derived from the total surplus value produced in an economy as a ratio to the total costs of capitalist production.  All that surplus is produced by the labour power of workers employed in the ‘productive’ capitalist sectors of production.  But some of that value is also transferred to unproductive sectors in the form of wages and profits and to non-capitalist sectors in the form of wages and taxes. 

So the rate of profit is the total surplus value divided by total value of labour in all sectors and the cost of fixed and circulating assets in the capitalist sector.  That means the fixed and circulating capital in the non-capitalist sector are not counted in the denominator for calculating the ROP.  But the wages are.

Profit as a category applies to the capitalist sector of the economy.  Wages as a category applies to the non-capitalist sector too.   The value measured in the non-capitalist sector has been transferred from the capitalist sector through taxation, sales of non-capitalist production to the capitalist sector and through the raising of debt.

There are many ways of measuring a rate of profit.  Take constant capital.  This is fixed assets of capitalist production plus raw materials used in the production process (circulating capital).  In measuring the rate of profit, we must therefore exclude the residential assets (homes) of households and the assets of government and other non-profit activities. 

A capitalist economy can be divided between a productive and unproductive sector.  The productive sector (goods producing, transport and communications) creates all the value and surplus value.  The unproductive sector (commercial trading, real estate, financial services) appropriates some of that value.

Then you could just look at the business sector of the capitalist economy for all parts of Marx’s ROP formula and exclude the wages of public sector workers.  You could narrow it further and exclude the wages of unproductive workers within the productive sector (supervisors, marketing staff etc).  You can measure constant capital in current costs or in historic costs.   And you can measure profit before or after tax. 

In my view, the simplest is the best.  My graphic for the US economy follows a simple formula.  S = net national product (that’s GDP less depreciation) less v (employee compensation); C = net fixed assets (either on an historic or current cost basis); and v = employee compensation i.e. wages plus benefits.  My measure of value is for the whole economy and not just for the corporate sector (which would exclude employee costs or the product appropriated by government from the private sector through taxation).  It also includes the value and profits appropriated by the financial sector, even though it is not productive in the Marxist sense.  My measure of constant capital is for the capitalist sector only and so excludes household investment in homes and government investment.

In one way, it does not seem to matter how you measure the Marxist rate of profit.  All measures show that for the US economy, the largest capitalist economy with 25% of annual world GDP and twice as large as the next largest capitalist economy, there has been a secular trend downwards in the rate of profit for any period in which we have data.  And this is correlated with a trend upwards in the organic composition of capital, suggesting that Marx’s most important law of motion of capitalism, namely the tendency of the rate of profit to fall as the organic composition capital rises, is confirmed by the evidence.

 


[i] See Roberts-The Great Recession, chapter 7. We completely agree with Michael Roberts on this, and we have commented on it elsewhere. (See, for instance, Mick Brooks-Productive and unproductive labour.)There is little discussion of the difference between productive and unproductive labour or the productive sectors of the capitalist economy (those that produce surplus value) and the unproductive sectors in the text. That is because the book is concerned with the capitalist cycle as it was manifested in the Great Recession. Secular trends in capitalism are only dealt with incidentally. (MB)

 

 

 

 

 

 

 

 

 

 

 

Glossary

This is a quick reference guide to Marxist terminology and other technical terms.

Absolute surplus value: the surplus value produced by prolongation of the working day.

Abstract labour: labour from the general pool of labour power available to any society. Abstract labour is the substance of value.

Accumulation of capital: once surplus value has been produced and realised, the capitalist can either spend it on personal consumption or reinvest it to increase the scale of production. The latter is called accumulation.

BRICs: Brazil, Russia, India and China.  Large, fast growing emerging economies.

Constant capital: that part of the capital laid out by the capitalist which consists of machinery, raw materials, and everything else but labour power. Constant capital passes its value unchanged to the final product.

Deflation: a situation when prices are falling generally. This is an indication of severe economic difficulties and can become a trap.

Destruction of capital: the physical destruction of capital or destruction of capital values during a slump, in addition to the ongoing devaluation of capital. This lowers the organic composition of capital and prepares the conditions for a new boom in time.

Devaluation of capital (moral depreciation): the cheapening of existing constant capital because of rises in productivity in the capital goods sector and falls in the prices of capital goods. This lowers the organic composition of capital.

Disproportion crisis: view that capitalist crisis occurs because of the failure of the capitalist system to produce use values in the correct proportions for reproduction to take place.

Exchange value: commodities have to have a common property in order to be compared and exchanged with one another. According to Marx this common property is that they are products of abstract labour.

Exploitation: the process of extracting surplus labour (unpaid labour) in addition to labour necessary to maintain the exploited class (paid labour).

Fictitious capital: paper claims on a share of the surplus value, such as a share certificate. To be contrasted with real capital, real values incorporated in the means of production such as a car plant, ownership of which also entitles the capitalist to exploit the workers.

Financialisation thesis: advocates the view that financialisation represents a whole new phase of capitalist development and the cause of the Great Recession.

Fiscal policy: a policy instrument intended to influence the level of economic activity or prices in a capitalist economy. Fiscal policy usually consists of government spending and taxing decisions, which may involve the government running a deficit or a surplus on its budget.

Fixed exchange rate: the situation where a government fixes the value of its currency (and therefore the exchange rate of imports and exports) against another currency  or gold. The government may occasionally devalue or revalue its currency. Alternatively the government may abandon the national currency altogether. The Euro is an example of the latter policy.

Floating exchange rate: the situation where a government allows market forces to set the value of its currency against other currencies, so that it can fluctuate daily. The national currency may appreciate or depreciate. The government may try to influence the exchange rate, for instance by manipulating interest rates. Sterling is currently on a floating exchange rate.

Gross Domestic Product (GDP): the total value of new goods and services produced in a country over a period of time, usually a year. National income is often used as an equivalent expression in this book.

Inflation: a general rise in prices. The rate of inflation is the rate at which prices are rising. Inflation is only referred to incidentally in this book.

Labour power: the capacity to work. The workers are paid for their subsistence, not for the value of the labour they perform. The capitalist buys a capacity, not a predefined lump of work. How much he gets out of that capacity is up to him. The workers are exploited because the value of the labour they perform, the use value of labour power, is different from the value of their labour power.

Monetary policy: a policy instrument intended to influence the level of economic activity or prices in a capitalist economy. Monetary policy usually consists of attempting to control interest rates or the money supply.

Necessary labour time: the time the workers spend producing the value of the elements of their own subsistence. After that they are performing surplus (unpaid) labour. Then they are being exploited.

Organic composition of capital: the relative proportion of the price of dead labour (constant capital) to living labour (variable capital) employed in the production process. The formula for this is C/V.

Overaccumulation: the overproduction of capital.

Overproduction: the form of appearance of capitalist crisis. The capitalists are unable to sell the commodities produced at a price that will realise the surplus value congealed within them. By contrast all previous economic crises have taken the form of famines, physical shortages of the means of subsistence.

Profit share: the share of national income that goes to profit. It is assumed that the rest goes to wages, so the wages share is inversely related to the profit share, if the national income is just divided into those two classes of revenue. Profit share should be carefully distinguished from the rate of profit, which is calculated by dividing the amount of profit by the capital invested.

Rate of profit: surplus value divided by the constant capital and variable capital laid out by the capitalist. The formula for this is S/(C + V). Note that, in contrast to the value of a commodity, the rate of profit is calculated on the whole of the value of constant capital laid out, whether used up or not.

Relative surplus value: the surplus value arising from reducing the necessary labour time, and thus from increasing the time the workers produce surplus value. This is done by raising the productivity of labour.

Reproduction of capital: when a capitalist has successfully extracted surplus value from his workforce and realised it, he needs to find use values in the correct proportions in the market to begin the cycle of production again. Since capitalism is an unplanned system, this is not guaranteed to happen.

Socially necessary labour time: this determines the value of a commodity. It is the amount of labour required on average to produce an article under the normal conditions of production, and with the average degree of skill and intensity of labour prevalent at the time.

Surplus value: the surplus extracted from the exploited class, the working class, under capitalism. After the workers have produced values that go to pay for their subsistence, necessary labour, they perform unpaid labour for the capitalist class.

Underconsumptionism: view that capitalist crisis occurs because the working class are not paid enough to buy all the values they produce

Use value: a useful object. Being a use value is a precondition for a commodity, but is not a determinant of its value. A use value has to be useful to someone or nobody will buy it. Different commodities have different use values which are incommensurable.

Value of a commodity: this consists of the constant capital that passes its value to the final product, the capitalist’s outlay on wages and the surplus value generated in production. The value is thus resolved into C + V + S.

Variable capital: that part of the capital laid out by the capitalist on labour power, which goes to pay the workers’ wages. It is called variable capital because it potentially yields the capitalist surplus value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

 

Anderson-Is China export-led?, http://www.allroadsleadtochina.com/reports/prc_270907.pdf

Armstrong, Glyn and Harrison-Capitalism since 1945, Blackwell 1991

Brenner-The boom and the bubble: the US in the world economy, Verso Books 2002

Brenner-The economics of global turbulence, New Left Review no. 229 May/June 1998

Brenner-The economics of global turbulence, Verso Books 2nd 2006

Brenner-What is good for Goldman Sachs is good for America, May 2009 Prologue to the Spanish edition of The economics of global turbulence, http://escholarship.org/uc/item/0sg0782h

Brooks-1929 ­­— can in happen again?, http://www.marxist.com/1929-can-it-happen-again.htm

Brooks-Productive and unproductive labour, http://www.marxist.com/unproductive-labour1981.htm

Brooks-Rate of profit and capitalist crisis, http://www.marxist.com/brenner-rate-profit-capitalist-crisis150403.htm

Brooks-The Marxist theory of crisis, http://www.socialist.net/marxist-theory-crisis.htm

Buchanan-Commentary on the minimum wage, Wall Street Journal, 25.04.96

Buiter et al.-Debt of nations, http://www.nber.org/~wbuiter/DoN.pdf

Callinicos-Bonfire of illusions, Polity Press 2010

Clement-Interview with David Card, The Region, December 2006

Cassidy-How markets fail, Penguin Books 2009

Dow-Major recessions, Oxford 1998

Economakis, Anastasiadis and Markaki-An empirical investigation on the US economic performance from 1929 to 2008, http://www.informaworld.com/smpp/cont

Engels-Anti-Duhring, Foreign Languages Publishing House, Moscow 1959

Engels-The housing question, Progress Publishers 1970

Engels-The origin of the family, private property and the state, Progress Publishers 1968

Epstein (ed)-Financialization and the world economy, Introduction, Edward Elgar 2005

Fama interviewed by John Cassidy, http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html

Foster-The financialization of accumulation, Monthly Review, October 2010

Foster and Magdoff-The great financial crisis, Monthly Review Press 2008

Fox-Is the market rational?, Fortune 09.12.02, http://money.cnn.com/magazines/fortune/fortune_archive/2002/12/09/333473/index.htm

Freeman-What makes the US profit rate fall?, http://mpra.ub.uni-muenchen.de/14147/

Froud, Moran, Nilsson and Williams-Opportunity lost, in Socialist Register 2011, Merlin Press 2010

Glyn and Sutcliffe-British capitalism, workers and the profits squeeze, Penguin Books 1972

Glyn-Capitalism unleashed, Oxford University Press 2006

Grant-Will there be a slump?, http://www.tedgrant.org/archive/grant/1960/slump.htm

Haldane- Rethinking the financial network, http://www.bankofengland.co.uk/publications/speeches/2009/speech386.pdf

Haldane-The $100 billion question, http://www.bankofengland.co.uk/publications/speeches/2010/speech433.pdf

Harman-Zombie capitalism, Bookmarks 2009

Harvey-The enigma of capital, Profile Books 2010

Hearse-Socialists and the capitalist recession, Introduction, Resistance Books 2009

Hilferding-Finance capital, Routledge and Kegan Paul 1981

Husson-Financial crisis or crisis of capitalism?, http://www.oid-ido.org/imprimer.php3?id_article=1148

Husson-Les coûts historiques d’Andrew Kliman, http://www.npa2009.org/content/les-co%C3%BBts-historiques-d%E2%80%99andrew-kliman-par-michel-husson-d%C3%A9cembre-2009

Husson-The debate on the rate of profit, http://www.internationalviewpoint.org/spip.php?article1894

Hutton-Them and us, Little, Brown, 2010

Itoh and Lapavitsas-Political economy of money and finance, Macmillan 1999

Kemp-The Climax of capitalism, Longman, 1990

Kindleberger-Manias, panics and crashes, Wiley 3rd 1996

Kindleberger-The world in depression 1929-1939, Penguin Books 1987

Kliman-A crisis of capitalism, http://www.marxisthumanistinitiative.org/cc2010/andrew-kliman

Kliman- Master of words, http://www.marxisthumanistinitiative.org/economic-crisis/reply-to-michel-husson-on-the-character-of-the-latest-economic-crisis.html

Kliman-Reclaiming Marx’s ‘Capital,’ Lexington Books 2007

Kliman-The persistent fall in profitability underlying the current crisis: new temporalist evidence, http://akliman.squarespace.com/persistent-fall/

Lapavitsas-Financialisation and capitalist accumulation: structural accounts of the crisis of 2007-9, http://www.researchonmoneyandfinance.org/media/papers/RMF-16-Lapavitsas.pdf

Lenin-Imperialism, the highest stage of capitalism, Progress Publishers 1966

Lipsey-An introduction to positive economics, Weidenfeld and Nicholson 7th 1989

McNally-Global slump: the economics and politics of crisis and resistance, Merlin Press 2011

Maddison- Contours of the World Economy 1-2030 AD, Oxford 2007

Marx-A contribution to the critique of political economy, Lawrence and Wishart 1971

Marx-Grundrisse, Penguin Books 1973

Marx-Capital Volume I, Penguin Books 1976

Marx-Capital Volume II, Penguin Books 1978

Marx-Capital Volume III, Penguin Books 1981

Marx-Theories of surplus value Volume II, Lawrence and Wishart 1969

Marx-Theories of surplus value Volume III, Lawrence and Wishart 1972

Marx and Engels-Communist manifesto, Merlin Press 1998

Marx-Engels Collected Works Volume 33, Lawrence and Wishart 1991

Marx-Engels Selected Correspondence, Progress Publishers 1965

Mason – Meltdown, Verso 2010

Minsky-Stabilizing an unstable economy, McGraw-Hill 2008

Moseley-The long trend of profit, http://www.workersliberty.org/story/2008/03/19/marxists-capitalist-crisis-1-fred-moseley-long-trends-profit

PerelmanRailroading economics, Monthly Review Press 2006

Perelman-The invisible handcuffs of capitalism, Monthly Review Press, 2011

Preobrazhensky-From N.E.P. to socialism, New Park Publications 1973

Reinhart and Reinhart-After the fall, http://www.kansascityfed.org/publicat/sympos/2010/2010-08-17-reinhart.pdf

Reinhart and Rogoff- This time is different, Princeton 2009

Roberts-The Great Recession, 2009

Michael Roberts’ blog, http://thenextrecession.wordpress.com/

Saad-Filho-Crisis in neoliberalism or crisis of neoliberalism, in Socialist Register 2011, Merlin Press 2010

Sanders-A real jaw dropper at the Federal Reserve, http://www.huffingtonpost.com/rep-bernie-sanders/a-real-jaw-dropper-at-the_b_791091.html

Saul-The motor industry in Britain to 1914, Business History 5

Schmitz-The growth of big business in the United States and Western Europe, 1850-1939, Macmillan 1993

Shilling-Irrational exuberance, Broadway Books 2000

Shilling-The age of deleveraging, Wiley 2011

Sinclair-The Flivver King, Charles H. Kerr Publishing Company 1984

Smith-Wealth of nations, http://www.econlib.org/library/Smith/smWN1.html#B.I

Soros-The crash of 2008 and what it means, Public Affairs 2009

Stiglitz-Freefall, Penguin 2010

Temin – Did monetary forces cause the great depression?, Norton 1976

Trotsky-History of the Russian Revolution Volume One, Sphere Books 1967

Turner-No way to run an economy, Pluto 2009

United Kingdom National Accounts: Blue Book 2007, Office for National Statistics

United States: Bureau of Economic Analysis, http://www.bea.gov/national/index.htm#corporate

 

 

 

 

 

 

 

 

 

Measuring the rate of profit

by Michael Roberts

Marx’s law of profitability suggests a cyclical and a secular process combined.  The causes of both the cyclical and secular movements in profitability are broadly two-fold.  The first is driven by the change in the organic composition of capital.  This change is brought about through crisis and the destruction of the value of accumulated capital.

The second is driven by the change in the share of unproductive to productive labour and a long term tendency for the organic composition of capital to rise.  A rising organic composition of capital will eventually lead to a fall in the rate of profit and vice versa.  A rising share of unproductive to productive labour will lead to a fall in the rate of profit and vice versa[i].

This is displayed by the following graphics, measured by both current and historic costs.  In the first graphic, the secular decline in profitability is exposed, whichever way you measure it.  The cyclical movement in profitability is revealed clearly in the second graphic (measured by replacement or current costs) and its inverse relationship with the organic composition of capital. 

                       

 

The cause of a crisis like the Great Recession must lie with the key laws of motion of capitalism.  The most important law of motion of capitalism, Marx argued, was the law of the tendency of the rate of profit to fall.  So it must be relevant to a Marxist explanation.

Marx was clear on what his definition of the rate of profit (ROP) was – the general or overall rate of profit in an economy was the surplus value generated by the labour force divided by the cost of employing that labour force and the cost of physical or tangible capital:  P = S/C +V, where P is the rate of profit; S is surplus value; C is constant capital (means of production) and V is the cost of the labour power.

Marx is clear that the ROP applies to the whole economy.  It is a general rate of profit derived from the total surplus value produced in an economy as a ratio to the total costs of capitalist production.  All that surplus is produced by the labour power of workers employed in the ‘productive’ capitalist sectors of production.  But some of that value is also transferred to unproductive sectors in the form of wages and profits and to non-capitalist sectors in the form of wages and taxes. 

So the rate of profit is the total surplus value divided by total value of labour in all sectors and the cost of fixed and circulating assets in the capitalist sector.  That means the fixed and circulating capital in the non-capitalist sector are not counted in the denominator for calculating the ROP.  But the wages are.

Profit as a category applies to the capitalist sector of the economy.  Wages as a category applies to the non-capitalist sector too.   The value measured in the non-capitalist sector has been transferred from the capitalist sector through taxation, sales of non-capitalist production to the capitalist sector and through the raising of debt.

There are many ways of measuring a rate of profit.  Take constant capital.  This is fixed assets of capitalist production plus raw materials used in the production process (circulating capital).  In measuring the rate of profit, we must therefore exclude the residential assets (homes) of households and the assets of government and other non-profit activities. 

A capitalist economy can be divided between a productive and unproductive sector.  The productive sector (goods producing, transport and communications) creates all the value and surplus value.  The unproductive sector (commercial trading, real estate, financial services) appropriates some of that value.

Then you could just look at the business sector of the capitalist economy for all parts of Marx’s ROP formula and exclude the wages of public sector workers.  You could narrow it further and exclude the wages of unproductive workers within the productive sector (supervisors, marketing staff etc).  You can measure constant capital in current costs or in historic costs.   And you can measure profit before or after tax. 

In my view, the simplest is the best.  My graphic for the US economy follows a simple formula.  S = net national product (that’s GDP less depreciation) less v (employee compensation); C = net fixed assets (either on an historic or current cost basis); and v = employee compensation i.e. wages plus benefits.  My measure of value is for the whole economy and not just for the corporate sector (which would exclude employee costs or the product appropriated by government from the private sector through taxation).  It also includes the value and profits appropriated by the financial sector, even though it is not productive in the Marxist sense.  My measure of constant capital is for the capitalist sector only and so excludes household investment in homes and government investment.

In one way, it does not seem to matter how you measure the Marxist rate of profit.  All measures show that for the US economy, the largest capitalist economy with 25% of annual world GDP and twice as large as the next largest capitalist economy, there has been a secular trend downwards in the rate of profit for any period in which we have data.  And this is correlated with a trend upwards in the organic composition of capital, suggesting that Marx’s most important law of motion of capitalism, namely the tendency of the rate of profit to fall as the organic composition capital rises, is confirmed by the evidence.

 


[i] See Roberts-The Great Recession, chapter 7. We completely agree with Michael Roberts on this, and we have commented on it elsewhere. (See, for instance, Mick Brooks-Productive and unproductive labour.)There is little discussion of the difference between productive and unproductive labour or the productive sectors of the capitalist economy (those that produce surplus value) and the unproductive sectors in the text. That is because the book is concerned with the capitalist cycle as it was manifested in the Great Recession. Secular trends in capitalism are only dealt with incidentally. (MB)

 

 

 

 

 

 

 

 

 

 

 

Glossary

This is a quick reference guide to Marxist terminology and other technical terms.

Absolute surplus value: the surplus value produced by prolongation of the working day.

Abstract labour: labour from the general pool of labour power available to any society. Abstract labour is the substance of value.

Accumulation of capital: once surplus value has been produced and realised, the capitalist can either spend it on personal consumption or reinvest it to increase the scale of production. The latter is called accumulation.

BRICs: Brazil, Russia, India and China.  Large, fast growing emerging economies.

Constant capital: that part of the capital laid out by the capitalist which consists of machinery, raw materials, and everything else but labour power. Constant capital passes its value unchanged to the final product.

Deflation: a situation when prices are falling generally. This is an indication of severe economic difficulties and can become a trap.

Destruction of capital: the physical destruction of capital or destruction of capital values during a slump, in addition to the ongoing devaluation of capital. This lowers the organic composition of capital and prepares the conditions for a new boom in time.

Devaluation of capital (moral depreciation): the cheapening of existing constant capital because of rises in productivity in the capital goods sector and falls in the prices of capital goods. This lowers the organic composition of capital.

Disproportion crisis: view that capitalist crisis occurs because of the failure of the capitalist system to produce use values in the correct proportions for reproduction to take place.

Exchange value: commodities have to have a common property in order to be compared and exchanged with one another. According to Marx this common property is that they are products of abstract labour.

Exploitation: the process of extracting surplus labour (unpaid labour) in addition to labour necessary to maintain the exploited class (paid labour).

Fictitious capital: paper claims on a share of the surplus value, such as a share certificate. To be contrasted with real capital, real values incorporated in the means of production such as a car plant, ownership of which also entitles the capitalist to exploit the workers.

Financialisation thesis: advocates the view that financialisation represents a whole new phase of capitalist development and the cause of the Great Recession.

Fiscal policy: a policy instrument intended to influence the level of economic activity or prices in a capitalist economy. Fiscal policy usually consists of government spending and taxing decisions, which may involve the government running a deficit or a surplus on its budget.

Fixed exchange rate: the situation where a government fixes the value of its currency (and therefore the exchange rate of imports and exports) against another currency  or gold. The government may occasionally devalue or revalue its currency. Alternatively the government may abandon the national currency altogether. The Euro is an example of the latter policy.

Floating exchange rate: the situation where a government allows market forces to set the value of its currency against other currencies, so that it can fluctuate daily. The national currency may appreciate or depreciate. The government may try to influence the exchange rate, for instance by manipulating interest rates. Sterling is currently on a floating exchange rate.

Gross Domestic Product (GDP): the total value of new goods and services produced in a country over a period of time, usually a year. National income is often used as an equivalent expression in this book.

Inflation: a general rise in prices. The rate of inflation is the rate at which prices are rising. Inflation is only referred to incidentally in this book.

Labour power: the capacity to work. The workers are paid for their subsistence, not for the value of the labour they perform. The capitalist buys a capacity, not a predefined lump of work. How much he gets out of that capacity is up to him. The workers are exploited because the value of the labour they perform, the use value of labour power, is different from the value of their labour power.

Monetary policy: a policy instrument intended to influence the level of economic activity or prices in a capitalist economy. Monetary policy usually consists of attempting to control interest rates or the money supply.

Necessary labour time: the time the workers spend producing the value of the elements of their own subsistence. After that they are performing surplus (unpaid) labour. Then they are being exploited.

Organic composition of capital: the relative proportion of the price of dead labour (constant capital) to living labour (variable capital) employed in the production process. The formula for this is C/V.

Overaccumulation: the overproduction of capital.

Overproduction: the form of appearance of capitalist crisis. The capitalists are unable to sell the commodities produced at a price that will realise the surplus value congealed within them. By contrast all previous economic crises have taken the form of famines, physical shortages of the means of subsistence.

Profit share: the share of national income that goes to profit. It is assumed that the rest goes to wages, so the wages share is inversely related to the profit share, if the national income is just divided into those two classes of revenue. Profit share should be carefully distinguished from the rate of profit, which is calculated by dividing the amount of profit by the capital invested.

Rate of profit: surplus value divided by the constant capital and variable capital laid out by the capitalist. The formula for this is S/(C + V). Note that, in contrast to the value of a commodity, the rate of profit is calculated on the whole of the value of constant capital laid out, whether used up or not.

Relative surplus value: the surplus value arising from reducing the necessary labour time, and thus from increasing the time the workers produce surplus value. This is done by raising the productivity of labour.

Reproduction of capital: when a capitalist has successfully extracted surplus value from his workforce and realised it, he needs to find use values in the correct proportions in the market to begin the cycle of production again. Since capitalism is an unplanned system, this is not guaranteed to happen.

Socially necessary labour time: this determines the value of a commodity. It is the amount of labour required on average to produce an article under the normal conditions of production, and with the average degree of skill and intensity of labour prevalent at the time.

Surplus value: the surplus extracted from the exploited class, the working class, under capitalism. After the workers have produced values that go to pay for their subsistence, necessary labour, they perform unpaid labour for the capitalist class.

Underconsumptionism: view that capitalist crisis occurs because the working class are not paid enough to buy all the values they produce

Use value: a useful object. Being a use value is a precondition for a commodity, but is not a determinant of its value. A use value has to be useful to someone or nobody will buy it. Different commodities have different use values which are incommensurable.

Value of a commodity: this consists of the constant capital that passes its value to the final product, the capitalist’s outlay on wages and the surplus value generated in production. The value is thus resolved into C + V + S.

Variable capital: that part of the capital laid out by the capitalist on labour power, which goes to pay the workers’ wages. It is called variable capital because it potentially yields the capitalist surplus value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

 

Anderson-Is China export-led?, http://www.allroadsleadtochina.com/reports/prc_270907.pdf

Armstrong, Glyn and Harrison-Capitalism since 1945, Blackwell 1991

Brenner-The boom and the bubble: the US in the world economy, Verso Books 2002

Brenner-The economics of global turbulence, New Left Review no. 229 May/June 1998

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Review by Michael Roberts

http://thenextrecession.wordpress.com/2012/08/20/capitalist-crisis-theory-and-practice/

I got a few complaints on my comments page for reporting on Sylvia’s Nasar’s book on great economists (see my post, A Grand Pursuit, 13 August 2012). Some readers reckoned that I was wasting my time discussing Nasar’s rather bizarre and jaundiced views on Marx. Well, I am not wasting my time bringing to your attention Mick Brook’s new book, Capitalist crisis – theory and practice (published by Expedia and available at Brooks’ blogsite, http://capitalistcrisis.org/). Brooks provides one of the best and most succinct accounts of the causes of the Great Recession, how it compares with previous crises and the role of finance, all based on a solid theoretical foundation. He also looks critically at the policy response of governments and economists.

Brook deals with the failure of orthodox economics to foresee or explain the Great Recession. They were caught on the hop and afterwards carried on as though there had been no crisis. None of the failed theories of mainstream economics have been disowned, confirming that mainstream theories are more apologies for, than analyses of, capitalism. Brooks argues that only a radical shift in economic thinking towards a Marxist explanation can revive the credibility of economics as science.

Brooks stands four square behind Marx’s law of profitability as the key underlying cause of capitalist crises, in opposition to the alternative explanations of underconsumption and disproportionality (see his chapter 3.7). Brooks explains that the Great Recession was triggered by the credit crunch as the capitalist mode of production is connected through the circulation of money and credit. Financial crises can spread to the rest of the capitalist economy, but only when the ‘real’ economy is weak, can they have devastating consequences.

Yes, finance is inherently unstable, as Hyman Minsky perceived, but it is the ability or otherwise to generate profit or surplus value that is the real Achilles heel of capitalism. There is a close causal connection between general profitability in a capitalist economy and the boom-slump cycle. That approach explains, not just the Great Recession but also the Great Depression, which in Brooks’ view was not the result of some ‘stock market crash’, but rooted in the weakness of the boom in the US economy of the 1920s before the crash.

The ‘financialisation’ of capitalism in the last half century has been an important long-term trend, but it is not a ‘new stage’ of capitalism that radically transforms the underlying forces in capitalist accumulation. In chapter 3, Brooks explains how capitalist accumulation takes place and why the rate of profit is the regulator for the capitalist economy as a whole. Brooks confirms the view of many other Marxist scholars that there has been a secular decline in the rate of profit since the end of world war two, even though there have cyclical upturns in the last 60 years. A declining rate of profit is the simplest and best explanation for the declining rate of accumulation that capitalist economies have experienced over the last half-century.

Brooks analyses some of the debates that we Marxist economists have had over measuring the rate of profit, including the vexed question of current and historic cost measures for fixed capital. His main conclusion is that Marx’s law of profitability, based on a rising organic composition of capital, remains confirmed. He rejects the alternative of ‘overproduction’ as an explanation of crisis. As Brooks puts it: “to simply attribute the crisis to overproduction gives no explanation as to when the crisis breaks out as it does. Overaccumulation means the overproduction of capital. That means more capital has been produced than can be used to make a profit”. p194. And it is the collapse of investment, not consumption, that is the key feature of any slump.

Brooks dismisses the policy responses of governments through either austerity or the alternative Keynesian solutions of quantitative easing, fiscal stimulus etc, as unable to turn around capitalism. Only the destruction of capital values in a significant way, either through the long process of deleveraging or through the violent intervention of war, can restore capitalist accumulation.

Brooks’ book may not offer anything startlingly new to readers of this blog and for those who follow the current debates among Marxist economists. But he does provide a rounded account of the nature of capitalist crises and the causes with all the jargon and pretensions of some stripped away. Clarity is his watchword.

 

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Happy New Year? Not likely

An update to Capitalist crisis – theory and practice by Mick Brooks

The crisis of capitalism and the Euro in 2013

The gloomy prognosis for the world economy outlined in the book (Capitalist crisis – theory and practice) has been confirmed. What we see stretching before us is an age of capitalist-imposed austerity. On the other hand revolutionary possibilities are beginning to open up on account of the unprecedented hardships being inflicted on the working class in all the main capitalist countries.

  • The crisis began in 2007 in the form of a financial crisis, called the ‘credit crunch’. In fact it was a classical crisis of capitalism.
  • By 2008, as the major capitalist powers rushed to bail out the banks at whatever the cost, output dipped and, with it, tax revenues. The inevitable outcome of increased state outlays and falling income was that governments of all political complexions ran deficits. They were spending more than they were getting in. Public debt soared. This fiscal crisis of the state was another manifestation of the crisis of capitalism.
  • The crisis then appeared next as a sovereign debt crisis, a particularly severe fiscal crisis of the weakest and most indebted capitalist governments.
  • The crisis was compounded by the existence of the Euro. The Eurozone consists of 17 nations of the European Union (EU). They have abandoned their national currencies and adopted the Euro as a single currency. Now the crisis has taken the form of a Euro crisis.

Capitalist competition produces winners and losers, among firms and between nations. Naturally the weaker capitalist countries experienced the greatest economic difficulties and ran the biggest trade deficits. These countries no longer had the option of devaluation as a short term solution to their balance of payments problem. This put pressure on the Euro.

The sovereign debt crisis was particularly acute within the peripheral countries of the Eurozone. They ran even bigger government deficits than the more successful economies as the crisis hit them harder.

In addition peripheral country banking systems were under more strain because they had borrowed from the core net exporting nations and gone into debt to pay for their imports. In effect banks in countries like Greece were being lent money by banks in countries like Germany to lend to Greeks in order to buy German products.

All these problems caused stresses to the structure of the Euro. So, within the Eurozone, the crisis was perceived as a crisis of the Euro. These difficulties have been dragging on for a long time now, and they threaten to drag the rest of the world economy back into recession. So the notion has taken hold that the faulty architecture of the Euro is the sole problem holding economic growth back in Europe and beyond.

This is completely wrong. The Euro was launched in 1999 and worked perfectly well for almost a decade despite its fundamental design flaws. The reason it seemed to work for so long was that the world economy was booming all this time. It was the Great Recession of 2008-9 that opened up the cracks in the structure of the Euro. If capitalism were crisis-free, then no doubt the Eurozone could have carried on indefinitely despite its faulty structure. It is the crisis of capitalism that threatens to lay the Euro low.

Capitalism is a system that runs on profit. At bottom the underlying cause of the Great Recession was a fall in the rate and mass of profit. US profits peaked in the third quarter of 2006, according to the US Bureau of Economic Analysis. (American economic statistics are the best in the world and the USA is still by far the most important capitalist economy.) Thereafter they fell dramatically, and had halved by the end of 2008. This is itself would have caused a crisis, even without the ‘credit crunch’. In fact the fall in profits is the underlying cause of the banking crisis, and subsequent events in the world economy are also unfolding aspects and forms of appearance of this fundamental crisis of capitalism.

The Great Recession is over. The crisis continues. The mass of profits has revived in the major capitalist economies, though the rate of profit remains generally lower than it was in 2007.There has been no new surge of investment that could propel the world economy forward. Upon the onset of recession a period of capital destruction is necessary to restore the rate of profit. But the authorities, by intervening to prop up the banks and other bankrupt capitalist institutions, have delayed that destruction of capital from taking place. Indeed they would argue that the ‘cure’ of firms going to the wall wholesale would have been worse than the disease.

As a result we have experienced, even after the Great Recession ended, a period of stagnation that Reinhart and Rogoff in their book This time is different (Princeton, 2009) and others find typical of ‘Great Depression’ crises. For Britain the present ‘recovery’ (the country dipped back into recession in 2012) is the slowest for a hundred years – worse than 1930-34, 1973-76 and 1979-82.

The Euro crisis

Since the Euro crisis has been the flashpoint of renewed recessionary pressures within the world economy for the past year or so, we concentrate on events in the Eurozone. The Euro is an example of a fixed exchange rate currency. Joining the Euro involves a commitment never to devalue. Devaluation is only ever a quick fix, since the real problem a country faces is a lack of competiveness on the part of home producers (capitalists). But this short term solution is denied to members of the Eurozone – in principle for ever.

Devaluation (a one-off reduction in the value of the currency within a system of fixed exchange rates) or depreciation (a gradual reduction within a system of floating exchange rates) gives a country a temporary competitive advantage. With devaluation or depreciation the native currency becomes cheaper and buys fewer units of foreign exchange than before; home country exports become cheaper for people living abroad, while imports are dearer in the home market. So exports should soar while imports fall.

The Euro is a currency without a nation state to back it up. Countries with their own money have two economic levers which they can try to use to manipulate the level of the currency and to influence the level of economic activity generally. These are fiscal policy (taxing and spending) and monetary policy.

Countries surrender monetary policy along with their currency when they enter the Eurozone. Emissions of Euros are determined by the European authorities, in particular by the European Central Bank (ECB). Moreover the ECB is constrained by various rules which do not restrict the operations of other central banks, such as the Bank of England or the American Federal Reserve (Fed). As was pointed out in the book, control over monetary policy does not mean that the ECB can always control the level of interest rates throughout the Eurozone.

Fiscal policy within the Eurozone is nationally determined. Nation states jealously defend their right as to how much to tax their citizens and how to spend the money. This means that countries in the Eurozone get no help when it comes to transfers from rich to poor and indebted countries.

The Euro produced a clear division between the core countries (above all Germany) and the periphery – Greece, Portugal and Ireland, but also Spain and Italy. The core countries ran trade surpluses with the periphery and lent them money – to keep on buying their exports. The periphery bought more imports than they exported and borrowed from the core countries to pay for imports from Germany and other countries.

So, if countries are unable to devalue when confronted with a balance of payments crisis, how are they supposed to adjust to improving their exports and cutting imports? The only alternative is deflation – cutting the general level of wages and prices in the country so as to improve international competitiveness. This is an extremely protracted and painful process. if it works at all, it works by using the scalpel of austerity upon the whole nation as deliberate policy.

The debt trap

During the boom years after the launch of the Euro, interest rates throughout the Eurozone did tend to converge to a level determined by the monetary policy of the ECB. Government bonds issued in Greece would pay similar ‘returns’ (interest rates) to their holders to those in Germany. This showed that ‘the markets’ (the rich people who buy these bonds and so lend money to governments) regarded both German and Greek government debt as risk free. In conventional financial analysis risk and return are what ‘investors’ weigh up when buying pieces of paper – the higher the risk, the greater the return they will demand.

As the Great Recession rolled on and state debts and deficits rose to dangerous levels, the markets began to factor in risk for the government securities of peripheral countries. They demanded a higher return for the privilege of lending to the Greek, Portuguese and other governments. As a result government debts ballooned further and the distressed countries were paying more and more of their overseas earnings just to pay the interest on the debt.

The debt trap opened up for Greece in particular, just as it has held poor countries in its vice-like grip for decades. Take the example of Egypt. Between 2000 and 2009 Egypt, a desperately poor country, paid $3.4bn more in interest to its creditors than it received from them. This was a direct transfer from poor to rich nations. Despite the fact that Egypt repaid a total of $24.6bn over this period, the debt burden grew by 15% (World Bank – World Development Indicators 1960-2008). In effect the Egyptian people were thrust by the turning of the debt screw down a deep hole from which they could not emerge unless they threw off their debt shackles by revolutionary means.

Greece now faces the prospect of having the same fate imposed upon it – the transition from a middle income to a ‘third world’ country. In thrall to debt and in need of handouts, it is being administered by the troika (the International Monetary Fund, European Commission, and European Central Bank) who in effect rule the country like conquerors. The powers that be have even demanded that Greece rewrite its constitution so as to give priority to the repayment of foreign debt. This arrogance is an echo of the classic colonial era. In 1882 British troops occupied and annexed the whole of Egypt for non-payment of debt. Rosa Luxemburg commented on this:

“It should now be clear that the transactions between European loan capital and European industrial capital are based upon relations which are extremely rational and ‘sound’ for the accumulation of capital, although they appear absurd to the casual observer because this loan capital pays for the orders from Egypt and the interest on one loan is paid out of a new loan. Stripped of all obscuring connecting links these relations consist in the simple fact that European capital has largely swallowed up the Egyptian peasant economy” (Accumulation of capital, p.438, Routledge, 1963)

This is exactly what is happening in Greece. When asked whether a cut-off of loans ordered by the troika would mean that Greek civil servants and others wouldn’t be paid, Syriza MP Panagiotis Lafazanis shrugged, commenting, “The loans basically cover interest payments.”

The case of Greece

At the time of writing the Greek people have suffered five years of falling living standards as a result of austerity policies, with a cumulative collapse of 25% of Greek national income over that period. They face an indefinite future of more cuts and hardship. The economic and political crisis in Greece remains a hot headline issue of the day. Greece’s continued membership of the Eurozone and the future of the single currency itself hangs in the balance.

The newspaper headlines scream lies at us. The first lie is that the bailout is for the benefit of the Greek people. On the contrary, the conditions imposed as part of the bailout are the cause of the people’s suffering. The European Union authorities have shown a cold hearted indifference to the plight of the Greeks. They have no interest in their welfare.

The crisis began as a banking crisis and governments all over the world intervened to bail out the banks. French and German banks in particular had incautiously bought huge sums of Greek government bonds and lent to Greek banks. Now they are in trouble. The so-called rescue of Greece is in fact a further cynical attempt to bail out these banks, the cause of so many of our woes. The banks are the real beneficiaries of the rescue.

We are told that the Greeks are lazy tax dodgers. This is racist abuse masquerading as political analysis. In fact Greek workers put in longer hours than German workers. It is the case that they are far less productive than the Germans. This is not their fault. It is because of a persistent failure by Greek capitalists to invest.

Greek workers in the public or private sector can no more avoid tax than British, German or American workers. Income tax is deducted at source. Value Added Tax is paid every time you buy something. It is true that there is a longstanding culture of Greek millionaires dodging tax. This characteristic is by no means confined to Greece. Companies like Vodafone in Britain are notorious for not paying taxes. Tax dodging is a capitalist characteristic. Greek capitalists have more opportunities to get away with it because of the weakness of the Greek state, that’s all.

So the Greek people in particular are the victims of a crisis of capitalism, not of their own over-borrowing. In the same way working class people in Britain or the USA are not responsible for the crisis (as they are sometimes accused of being) because they accepted loans in the boom years when the banks were literally hurling money at them.

Options for the future

The dilemma facing the European Union (EU) authorities posed by the crisis of the Euro can be dealt with in several ways:

Fiscal union: If the ECB were to issue bonds backed by the authority of the EU as a whole, the money raised could be transferred to any country in the Union. At present fiscal policy (how governments raise their money and what they spend it on) is determined at national level. These Eurobonds would be a big step towards fiscal union, towards turning Europe into one country. The European Union is not united. It is riven by national antagonisms. National governments will oppose any steps towards fiscal union on the grounds that it would take away their power. Fiscal union would be a mighty step towards complete political union.

Muddling along: Given the national antagonisms that have paralysed the decision-making process in the European Union, this has been the easy option so far. ‘Kicking the can down the road’ has been the wearisome cliché in the financial press. The leaders of the EU are determined to hold things together till the German elections later this year. Their thoughts are dominated by short-term trivial calculations rather than grand strategic concerns.

Break up: The single currency must proceed towards fiscal union or it will collapse at some point. At present fiscal union is politically impossible. Yet more temporary fixes are possible to prevent a break up, but it seems that some senior figures in the counsels of the EU are steeling themselves for a Greek default and possible exit from the Eurozone. The consequences of this will be discussed later.

The fiscal compact

The fiscal compact is a new European Union Treaty which has been signed by all the members of the EU apart from Britain and the Czech Republic. It is due to come into force in 2013. It commits its members to maintain a balanced budget. Member countries are allowed to run a maximum government deficit of 0.5 % of GDP and a public debt of 60% of GDP. The fiscal compact has been imposed on the EU at the behest of the German government, whose bourgeois politicians think this is the way to impose fiscal discipline upon their lax-minded partners.

The fiscal compact is insane. Public deficits ballooned open in all the countries both inside and out of the EU with the coming of the Great Recession. This did not happen just because some countries were run by politicians who were weak of will. Growing government deficits and debts were universal. Deficits grew because the inevitable effect of recession is to shrink governments’ tax revenues and force them to pay out more in unemployment pay and other benefits. This is quite apart from the need they felt to bail out the banks at all costs. So governments of all political persuasions began to run deficits and clock up bigger debts. The injunction from the EU not to let it happen is like King Cnut demanding that the waves roll back at his command.

Bizarrely, policing the policy on deficits under the fiscal compact has been left to the European Court of Justice. It will have the power to fine countries that exceed the guidelines. We ask: what will the imposition of fines on countries that are running a deficit on their government finances do to those deficits?

The fiscal compact is a classic policy of neoliberalism. It seeks to place the burden of the crisis onto the shoulders of the working class by attacking wages and the social wage aspect of government spending. So in Britain the Trident nuclear submarine programme is not under threat! The compact commits the EU as a whole to a vicious policy of imposed austerity when it is becoming increasingly obvious that austerity will not serve to right the European economy. It in effect assumes that capitalism always works perfectly (when that is manifestly not the case), and that problems only come about when governments interfere in the smooth workings of the free market.

Naturally this proposition has come under increasing question as years of austerity seem to stretch unendingly before us. Austerity policies are also being resisted in practice more and more by the working class all over the continent.

Angela Merkel and the grey bureaucrats in the top echelons of the EU reject this resistance with contempt. What has democracy got to do with it, they ask? How can ordinary people understand the wonderful complexities of the market economy? The EU ‘doctors’ alone understand that never-ending austerity, mass unemployment and shrinking living standards are all good for us!

All the same, weariness with austerity is growing all over the European Union and beyond. A mood of profound questioning and opposition is in preparation. Millions of workers recognise that austerity is not working to restore prosperity. On the contrary it is spreading misery. They are looking for an alternative.

‘Whatever it takes’

Though the normal reaction to the crisis within the EU has been institutional paralysis, the European Central Bank under its new President Mario Draghi has made attempts to palliate the problem. Draghi realised that something must be done, In July he declared, “The ECB is ready to do whatever it takes to save the Euro and, believe me, it will be enough.” His tone of determination contrasted dramatically with the interminable procrastination of the EU authorities up to that point. For the first time the world heard the plop of fingers being pulled out. Stock markets rallied after his speech and for a time interest rates on peripheral country bonds dropped markedly. The Financial Times proclaimed him person of the year for 2012. So what has he achieved?

The case for Eurobonds

The Greek government has to offer usurious returns on the bonds it issues because the ‘bond vigilantes’ claim there is a danger of default and demand ever-higher rates of return. One way of countering the speculators would be to issue a Eurobond with the finances of the entire European Union mobilised behind it. At present (December 2012) the German government borrows at about 1.3%, while the Italians have to pay 4.6%, and the Spanish state 5.7%. The Greeks have been paying even more outrageous and punitive rates for years now (now less than 12%, but earlier in 2012 they stood at 18%). The Eurobonds would be a risk-free investment with AAA rating. Interest paid would be low, at German levels.

So what’s the problem? The problem is the whole nature of the EU as a multinational capitalist institution. Who would determine how many Eurobonds an indebted country like Greece could issue? The risk is that the periphery would go on a spending spree. This is what the German capitalists are afraid of. So they have imposed their veto. Eurobonds are not going to happen. This is yet another example of how national antagonisms can paralyse the decision-making process within the EU.

Outright Monetary Transactions (OMTs)

In September 2012 Draghi launched a policy called Outright Monetary Transactions (OMTs). The idea is for the ECB to issue Euros in order to buy national bonds that are coming towards maturity. The intention was to cut the usurious interest rates which prevented peripheral governments from ever paying off their debts.

Governments issue the bonds as a way of borrowing money to pay their national debt. They issue the bonds at a discount, which is effectively interest paid on the loan. The bigger the discount on the face value of the bond, the higher is the effective interest rate. As we saw earlier interest rates paid by different countries within the Eurozone have moved wildly out of kilter and for peripheral countries have become an impossible burden.

Operating on basic supply and demand analysis, Draghi reckoned that if the ECB bought peripheral country state bonds, the increased demand would raise bond prices and so reduce the effective interest rate paid. Draghi insists that OMTs are not the same as the Quantitative Easing (QE) practised by the US Fed and the Bank of England, whose aim is to print money and (they hope) purchasing power. Draghi claims that OMTs would not inject liquidity into the Eurozone economy. The ECB would not be printing money.

There was just one problem – the same problem that has stymied successive co-operative attempts to get out of the crisis. National antagonisms, and particularly the dominant role of Germany, meant that the ‘lucky’ country getting this form of relief would have to agree to ‘conditionality’. Speaking in plain English, the country in question would have to sign up to harsher austerity policies that would make economic recovery impossible.

The right wing PP Spanish government found itself in paying exorbitant rates on its borrowing in the second half of 2012. But it did not apply for OMTs, partly because it would involve a national humiliation, but mainly because the further austerity demanded as the price could be the straw that broke the camel’s back. OMT remains a shot in Draghi’s locker but it has never actually been tried.

The long term refinancing operation (LTRO)

Draghi found he could also lend to European banks in case of emergency. Whereas OMTs were intended to bail out indebted governments, this scheme was intended to save the banks.

He launched the long term refinancing operation (LTRO), a European-wide expansionary monetary policy. LTRO was quite dramatic in its impact. The ECB succeeded in lending a trillion Euros to commercial banks in just three months! The ECB lent at a very low rate of interest – 1%. Then the European banks bought national government bonds with the loan. In the case of Spanish and Italian banks they got a return of more than 5%. This was entirely risk free. It was money for old rope. But there were dangers to the wider economy, even if the banks were saved for the time being. In effect insolvent banks were given the money to lend to insolvent nation states.

The effect of banks entering the market and buying government securities was to reduce the interest rates that the governments had to offer in order to borrow money to finance their debts. Spanish and Italian borrowing was getting perilously close to a danger level. Above an interest rate of about 7%, more and more government revenue is swallowed up in servicing the state debt, and the country enters the sort of death spiral we see so clearly in Greece.

Unfortunately the effect of LTRO was small and short lived. As soon as it was abandoned Spanish and Italian government interest rates spiked up again. Why was the policy abandoned? First LTRO seemed to be pouring money into a bottomless pit. Secondly national antagonisms to the policy, particularly the objections of the German Bundesbank, caused its withdrawal.

But the fundamental reason why LTRO didn’t work was because the banks were busy deleveraging, winding down loans and rebuilding their assets. Martin Wolf reports (Financial Times 25.04.12) that, “58 large banks based in the European Union could shrink their balance sheet by as much as 2trn Euros by the end of 2013, or almost 7% of total assets.” But households have been responding to the crisis in exactly the same way. If everyone saves and nobody spends, the economy can enter into a deflationary spiral.

The banks behaved as they did because they were privately owned. Even state-supported banks were permitted to cock a snook at the urgent needs of the population for credit. Only public ownership and control of the banks run as a public service under a government determined to build a better, socialist society could change that.

Banking Union

Another attempt to resolve the crisis was the first tentative step towards a banking union. This is conceived as proceeding in three stages.

  • First it is necessary to set up a common supervisor operating out of the ECB. This is the easy bit. The supervisor will develop a single rule book for all the big banks in Europe, covering such issues as the amount of capital they have to hold to be regarded as safe, and the procedure to adopt if they need to be bailed out.
  • Proceeding from the single rule book the leaders need to develop a common resolution authority. In the event of a banking crash in one country, the full force of EU finance will be mobilised to stop the infection from spreading. This involves other countries reaching into their pockets. It hits the same iceberg as all the other proposals – the determination of nation states to hold on to their power and their unwillingness to bail out trading partners they do not trust.
  • Finally the authorities need to develop a European-wide deposit guarantee scheme, aimed at preventing bank runs, such as brought down Northern Rock in 2007-8. At present deposit guaranteed schemes are administered nationally. Once again the fearful prospect is posed of one country paying to bail out another. Even if that is really in their common interests, each nation state will look to everyone else to save the day first.

So a banking union, like a full fiscal union, will mean a transfer of funds from one country to another. Potential payers were bound to protest. The opposition of the German Bundesbank in particular means that only about 100-200 of the biggest banks (those worth more than 30bn Euros) out of a total of 6,000 banks in the Eurozone will be covered by the accord. Germany, which has many small regional banks, would be largely outside the regulatory framework, while the big French banks would be caught by the rules.

All the measures intended to return the EU to economic health are stymied by a permanent feature of the European Union; the inability of capitalism to overcome the constriction of the nation state that it has outgrown. In fact, for all his bombast, Draghi has been unable has been unable to shake the EU out of its torpor. As Wolfgang Munchau commented (Financial Times 17.12.12), “The role of the OMT and the banking union is to keep up appearances.”

The European Stability Mechanism

The European authorities belatedly realised that the bond markets could bring down the entire European ‘project’. They needed a ‘big bazooka’, an enormous rescue fund to convince speculators they could not win against the Euro, and to bail out member states and their banks if in trouble. The alternative would be for the forest fire to spread throughout the EU and destabilise the entire world economy. The European Stability Mechanism (ESM) is to come into operation in 2013. Applicants for a bailout have to go to the troika, the same body that has placed Greece on a bed of nails for the past four years. The troika descends upon debtor nations and reads them homilies about cutting their coat according to their cloth. In practice this means imposing the burden of adjustment upon the working population. The troika imposes savage cuts as the cost of its ‘support’.

The usual unedifying quarrels between the warring brothers within the EU meant that the ‘firewall’ of the ESM was a long way from being fireproof. The funds it can lay its hands on in time of difficulties have been whittled down to 500bn Euros, at the behest of the Bundesbank. That would definitely not be enough to rescue Spain or Italy from the bond markets. The front page headline in the Financial Times on 15.05.12, ‘Faith fades in euro firewall’, says it all. So far from being a big bazooka, the ESM is just a pea shooter.

The failure of austerity

It is quite clear that the policy of giving the overriding priority to cutting the deficit at all costs has failed. When we say that it has failed, we mean that it is not restoring the capitalist system to sustained growth, full employment and ever-increasing prosperity.

That is not the ‘aim’ of capitalism: is not the maximisation of happiness, or even of Gross Domestic product (GDP); it is the maximisation of profit.  Since capitalism is a system where production is for profit, the purpose of austerity policies is to cut the wages and social wage of the working class in order to boost profits, not to return us all to full employment and prosperity.

But, even in its own terms, the effect of austerity is contradictory. To take the case of the UK, more than 380,000 public sector jobs have already gone. Infrastructure spending has collapsed by 25% over the past year. But government borrowing continues to rise and, if the deficit has narrowed, the reason is for that is tax rises, not cuts. In fact more than 80% of the intended cuts have not been implemented yet, though already the working population groans under the burdens imposed upon it by the Tory-led government. There is no end in sight.

What capitalists need in a crisis are profitable markets. Cutting the market in a crisis in order to raise profits can push capitalist firms teetering on the edge into bankruptcy. This can be seen most clearly in the case of Greece. As the economy collapses, firms go bust and stop paying taxes. Since the government is losing revenues it can’t pay its bills and now has mounting unpaid debts with private contractors. So attempts to cut the deficit can actually serve to keep it at an unsustainable level. Greece had a million companies in 2009. A quarter have since closed while a further 300,000 don’t pay their workers on time. The Greek economy is spiralling down into a chasm.

How can a nation escape from the debt trap?  The huge wartime debts after the Second World War of ‘victor’ countries such as Britain were eventually scaled down. Britain emerged from the War with a national debt of 250% of GDP.  But it was economic growth that allowed the debt to be paid down over time. This was not because governments after 1945 consciously decided to go for growth, rather than paying off the deficit, as some critics of austerity argue should be done today. On the contrary the state can do little to influence, let alone determine, the rate of growth in a capitalist economy. The post-War boom was not planned and implemented by governments. It happened because the laws that govern the accumulation of capital were functioning in a uniquely favourable environment. The golden age of 1948-73 will never recur. The economic perspectives before us are unremittingly bleak. So the problem of government deficits will not just disappear.

In the case of Greece, the Financial Times leader (22.02.12) argued: “Greece’s deficit reduction is off track largely because of a depression caused in part by the global slowdown and mostly by the programme itself.” Austerity may be self-defeating; but that doesn’t mean the capitalist class will automatically abandon the policy. It may not ‘work’, but they will persist with the policy unless they are knocked back by the struggles of the working class. It is their natural reaction, the only way they can unload the burden of the crisis on to the workers.

An extreme illustration of the pressures of an austerity programme is provided by the case of Portugal. David Bencek, analyst at the Kiel Institute for the World Economy, estimates that Portugal needs to run a primary surplus (a surplus that doesn’t include interest payments) on its budget of 10% of GDP for the next few years to reduce its debt to manageable levels. Clearly that is an impossible burden to bear.

For Portugal, Ireland, Greece and Spain the ratio of debt to GDP has increased every year since 2008, despite desperate attempts to economise. This shows that austerity is actually a tourniquet that cuts off the life flow of blood round an economy. Greece has cut and cut yet it still runs a deficit on government spending. It is like the labour of Sisyphus, condemned forever by the gods to roll a huge boulder up a hill, only to see it slipping down again after all his efforts.

Greece’s plight in 2013

In Greece yet another bailout was negotiated in 2012. As usual it imposed further hardships upon the Greek people. And yet the bailout was correctly billed as the biggest debt default in history. By the time of the latest bailout the Greek public deficit had ballooned to 166% of Gross Domestic Product (GDP). The plan was to reduce it to 120% by 2020 (still a crushing burden)! Thirty billion Euros in new money was to come to the rescue.

The vast majority of this cash went to rescue the European banking system, not the Greek people. Private holdings of Greek assets by foreign banks were transferred to the ownership of international financial institutions. The bailout has allowed private banks in Europe to wriggle out of some of the obligations they took on when they lent to Greece. Hardly any of this huge injection of cash went to ordinary people in the form of wages and benefits. Instead their living standards got a further squeeze.

But for the first time some of Greece’s debt was actually to be written off.  There was a write down of billions of Euros in securities held by Greek and European banks (the actual amount is subject to haggling).

This had a paradoxical effect on the Greek economy. Though it reduced the intolerable debt burden, it also wiped out elements of Greek workers’ pension schemes and assets held in Greek banks (both of which were invested in Greek securities). This leaves Greek banks on life support. Their vaults are now stuffed with ‘assets’ in the form of Greek government debt, which could prove worthless.

This was an orderly default managed by the powers that be as the least worst option in the situation. We advocate a unilateral default by the Greek people. Let us be quite clear; that would challenge the power of capitalism that is grinding down working class living standards in Greece and all over the world. The capitalist class knows that. It will respond accordingly.

European banks have continued to withdraw their funds from Greek banks since the bailout. In this uncertain atmosphere Greek citizens also began to withdraw their cash and hoard it. Billions of Euros have disappeared from the vaults of Greek banks over the past year. This is a slow-burning run on the banks (called a ‘bank jog’). Panic can feed on itself. As Mervyn King, the governor of the Bank of England noted during the Northern Rock crisis in the UK in 2007, “Once a bank run has started, it is rational to join in.” The Greek banks are insolvent. Foreign banks have been running down their holdings in Greek financial institutions for months, making the situation worse. Any shock can push the banking system over the edge.

In June the parties that supinely supported the Greek austerity programme imposed by the terms of the bailout were knocked back in the elections. The real victor was the left wing coalition Syriza, committed to a clear anti-austerity programme involving renegotiation, and if necessary repudiation of the debt. From being a fringe party with less than 5% of the vote in 2009, Syriza gained 27% support. They were just pipped at the post by the right wing New Dimokratia, which went on to form a government committed to impose yet more austerity.

The 2012 bailout solved nothing. Greece remains on the critical list. Inevitably, resistance is growing.

Spain next?

Spain seems to be next in the speculators’ cross hairs. Though it is true that Spanish banks were quite heavily regulated (they were not permitted to dabble in dodgy American derivatives for instance), that did not stop the debacle. The reason is not far to seek. Capitalism is an unplanned system. It is quite obvious now, as we survey the carcases of empty unsold and half-built homes all over Spain, that the crazy housebuilding boom was unsustainable. Yet all the banks knew at the time was that this was a boom they had to be part of. House prices are still falling in Spain, down 21.7% from the 2007 peak, and experts think they have a long way further to drop.  More than half Spain’s young people are unemployed.

Also Spain has a federal constitution which gives wide powers to regional governments. This was created as a concession to national minorities and depressed regions after the demise of Franco’s highly centralised fascist regime. These regional governments are not going to automatically obey instructions from a right wing PP government in Madrid that they oppose to rein in their spending. They will do their best to look after their own, and, in these depressed times, that means running budget deficits, even if and especially if the regions are effectively bankrupt.

Spain is said to have a two tier banking system. Some Spanish banks, such as Santander, are internationally known. (So was RBS; so was Lehman Brothers of course.) But the banks most in peril are probably the regional cajas (savings banks), which are tied up with local government and, in many cases, with the construction industry. For instance Bankia was a conglomerate formed from seven cajas and floated on the Spanish stock exchange in 2010. With losses of an estimated 120bn Euros (its finances are murky) it had to be rescued by the Spanish government in the first half of 2012, for fear of wider repercussions from its collapse.

The danger of contagion

Nobody knows whether the Euro will survive. In the past its permanence was taken as an act of faith by the EU authorities. That confidence is now gone. Narrow calculation suggests that the Euro could survive a repudiation of the Greek debt. But the chaos associated with debt cancellation could cause contagion that drives the world economy back into recession. That in turn could lead to the breakup of the Eurozone and the destruction of the single currency.

The toxin that caused the credit crunch in 2007 was the sub-prime mortgage scandal. Sub-prime (rotten) mortgages were only issued in a few states of the USA. They were diced up, incorporated in dodgy derivatives, sold all over the globe, and incorporated into bank assets. In so doing they poisoned the entire world monetary system and had repercussions all over the planet. That’s the magic of the world division of labour imposed under capitalism! In the same way a disorderly Greek default or the exit of Greece from the Euro could be the first in a row of dominos to go down in the world economy.

In the first place a default would put enormous pressure on European banks. The world banking system is a complex skein of interdependence. British banks, for instance, are not heavily exposed to Greek finance, but they have invested heavily in French and German financial institutions, which are tied to Greek debt up above their necks. In addition Britain is the most indebted country of all the major economies. A bank collapse, or even wobble, could have knock-on effects on consumer debt and state finances. Adding together household, corporate and government debt the UK owes 507% of its GDP in 2012. Nowhere is safe.

Secondly, having claimed a scalp in Greece, the bond vigilantes would really go on the warpath. This is called contagion. Where would they strike next – Portugal, Spain or Italy? The real economy in Europe is very weak. Another financial atom bomb like the collapse of Lehman Brothers in 2008, which took us within a whisker of the destruction of the entire world financial system, could lay the whole continent low. This would have reverberating effects on the rest of the world economy.

Trade is another connecting rod that spreads the crisis from country to country. An economic collapse in a country’s trading partners is bad news. It hits exports. The Tories in Britain are already blaming recession on the continent for Britain’s poor economic performance. Actually their complaints are premature. If a Greek collapse, or any other dramatic disaster, hits the Eurozone then that will have incalculable effects on the British economy and beyond.

Can the Euro survive?

Since the autumn of 2012 the fate of the Euro has seemed a little more secure. There have been no major speculative flurries against peripheral countries. Draghi’s activism at the ECB seems to have encouraged the international financial markets though, as pointed out earlier, none of his schemes are a solution to the Euro crisis. The interest paid on peripheral country government bonds remains punishingly high, an indication of continued insecurity in the markets and a continued fear of default. In short the future of the Euro is balanced on a knife edge.

In Capitalist crisis – theory and practice we discussed the prospects in The fate of the Euro (Part 7.2):

“The fate of the Euro remains insecure. Economic trends are not inexorable forces. They can be interfered with and reversed by human action, in particular by government, which is an important economic player in the twenty-first century…The fact that the Euro has no real defences, or rather that these are being developed by the authorities on the hoof in the teeth of a crisis, makes the single currency very vulnerable…Since the world economy is recovering, on the balance of probabilities the Euro should survive this crisis, though there is no doubt that some peripheral countries will remain in intensive care for some years to come. This is not a hard and fast prediction. Capitalism is an irrational system, as we have seen many times in the course of this book.”

Many have predicted the imminent demise of the whole Euro project. The cautious prognosis in the book seems to have stood the test of the following eighteen months, and points to the travails ahead.

There are signs that the Euro could survive – for now. The permanent weakening of the world economy provided by the Great Recession means that the Eurozone will have to endure financial storms again and again in the future. The crisis of capitalism has produced two interrelated problems in the EU’s periphery:

  • A gigantic national debt and deficit owed by the government
  • An insupportable trade deficit, particularly with other countries inside the EU.

The only solution for this offered within the framework of a fixed exchange rate system is deflation – pulling your belt in. This has actually had some effect in improving the economic position of peripheral countries such as Greece.

On account of successive ferocious rounds of cuts Greece now has a primary budget surplus (a surplus that doesn’t include interest payments) for 2012. In other words the only reason that Greek government debt is still growing is because of interest rates – or rather paying interest rates upon interest rates. Greece’s primary budget surplus is 2.3bn Euros for January-November 2012, compared with a deficit of 3.6bn Euros in the first eleven months of 2011. Quite a turnaround – though not enough to satisfy the exactions of the country’s foreign creditors.

Greece’s trade gap has also shrunk markedly, proving that if you make people poor enough they will buy less imported goods. The balance of payments has also been transformed in Spain and Ireland and is improving for Portugal and Italy. Unit labour costs have fallen by 7% in Greece, Spain and Portugal, and by 18% from their peak in Ireland in 2007. In other words the ‘cure’ consists of cutting wages in order to boost profits.

We cannot be sure if the Euro will survive the present downturn. The immanent tendency of capitalism to go into crisis, together with the faulty architecture of the single currency, means that the existence of the Euro will be put to the test again and again in the future.

Can’t pay, won’t pay!

The immediate flashpoint for the world economy remains Greece. Polls show that a big majority of Greeks want to stay in the Eurozone. But they can’t pay and won’t pay the monstrous debts imposed upon their nation. This is a correct and healthy instinct. The Greek people correctly see the debt as the enemy that is impoverishing them. They need a revolutionary government that will move decisively to cancel the debts. That would involve capital controls and the nationalisation of the banks, which are effectively bankrupt in any case. No country in the world needs its banks to be run by a bunch of unaccountable speculators. Finance should be the servant of the people, not its master.

Does that mean that negotiations between a Syriza-led government committed to alleviate the debt burden and the EU authorities would be all a matter of bluff and double bluff, as Syriza’s leaders suggest? It is true that the two sides would be measuring each other up to test the other’s determination. The establishment would pile tremendous pressure on the Greek people, threatening them with catastrophe – as if that is not what they already confront. Syriza’s hope is that, on taking office, their opponents would blink first in this game of poker.

The outcome of such a standoff would be uncertain. It would depend in part on whether the EU authorities are prepared to make concessions at the last moment to save the European ‘project’ – for the time being. Even if they did, that will not be the end of the story.

Grexit?

The EU treaty covering entry into the Euro is quite clear. Formally there is no procedure for Greece or any other country to leave the Eurozone (Grexit). There is certainly no way that other member states can expel one of their number.

But for now the EU authorities want the Greeks to take their nasty medicine. If they don’t, they can see the Portuguese, the Irish, the Spanish and the Italians all queuing up for preferential treatment. The troika has already shown that it is quite prepared to play hardball if it sees the existence of the Euro, to be under threat. As Wolfgang Munchau puts it (Financial Times 14.05.12), “Technically, the European Central bank could decide not to accept Greek bonds as collateral. It could refuse to grant a request for emergency liquidity assistance. Greece would then have no choice but to leave ‘voluntarily.’ But this would be an incredibly hostile act.”

Indeed it would be a declaration of economic war. Faced with a unilateral default, one led by a movement of the Greek people from below, they would be quite prepared to expel or winkle Greece out of the Euro, whether that is legal according to EU treaties or not.

It would be a mistake by the radical left in Greece to make exit from the Euro its main demand. Greek workers would naturally ask the question, ‘why leave the Euro?’ If the parting of the ways in the form of expulsion from the Eurozone comes because the Greeks repudiate the debt, then the EU authorities will have put themselves in the wrong. Socialists in Greece should strive always to put the representatives of capitalism in the wrong and keep them there.

We don’t know how damaging the expulsion of Greece from the Eurozone could be. The early signs are that, if Greece falls, Portugal, or Ireland, or Spain or Italy would be next in the speculators’ firing line. Greece has only about 2% of the GDP of the Euro. But the knock-on effects could be enough to throw the whole of Europe back into recession. Another recession, so soon after the last serious collapse, could in turn cause permanent scarring to the European and the wider world economy.

How to fight back

The question for socialists is not – can the Euro survive? We have no control over that. What workers want to know is – how can we bring this nightmare to an end? The international capitalist class is striving might and main to make sure that Syriza or some other anti-austerity alliance don’t form a government commitment to repudiate the debt. At present the Greek working class is the advance guard of the movement against capitalist austerity.

The united pressure of the capitalist media can have an effect on the consciousness of the mass of the population, unless it is being argued against in every workplace and neighbourhood. The Greek people have been taken to the abyss and invited to stare over the edge. At least that is how the leaders of Pasok and ND, who have betrayed their people so shamefully, put it. They play upon fear of the unknown. They also warn (or rather threaten) that if Greece refuses to sign up to the bailout terms, the flow of international funds will be cut off. Civil servants and other public workers will simply not be paid. These are powerful arguments that can sway people unless they are countered with steely clarity by a mass mobilisation.

We support the demand for the complete cancellation of the debt. Indeed we believe that to be a precondition for freeing the Greek people from debt slavery to international finance capital. Such a measure would have to be supplemented by taking over the Greek banks and imposing severe capital controls to prevent the capital flight that is already happening. It would be the beginning of a social revolution that could spread across Europe and beyond.

Dithering at the top, resistance from below

Amid the crisis there are frictions and arguments within the senior counsels of the EU. The election of President Hollande and the Greek votes reflect a growing electoral weariness with austerity policies all over Europe – particularly when it is becoming increasingly obvious that they are not working. These arguments also reflect national antagonisms within the EU, and an increasing resentment at the dominance of Germany in the decision-making process. After all German capitalism is pursuing its own interests through the institutions of the EU; as a net exporter and creditor country these don’t necessarily coincide with those of all the other member states.

How intelligent and farsighted are the capitalists’ representatives within the counsels of the EU? Since the ruling class internationally do not all have common interests, and since capitalists work by instinct rather than according to a rational plan, there is massive scope for disagreements. The capitalist political process itself reflects this. It often rewards those best able to plot, manoeuvre and cobble together coalitions of interests solely concerned to hang on to power instead.

Even so, the EU decision-making process is hopelessly flawed. The survival of the Euro is not, and never was, a matter of pure capitalist economic rationality. No such thing exists. The Euro’s future will be the outcome of a complex interaction of political and economic factors. We predicted in the past that ‘on balance’ the Euro should survive as the world economy slowly revived.  This was not a hard and fast prediction. Perhaps we underestimated the collective stupidity of the EU authorities! In any case at the time of writing the Euro’s survival hangs by a thread.

This is not just a Greek crisis. It is a crisis, both economic and political, of world capitalism. Millions of workers all over the world are suffering hardship as a result. They see no way out at present; no major force is offering a clear way forward. So they are disoriented and angry. They are in the process of seeing through the lie that, after one further round of belt tightening, they will finally reach the sunlit uplands of full employment under capitalism. The polls all over Europe in particular show electoral weariness with never-ending austerity. Big protests, strikes and demonstrations are the order of the day. In this context a defiant movement of the workers in Greece or anywhere else could generate a huge movement of solidarity from the world’s working class. It is high time for a clear break with capitalism and its policies of austerity.

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Review by Andrew Fisher

A Marxist analysis of the crisis

Andrew Fisher, Left Economic Advisory Panel co-ordinator, reviewed Mick Brooks’ new book Capitalist Crisis: Theory and Practice in theOctober 2012 issue of Labour Briefing, the voice of the Labour Representation Committee, representing the left wing of the Labour Party.

The economic crisis that began in 2008, and through which we are still living, is a complex thing to analyse. Many books have been written to explain the crisis – some have been very good at explaining the complexity of the financial system and why it failed, but few have attempted to provide a comprehensive historical account of why this crisis occurred and how it fits with previous crises.

“Any real capitalist crisis involves a complex interaction of factors. The Great Recession showed that clearly”, says Brooks and his book exemplifies that contrast of complexity and clarity.

Reading Brooks’ book is not easy, it is not a light read. But that is a strength, not a weakness. The subject matter is complex, detailed and multi-faceted, and requires the reader to stop, digest and consider what they have read. Just as a fine wine is best sipped slowly, so this Marxist analysis is best enjoyed gradually.

The loyalty to the Marxist framework is not without risk. In the introduction, Brooks describes the current crisis as “a classic crisis of capitalism”. I feared that was ‘case closed’ and what would follow would be a Marxist “I told you so”, treating the long-dead German polymath, as so many do, like a divinity whose words should be treated like tablets of stone passed down through the ages. But such fears are unfounded.

Capitalist Crisis does though sometimes suffer from over-quotation of Marx, which is disappointing when Brooks himself has often put the same point across in more modern and accessible language. But these long excerpts – often from Capital – would be easily skipped by a reader not interested in Brooks’ nineteenth century inspiration.

However, this book is a forensic study of the capitalist crisis – drawing in previous crises, analyses of the crisis in individual nations, and testing alternative theories at each stage. In doing so it seeks to explain and educate on every page. Along the way he busts some of the mainstream myths like that of the ‘Keynesian moment’ in late 2008 / early 2009. As Brooks concludes, “The intention was to bail out the banks – nothing more or less. It was not Keynesianism in action.”

Its particular skill is in successfully rehabilitating some of the oft-doubted tenets of Marxist economic theory: the tendency of the rate of profit to fall and the labour theory of value. Brooks explains these and – crucially – all the caveats and reservations that Marx himself wrote into explaining them, but have often been lost in the intervening century and a half. This is important because the readers feels like they are taking part in an honest appraisal of a complex crisis rather than having ready-made answers welded onto their questions.

Some of the welcome elements for socialists is the clear-headed section on the financial crisis – explaining the role of finance capital, explaining precisely ‘fictitious capital’ and more practically (this is theory and practice after all) nailing the myth that this was the fault of a few irresponsible banks. Instead, as Brooks explains, “Their assets were melting away. The crisis was one of solvency. They were actually broke”. ‘They’ not one or two, but collectively: the system.

One of the strengths of the book is the ease and logical order with which it switches from practice (like the practices of the banks that inescapably led to the crash) to theory – explaining what is capitalism, how it emerged and why it endured. As such this book explains not only the current crisis, but the more fundamental questions necessary to effect change on the system.

On that latter point, one fact that should give all socialists hope is that, “There are now more than a billion wage workers. They, together with their families, outnumber the peasantry for the first time in the history of the world.”

This book is in the best traditions of the “scientific socialism” that Marx advocated and deserves close and patient study and discussion.

 

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The book is out now! How to buy a copy of Capitalist Crisis

If you live outside the UK, go to:

http://capitalistcrisis.org/how-to-buy/

If you live in the UK, the book is 268 pages in paperback and costs £9.50 + £1.50 postage.

Copies are available from the author for £11 including postage.

You can write a cheque and send it to M. Brooks,

at 117A, Uxbridge Road, London W7 3ST 

If you have a Paypal account, you can send payment to:                                                                :

mickandbarbara@btopenworld.com

Or you can contact me at the above email address for  bank details.

In all cases let me have your postal address

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Review by David Brandon

Here is the first review from David Brandon:

David Brandon is a longstanding labour movement activist living in Peterborough. He is the author of many books including a forthcoming biography of Margaret Thatcher and the horrors of Thatcherism.

“Mick Brooks is a lifelong socialist and activist in the labour movement and this commitment shows through in this book. He is no mere ranter, however, for this is a tightly-argued and coolly measured examination of the dynamics of capitalism and how a variety of conflicting forces create internal contradictions that lead to crises that ultimately it cannot avoid.

Brooks points out that even the most robust protagonists for capitalism do not understand the economic system they so vehemently advocate. These pundits were caught totally unawares by the onset of the Great Recession in 2007 for they had previously been arguing passionately that such events could never occur again. Other economists with disarming candour actually admit that they don’t know the first thing about economics and cannot explain what causes recessions under capitalism or the speculative bubble which was the obvious manifestation of deep-seated problems.

The author, however, draws extensively on Marxist economic theory to argue cogently that falling rates of profit from the early 2000s encouraged those with spare cash to go in search of new or alternative places for quick returns on investment. Turning their back on what they considered to be the paltry returns from manufacturing industry and the provision of services, they engaged in a variety of ventures, particularly speculation in rising house prices. These created only fictitious capital. This is ‘paper money’ unsupported by any increase in real wealth. A ‘bubble’ by its very nature is bound to burst and when an economic bubble bursts it always does so with far-reaching and disastrous economic and social results. While it lasted, the bubble was simply a fool’s paradise, a Tower of Babel built on a quicksand. Only Marxists predicted that its collapse would bring about a spectacular crisis of international capitalism the full implications of which are not yet clear.

‘Capitalist Crisis’ is based on wide reading, is scholarly but accessible and makes judicious use of quantitative evidence in support of its arguments. It is at one and the same time a narrative, a text-book and a call to action. In the author’s own words: ‘This book has been written in part to outline the background to these battles (in defence of public services and public sector jobs) to those who find themselves in the firing line. it strives to explain what happened, why it happened and why this extra fight is being picked with the working class now’.

Brooks looks at the two main options available to governments within capitalism – Keynesianism and monetarism, and concludes that neither of these ‘solutions’ will restore the long-term prospects of capitalism and guarantee rising living standards and expectations for the majority in society. It argues that the critique of capitalism put forward by Marx and his collaborators in the nineteenth century remains relevant and provides the underpinning for the creation of a fighting socialist alternative to end the chaos, anarchic waste, the wars and crises that the existence of capitalism inflicts on the world.”

This is a book to be read and learned from and used and its appeal should extend not only to existing political activists but wider layers of those who want some explanation of the forces that are moulding their lives, for which they are being required to make sacrifices and over which they seem to have no control.

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Afterword

Afterword: Fighting back

The crisis threatens to impose huge burdens upon the working class. It is inevitable that there will be a fight back. To be effective the labour movement needs a correct analysis of the situation it faces and, flowing from that, a correct programme. This book is offered as a contribution to rearming the movement.

What have we learned so far? The first lesson is regarding the nature of capitalist crisis. Capitalism has gone through world economic cycles regularly since 1825. Crisis is therefore an inevitable outcome of the laws of motion of capitalist development. But each crisis is not a simple repetition of the previous crisis. Each crisis has features in common with the others. It is also a unique historical event. No wonder capitalism is hard to figure out. The economy is anarchic. The system is a stew of conflicting interests, and as a result outcomes are unpredictable.

Causation is complex but the widespread view that the Great Recession was just a financial crisis, a historic accident, is wrong. It was a classic crisis of capitalism. Every crisis has its unique form of appearance and trigger that sets it off. The role of the rate of profit is central to the functioning of the capitalist system, but it is only ever an underlying cause of crisis. Apparently accidental factors can profoundly affect the actual course of events.

The capitalist system is irrational as well as anarchic. Individual capitalists chase after their own interests. There is no common interest of the system they can work towards. Capitalists navigate by instinct, not according to a plan. Their instincts brought the world economy to the brink of meltdown (a situation where they too could be ruined). They may well do so again unless they are stopped.

The second lesson from the recent past is that capitalism is a system out of control. The state is a capitalist state. Politicians do not bend the system to their will; they are bent to the will of capitalism. They do not dictate to the financiers. The financiers, the bosses and the markets dictate to the politicians.

This is very clear in Britain in 2011. The Tory-led coalition is doing the bidding of the bosses. In this they are pursuing the common policy of the international capitalist class to deal with the effects of the crisis. They are attacking the workers on every front, with the intention of loading the burden of the crisis on to them. We hope that readers of this book will have learned something from it that will help them to speak up and fight more effectively for the working class.

The third lesson is that cuts in wages and public services, unemployment and short time working do not solve a crisis of capitalism. At best a revival prepares conditions for another economic downturn further down the road. Here are some practical arguments for activists arising from the previous discussion of the role of the state under capitalism.

Government imposed austerity

All the major capitalist powers have identified excess government spending as the central problem that their economy faces in the wake of the crisis. All the major capitalist countries are deep in debt. All are running deficits on government spending. The G20 (meeting of 20 important countries) in summer 2010 decided that rectifying these deficits and debts was the most urgent task for recovery of the world economy. This is quite a turnaround. Only a year ago the bankers were widely seen as villains. Now nurses and teachers are to blame for our economic woes! The capitalist press has worked relentlessly to put this message across.

We shall use the right wing coalition government (often called the ConDems), elected in Britain in May 2010, as an illustration of the austerity drive. Bleak as the situation is in Britain the summer of 2011, the assault on public services and public sector workers has only just begun. The Conservative and Liberal Democrat government published a Fundamental Spending Review in October 2010 proposing to cut government spending by 1.6% of GDP a year every year for four years. They say they have ring-fenced the National Health Service, education and overseas aid, though experts and professionals doubt this is possible in the general economic austerity and gloom.

But all other public services are to be hacked back by 25%. This means the loss of half a million jobs in the public sector over four years. Since the public and private sectors are interdependent, it is also likely to cause the leaching away of half a million jobs in the private sector as well. Cutting a million jobs! How will that speed economic recovery?

Other serious commentators see this as foolhardy. For a start the cuts are savage and bound to mean the massive destruction of basic social services provision. Martin Wolf, instance, comments in the Financial Times (29.10.10), “The overall prospective cuts in real spending are the most severe since the second world war”. The coalition proposes to come down harder on the working class than Thatcher. This is a provocation which could well blow up in the government’s face.

Secondly the cuts could actually choke off the recovery. They even provoked fears of a double dip recession. Wolf’s article, cited earlier, is headlined Britain has gone climbing without a rope. Recovery has been under way for more than a year in Britain now, but it is hesitant and partial. A return to boom conditions is a long way off. In those circumstances to cut into the markets of those capitalists who are able to scrape a living and have shown the ability to pick themselves up off the floor and survive the crash is to tempt fate.

Crowding out?

The coalition government in Britain argues that they need to trim back state expenditure in order to give the private sector room to grow. This argument is called ‘crowding out.’ While it is completely incorrect in the case of Britain, the burden of state debt incurred to bail out capitalism in its crisis has dropped a dead weight on the recovery prospects of peripheral countries such as Greece and Ireland (see Part 1: What happened in the Great Recession).

At the time of writing (the summer of 2011), it is a grotesque misrepresentation  in Britain to present a picture of a vigorous private sector trying to thrust its way forward, but held back by the thickets of ‘bureaucracy’ and ‘waste’ represented by government spending.

In fact firms are awash with cash. Profits have recovered but profitable investment opportunities remain few and far between. Private sector growth is anaemic in Britain and all the other major capitalist countries after the blows delivered to it by the recession. There are plenty of idle resources out there that could be used for expansion. But the impulse for the capitalist sector to grow fast enough to gobble up unemployment just does not exist anywhere in the advanced capitalist world at present, and there is no sign of it materialising any time soon.

In the presence of idle workers confronting idle machines, the contention that the different components of national income (investment and government spending) have to compete against one another for resources just to stand still is ridiculous. This is to turn a national accounting identity into a causal connection. There is room for all sectors to grow in principle. What stands in the way is the capitalist system. When the Tories and Liberal Democrats say, there is no alternative to cuts in the public sector they’re talking rubbish.

In any case the relation between the components of national income is complementary, not competitive. To take one example from the UK: the decision by the coalition government to cancel Labour’s programme of schools renovation in 2010 was not just a blow to the public sector. It also hit the construction industry hard.

More broadly, an expansion of investment will have a positive effect on consumption as more workers are taken on to produce capital goods, and an increase in consumption will likewise stimulate new investment. The other components of national income are complementary to one another in the same way. The resources available to society are not limited, like a stagnant pool of water in a desert, every drop of which has to be fought over. They will grow with the growth of the economy.

The capitalist economy is hardly ever working at 100% of capacity and full employment – it certainly isn’t in the wake of the Great Recession. Idle resources are omnipresent. So there are alternatives to austerity, to be gained by tapping the idle resources that exist and putting them to work. Understanding that is at the root of arguing the case for defending public spending against the cuts the Tory-led government intends to impose.

Advocates of austerity

Another illusion that is played on by the representatives of the ruling class in their determination to ram through cuts in public expenditure is to compare the national economy to a household and then claim there is no alternative to cuts. To start with, ruling class priorities for the national ‘household’ budget may strike the rest of us as very odd. Spending money on Trident while cutting back on health and education is like buying a machine gun in preference to food and paying the rent.

There are basic differences between the economic situation of a household and a government in any case. A household has a quite limited potential to vary its income. If a major breadwinner loses their job when there is mass unemployment, then cuts in living standards may have to be accepted by the family for the time being. There is often no alternative under capitalism.

But households do borrow under capitalism, and it is often in their interests to do so. Borrowing to buy a house or to pay for university education can improve the prospects of household members. Why should the government not do the same? In any case the government has more power to change things than an individual household. Few households have the ability to pay their bills by printing money for instance, as the government can.

The present government in Britain pretends that there is no alternative to their policies of austerity. They do so in order to foist the priorities of the ruling class they represent upon the British working class. The bosses pass off their own interests as the way things must be, the way of the world. In reality it is a system that squanders human and material resources and skews production towards profit, not human need.

Another deception carried out by the coalition’s representatives is the way they lump all government expenditure together as ‘waste’. This is false. Though public investment doesn’t directly generate surplus value for individual capitalists, it can create an environment where the economy grows and capitalists make money. So the outlook of the ruling class is shortsighted. They regard every penny of government spending as a penny that can’t be used to accumulate capital. It is a penny wasted. Hence their hostility to public expenditure and the government deficit.

Is the debt insupportable?

The government is using the ballooning deficit to argue for cuts in the social wage that the capitalist class believe are necessary. The ConDems wail that Britain is bust. The debt and the deficit are all Gordon Brown’s fault, says the coalition government.  This is poppycock. Brown wasn’t Prime Minister of Iceland. Greece or Ireland, all of which are in a worse mess than Britain is. The crisis is not the fault of the public sector. The public deficit and the growing state debt are the products of the world crisis of capitalism. Why should we be made to pay for their crisis?

In any case the cuts may well be counterproductive. Martin Wolf is very concerned at the effect the coalition’s policies in Britain may have in throttling off the recovery. He also notes (Financial Times 21.10.10), “The chancellor presents the hypothesis of looming national ‘bankruptcy.’ If so the UK must have been bankrupt for much of the past two centuries.” And he presents a chart on national debt to GDP ratios to show what nonsense this argument is. For instance, from 1688 to 2010 the national debt was on average 112% of national income. (Financial Times 21.10.10) Now it has gone up to a projected 75% and the Tories are shrieking that the end of the world is nigh.

Critics of the right wing UK government rightly raise the fact that the post-War Labour government set up the welfare state while national debt was more than double GDP and national income per head was between about a quarter of what it is today. Now the country is so much richer, and so much less burdened by debt, the government tries to persuade us the situation is so desperate we have to scrap the welfare state! This is really just the rhetoric of class war. The Tories see the crisis as an opportunity to tip the balance of class forces back in favour of the ruling class by hacking away at the welfare state.

Fighting the cuts

For the working class government spending has an entirely different significance. Of course the state is a capitalist state, but government spending is an arena of class struggle. We have fought on the industrial and political fronts for centuries to preserve and improve our living standards. The proportion of government expenditure that is spent on welfare benefits is a vital protection against the insecurity that is a permanent feature of life under capitalism. Inadequate as they are, they are a shield against poverty incurred while bringing up a family, unemployed or in old age. Likewise the National Health Service provided free comprehensive medical provision to the mass of people for the first time. In the years after the Second World War we saw working class students who were able in some numbers to take advantage of a system of grants and the free provision of education to go to university for the first time. That has already been severely trimmed back and is being whittled away further as we write.

All this is part of a social wage. It is as precious to working class people as the wages they earn in the workplace. It has to be defended. And of course, this is the part of government spending that is particularly under threat now. The class struggle is not just waged at work, on the shop floor. It also has a political aspect. The working class has fought historically for the social wage. The fight against cuts is part of the struggle to defend working class living standards against the offensive triggered by the capitalist crisis.

We can beat the cuts. But to do so we must be clear that we are taking on the entire might and the interests of the ruling class. This book was written by a socialist and Marxist. It is evident, now more than ever, that the only real solution to the problems of working people is to transform society in the direction of socialism. Let us dedicate ourselves to that task.

 

 

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Part 7

Part 7: Economic perspectives

Over the course of the narrative we have identified two distinct periods since the Second World War. The first was the golden age of the post-War boom which came to an end with the recession of 1973-4. The second was the more difficult period thereafter, sometimes called the neoliberal era. That period came to an end in 2008 in the Great Recession, with wholesale state intervention in the economy aimed at saving capitalism. We are entering a new era. What will be its characteristic features? We seem to be entering a period of what may be permanent slower growth and higher unemployment – an age of austerity.

Chapter 7.1: What the crisis has cost so far and what it will cost in the end

Any assessment of what the crisis has cost us needs to end with the words ‘so far.’ If the ruling class get their way we could be paying for their crisis for years and years. Here are some findings.

Reinhart and Rogoff

In the book This Time is Different, Reinhart and Rogoff have made a quantitative analysis of hundreds of financial crises going back to the run on Florentine banks in 1340, and tried to factor in the effect of additional factors,. The authors are orthodox economists. They see financial crises (as they call them) as often caused by accidental factors rather than inevitable under capitalism. They chronicle the financial fluctuations and panics without perceiving them as just the form of appearance of a crisis of capitalism, as the Great Recession undoubtedly was and is.

 

They are emphatic that the costs of a banking crisis cannot be reduced to the direct costs of bailing out the banks (which are huge). In this they are right. They explain:

 

“This nearly universal focus on opaque calculations of bailout costs is both misguided and incomplete. It is misguided because there are no widely agreed-upon guidelines for calculating these estimates. It is incomplete because the fiscal consequences of banking crises reach far beyond the more immediate bailout costs. These consequences mainly result from the significant adverse impact that the crisis has on government revenues (in nearly all cases) and the fact that in some episodes the fiscal policy reaction to the crisis has also involved substantial fiscal stimulus packages.”  (p.164)

 

Despite these words of warning from serious number crunchers, we shall try to give a preliminary measure of what the crisis has cost us all, or at least drive home the seriousness of the situation facing working people everywhere in the future.

 

Reinhart and Rogoff differentiate between the general run of post-World War II crises, and what they call Great Depression crises, of particular severity, which are of course the nearest comparison with what we are grappling with today. They show that the big ones last an average of 4.1 years rather than 1.7 years. (p.234)

 

They also take up the fiscal legacy of crises, and work out the historical average real public debt in the three years following a banking crisis as 186.3% of what it was in the year of the crisis (an average 86%  increase). (p.232)

 

As regards crises involving sovereign default, debt restructuring and near default avoided by international bailout packages they see an average 15% decline in GDP from peak to trough, with the effects lasting for more than five years.

 

So this is a summary of their conclusions on the consequences of ‘Great Depression’ crises:

 

  • At least four years of austerity
  • Public debt almost doubling
  • A 15% fall in GDP over more than five years

 

This is what is in store for us based on past experience. This is the likely cost of the Great Recession, a classic crisis of capitalism.

 

Andrew Haldane

 

We are all appalled at the enormous amounts stumped up to save the banks from their own stupidity. But this is peanuts compared with the total costs we are likely to incur. Andrew Haldane has calculated that:

 

“World output is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms that translates into losses of $4 trillion” (for the world economy) “and £140 billion” (for Britain). These are losses for just one year!

 

“As” (evidence given in Haldane’s paper) “shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP.” If this is right the crisis has lost us between one and five year’s output for ever. Haldane goes on:

 

“Put in money terms, that is output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers ‘astronomical’ would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. ‘Economical’ might be a better description.”

He calls his paper The $100 billion question, and finds out the title he dreamed up is a gross underestimate. The cost of the crisis to Britain alone could eventually be as much as the fruits of the economic activities of more than 60 million people for five years.

Christopher Dow

Christopher Dow also demonstrates that losses to GDP in major recessions can be grievous and longstanding.  His book looks in detail at five major recessions in the UK over the last century. He shows in Major recessions that output fell by 10.6% in 1920-21, 12.6% in 1929-33, 8.1% in 1973-5, 10.6% in 1979 and 12.4% in 1989-93.

Moreover he emphasises it is unlikely that, in a major recession, after experiencing the shock the economy will just bounce back into action as if nothing had happened. This is called a V-shaped recession, and some optimists are hoping that is what we will experience in the near future. In fact it is already clear that the recession has done permanent damage to future growth prospects and that the economic outlook is far from sunny:

“The asymmetric shape of a major recession is held to result from two mechanisms. First it is easier to shatter confidence than to restore it…Second, a major recession of demand results in a downward displacement of the path of capacity growth.” (Major recessions, p.374)

In other words the economy will be permanently shunted on to a lower and slower flight path. Losses from the crisis will be correspondingly bigger. Dow divides the 1920-95 time frame of his book into three periods: the interwar period, the post-War boom and the time from 1973 to 1995. He shows the difference in growth patterns between the golden age and the other two periods is that during the post-War boom the country experienced no serious recessions. Such recessions in effect hole the economic ship below the water line and reduce growth prospects for a whole generation:

“The three major recessions since 1973, taken together, could well have reduced output to 25 per cent below what it would otherwise have been, and thus could have reduced government tax revenue in real terms, as compared with the previous trend, on at least this scale.” (ibid p.403)

These major recessions hit the government finances too (as Reinhart and Rogoff also noted). Government debt thus fell much slower after 1975, despite the bonanzas of North Sea oil and privatisation receipts: “The main reason” (why the debt ratio ceased to fall as rapidly) “was that, chiefly because of the big recessions, nominal debt now started to rise considerably more rapidly.” (ibid p.410)

The Reinharts

Carmen M. Reinhart and Vincent R. Reinhart summarise their conclusions in After the Fall, written in August 2010. This is all part of a body of work by the Reinharts and Kenneth Rogoff that attempts to analyse the present crisis in the light of the past. They draw similar conclusions to Dow from a wider international body of evidence. They compare the situation to that of the Great Depression.

 

“Our main results can be summarized as follows:

 

“Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. The median post-financial crisis GDP growth decline in advanced economies is about 1 percent…

 

“What singles out the Great Depression, however, is not a sustained slowdown in growth as much as a massive initial output decline. In about half of the advanced economies in our sample, the level of real GDP remained below the 1929 pre-crisis level from 1930 to 1939. During the first three years following the 2007 U.S. subprime crisis (2008-2010), median real per capita GDP income levels for all the advanced economies is about 2 percent lower than it was in 2007…” (It’s still lower in most countries after four years in 2011 – MB)

 

“In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher. In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009…

 

“The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.”

 

Lower growth for a decade; a collapse in output; unemployment significantly higher for ten years. We face a future of austerity as far ahead as the eye can see.

 

  • A comparison with the past, and an analysis of      present trends, show that we face a decade of austerity.

 

An age of austerity

 

In their book This Time is Different Carmen Reinhart and Kenneth Rogoff deal with the shape of the recovery. As they comment, “V-shaped recoveries in equity prices are far more common than V-shaped recoveries in real housing prices or employment” (p.239). This is unfortunate, since most of us are much more interested in our chances of a job and our living standards than the price of shares. We can rule out a V-shaped recovery as a serious prospect already from the slow pace of recovery. All the serious economists see doom and gloom ahead for years to come.

 

It seems the world economy will be faced with being knocked down onto a lower and slower flight path for the indefinite future on account of the crisis. This is quite apart from the crushing burden of state debt inflicted by the Great Recession. In The Age of Deleveraging, Gary Shilling notes that with deleveraging comes slow economic growth. He details nine reasons why real GDP will rise only about 2% annually in the years ahead  —  far below the 3.3% growth it takes just to keep the unemployment rate stable. Shilling had been notable in earlier years (for instance in Irrational Exuberance, 2000) in warning against the prevailing market euphoria. He has got it right in the past.

Shilling shows that the private sector is now definitely suffering a hangover on account of previously bingeing on credit. Saving will become the order of the day for households and firms. This is already happening. Meanwhile the banks are recapitalising. This amounts to unwinding all the excess leverage of the previous decade. Protectionism may grow under such gloomy conditions. Finally vicious cuts in government spending will further depress the outlook. His forecast is that the end of the spree will cut 1.5 percentage points off the 3.7% GDP growth rate of the relatively prosperous 1982–2000 years. He concludes, “These nine economic growth-slowing forces make 2.0% annual advances in real GDP in coming years reasonable, maybe even optimistic.”

Growth of 2% a year is not enough to restore full employment. In the summer of 2011 even that figure looks optimistic.

  • The world economy has been      permanently weakened. It will not just bounce back into full recovery.

What chance of a boom?

At the time of writing (the summer of 2011) the world economy has technically been in recovery for more than two years. For this reason the prospect of a double dip recession is receding. The obvious weak point that could challenge this prognosis is the fate of the Euro, discussed separately.

At the same time it must be recognised that the world economy, after a weak and lopsided boom, has suffered the most severe recession since the Second World War. It is severely weakened as a result. A recovery is under way, but there is no sign of a return to full employment. Where might a full recovery come from?

For most capitalist countries the condition of their economy is similar. This is the picture:

  • Consumption is reviving from the depths of 2008-9. Its      growth is severely constrained by the fact that households are      deleveraging, paying off debts rather than running up more credit. This      process of trying to getting back in the black is likely to continue for some      years Consumers have been burned by the speculative dance and then by the      recession.
  • Government spending cuts, which are likely to      maintain mass unemployment for years to come, will further hurt      consumption. As we pointed out earlier, consumption is the least volatile      element of national income. A real revival of consumption is likely to come      on the back of a boom elsewhere in the economy, probably in the investment      sector. But…
  • Investment is flat on its back and likely to remain so. Though      profits have revived, capacity utilisation in the USA is only running at      75%. Capital destruction has a way to go before a big investment boom will      start. British firms also have cash coming out of their ears that they      have no plans to invest.
  • Exports. ‘Export or die’ was the old motto. Countries      can export their way out of trouble. No doubt for some capitalist nations      exports will provide a fillip. But one country’s export is another’s      import. For the system as a whole exporting is a zero sum game.

The plans to cut public spending will further harm investment and consumption, since all the elements of national income are interdependent. Cuts will slow the recovery.  This is not the perspective for a healthy boom.

One common thread running throughout this work is that, though there have been common trends and laws of motion at work as long as the capitalist system has been in existence, history does not repeat itself exactly. With all the qualifications it might be worth looking at the 1973-4 crisis and its aftermath as a guide to perspectives for the future. There was never a complete recovery of economic health after 1974 and the recession was followed only five years later by another serious downturn. A similar pattern to the 1970s could well occur only a few years down the line once the economy has, it seems, successfully recovered. The twin crises of that period seriously brought the continued existence of capitalism into question.

Since the collapse of Stalinism after 1989 capitalism has seemed to the overwhelming majority of the population to be the only game in town. Whatever the political consequences of the Great Recession, and they have by no means been played out yet, the massive waste and injustice we have seen is bound to have produced a profound questioning of the system in the minds of millions of working people all over the world.

  • The economy is in slow      recovery. This is fragile.
  • Another recession soon would      have devastating consequences.

Growing out of debt?

It is argued that, when the economy gets going again, all the economic difficulties like government deficits will disappear. How do countries cut down the public debt? In theory they could just grow out of debt. If GDP grows and the debt remains the same size, then it gets progressively smaller as a proportion of GDP. It’s happened before.

In all the major capitalist countries the national debt sank quite dramatically after the Second World War because the economy grew. That is not the prospect that confronts the capitalist world now. We are confronted by years of austerity. It is quite possible that we will face another, even more serious, recession in a few years time. Full employment and the prosperity of yore seem to have gone for good. In a situation of slow and halting growth at best, the major capitalist countries will not be able to grow out of debt.

In any case the G20 meeting in June 2010 committed the governments involved to wage war on their national debt rather than concentrate on growing. The present round of global cuts, which is aimed at reducing the government deficit and debt, risks strangling the recovery by creating more redundancies and cutting living standards.

Take the case of Britain. Martin Wolf explains that the national debt to GDP ratio Britain confronts at present is by no means unprecedented. The average debt to GDP ratio has been 112% for the whole period from 1688 (when the debt was founded) to the present. (Financial Times 21.10.10) Yet the Tory dominated coalition is ringing the alarm bells as the ratio creeps up to 75% of national income. In fact the coalition’s austerity policies are likely to hamstring and constrain economic growth further, and slow the repayment of the debt as a result.

Every other capitalist government is trying to do the same, outdoing one another in their attempts to load austerity upon their citizens. For some capitalists, the public sector provides an important market. For the system as a whole, public expenditure makes capitalism more stable by providing a floor below which economic activity cannot plunge. It maintains a modest level of spending throughout the economy, pays wages and buys in services. Now the Tories in Britain and the rest of the G20 governments want to smash that floor.

But the fundamental problem for all the main capitalist countries is that capitalism continues to be in crisis. The recession is (technically) over. The crisis goes on. All the authoritative commentators we quoted in earlier in this Chapter see that problems stretch ahead for years to come. After the heart attack it has just suffered we cannot expect miracles of athleticism from the system in the future.

  • Capitalism grew out of its public debt burden in the      past. Slow growth in future means it won’t do so this time.

The BRICs

Commentators have noted that large parts of the world appear to have made a complete recovery from the great Recession. That is particularly the case for China which, after consciously adjusting policy to a sudden loss of export markets as a result of the recession, stormed ahead with growth rates of 8-10% p.a. as if nothing had happened. India, Brazil and other ‘emerging economies’ are also growing strongly. (The term is used for what were formerly called less developed countries.)

Our concern is principally with the heartlands of modern capitalism. These are still the metropolitan countries – the USA, European Union and Japan. Together these three are responsible for more than 60% of world of world output. Their fate is by and large the fate of world capitalism. The peripheral capitalist economies are mainly dependent upon them for markets and for growth prospects. By contrast China, by far the biggest, most important and most dynamic of the emerging economies is responsible for just 8% of global production.

To turn briefly to the case of China, there is a widespread misperception that the country is totally dependent on export earnings to explain its astonishing growth record. In effect China is seen as a vast sweat shop used by private capitalist firms from the advanced capitalist countries to export to the rest of the world. If this were the case then China would be completely dependent upon the performance of rest of the world economy and would grind to a halt in the case of economic crisis. This has not happened.

There are two things wrong with the conventional picture. First economic growth is powered by Chinese firms, mainly publicly owned. Secondly investment in China is the driving force of economic take-off, not exports to the rest of the world. Though China is integrated into the international division of labour, the Great Recession has shown that the country is pursuing its own trajectory, not helplessly dependent upon events in the advanced capitalist countries.

Jonathan Anderson (in Is China export-led?) estimates net exports as being responsible for about 9% of GDP. The Chinese authorities themselves announce that investment has made up about 40% of national income in recent years. The Chinese Xinhua News Agency announced recently that, “Investment accounted for 92.3 percent of China’s Gross Domestic Product (GDP) growth in 2009.” Anderson’s 2007 paper gave advance notice that China’s economic performance would not be totally dependent on that of the advanced capitalist countries.

The development of the so-called BRICs (Brazil, Russia, India and China) has been trumpeted as a phenomenon of great importance. But it deserves separate analysis. In passing it might be mentioned that we have sympathy with the view that the concept of the BRICs is a ‘broker’s fantasy’. Thank you, Alex Callinicos (Bonfire of illusions, p.116). Even if the BRICs are really a unified economic phenomenon, and their rise is preordained and irresistible, that would be a secular trend rather than a fundamental factor in the present cyclical crisis of capitalism, which is our principal object of study.

In fact Brazil and Russia are wholly dependent on commodity exports for their recent spurt of growth. China seems set to become the biggest exporter of manufactures in the world. India has a huge home market, but seems very dependent on the export of services to the advanced capitalist countries. To be sure, all these countries are growing quite fast by historic capitalist standards, but all for different reasons. Combined and uneven development is after all a basic feature of capitalist growth and development.

  • The BRICs are important in their own right, but      world economic development is still dominated by the imperialist      heartlands.

Chapter 7.2: Problems ahead

The destruction of capital

Marx was well aware that capitalism destroys capital continually and remorselessly as it accumulates. Never let it be said that capitalism uses resources efficiently. It advances by destroying the value of the means of production in its path.  This devaluation or moral depreciation of capital occurs because of the continuous rise in productivity spurred on by competition between capitalists. So machinery, and other fixed capital, has to be scrapped as it has become out of date long before it is worn out. If constant capital cannot allow the capitalist to compete with rivals who have retooled with the latest equipment, then it has to go

Marx quoted Babbage, a polymath who wrote extensively on the role and importance of machinery in the nineteenth century, with a startling example of this depreciation. “The improvements…which took place not long ago in frames for making patent-nets were so great, that a machine, in good repair, which had cost £1,200, sold a few years after for £60.” (Marx-Engels Collected Works Volume 33, p.350).

All this did not benefit the workforce one jot. Equipment had to be worked 24 hours a day by shifts of  workers to transfer all the value out of that expensive constant capital to the tulle (the final product)  before the machine became scrap metal. As Marx comments on this process:

“John Stuart Mill says in his Principles of Political Economy: ‘it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being.’ That is, however, by no means the aim of the application of machinery under capitalism…The machine is a means for producing surplus value.” (Capital Volume I, p.492)

Under capitalism innovation can often prove to be the ruin of the inventor:

“The far greater cost of operating an establishment based on a new invention as compared to later establishments arising from its very bones. This is so very true that the trail-blazers generally go bankrupt, and only those who later buy the buildings, machinery, etc., at a cheaper price, make money out of it. It is, therefore, generally the most worthless and miserable sort of money-capitalists who draw the greatest profit out of all new developments of the universal labour of the human spirit and their social application through combined labour.” (Capital Volume III p.199)

Here is a more recent example of the process that Marx called moral depreciation:

“From 1977 to 1984, venture capital firms invested almost $400 million in 43 different manufacturers of Winchester disk drives…including 21 startup or early stage investments….During the middle part of 1983, the capital markets assigned a value in excess of $5 billion to 12 publicly traded, venture capital based hard disk drive manufacturers…However by 1984 the value assigned to those same 12 manufacturers had declined..to only $1.4bn.”  (Sahlman and Stevenson Capital Market Myopia, cited in Railroading Economics by Michael Perelman, pp.54-5)

It seems that even this regular destruction of the productive forces is not enough in the event of a crisis. As the Communist Manifesto declares, in a slump:

“The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises.” (Communist Manifesto, p.8)

Take the case of the boom that crashed in 2001. Earlier we reported Robert Brenner’s account of the massive build up of overcapacity in the ICT sector:

“Between 1995 and 2000, industrial capacity in information technology quintupled, accounting by itself for roughly half of the quadrupling of the industrial capacity that took place in the manufacturing sector as a whole, which also smashed all records. As a consequence the gain in profitability deriving from the increased productivity growth was counterbalanced by the decline in profitability that resulted from growing over-supply” (What is Good for Goldman Sachs is Good for America, p.31)

What happened to all this surplus capital? It has disappeared as surely as if the earth had opened to swallow it up. The Financial Times reckoned after the debacle that only 1 or 2% of the fibre optic cable buried underground had ever been turned on (cited in Chris Harman – Zombie capitalism, p.286). The inflated share prices of new technology firms set up during the boom also went south. Their resources disappeared for a song in sales of bankrupt assets. Many of these firms had never paid a dividend and never would.

The classic statement of the need for more capital to be destroyed in a crisis in order for the recovery to come is from Andrew Mellon, US Treasury Secretary after the Wall Street crash; “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he ranted. “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, lead a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Joseph Schumpeter was another advocate of ‘creative destruction’  Business cycles, he declares, “Are not like tonsils, separate things that might be treated by themselves but are, like the beat of the heart, of the essence of the organism that displays them.” (Business Cycles, quoted in Perelman-Railroading economics, p.60) In other words, just put up with it.

The greatest and most wanton destruction of capital in human history took place as a result of the Second World War. The War was followed by an enormous secular boom, based precisely on this capital destruction.

Of course the political conditions for the survival of capitalism after 1945 had first to be established. “The political failure of the Stalinists and the social democrats, in Britain and Western Europe, created the political climate for a recovery of capitalism.” (Ted Grant – Will there be a slump?)

Grant goes on, “The effects of the war, in the destruction of consumer and capital goods, created a big market (war has effects similar to, but deeper than, a slump in the destruction of capital). These effects, according to United Nations’ statisticians, only disappeared in 1958.”

The War of course physically destroyed capital physically. A slump destroys the value of capital. In doing so, it should prepare the conditions for a new upturn.

Throughout the Great Depression productive forces, not to mention people’s livelihoods and lives, were recklessly squandered as part of this ‘healing’ process. But capitalism was not cured till the Second World War broke out. The 1930s saw capitalism in mortal danger. The ruling class felt thereafter that it could not stand idly by and wait for the interminable time it took for the system to heal itself through deflation. Since the Second World War the capitalist class has intervened actively in the economy to stop it hitting rock bottom.

They have done so for two reasons: politically it was too dangerous to leave things alone. The working class would draw the conclusion in increasing numbers that capitalism was a failed system. The other reason they have intervened is because there is no reason to believe capitalism need ever necessarily recover from a serious and prolonged bout of deflation.

  • Capitalism continuously devalues capital as it      accumulates.
  • Marx observes that this process cheapens the      elements of constant capital, and it is a factor offsetting the tendency      for the rate of profit to fall.
  • In a recession further capital destruction is needed      in order to prepare the conditions for a new boom.
  • The Second World War, by destroying capital on the      grand scale, prepared the conditions for the post-War boom.

Deflation

Deflation is what happens when the Mellons of the world allow the rest of world capitalism to go hang, by allowing capital destruction without limit. It does not offer a healing process. This was discovered by Irving Fisher during the 1930s. Fisher is famous principally for coming out with possibly the most ludicrous prediction in the entire canon of neoclassical economics, when he declared in 1929, “Stock prices have reached what looks like a permanently high plateau.”

Haunted by this comment thereafter, he developed the theory of debt-deflation in order to try to restore his credibility as an economist. In effect, he claimed, capitalism in crisis can go into a vicious circle of decline. As the economy slides down, incomes fall and wealth declines. But debts maintain their value. If prices are actually falling (as they were at about 10% a year in the worst years of the Great Depression) then debtors have to shell out more and more of their earnings to pay for the debts they built up in the good years. The debts become insupportable. They consume the debtors, who lose everything with no salvation in sight.

Deflation causes other distortions. If prices are falling, why keep your money in a bank? Savings will be worth more next year than this year even if you keep them in a sock. On the other hand interest rates demanded by the banks are high enough to discourage capitalists who want to borrow in order to invest. If nominal rates are just 1% and prices are falling by 10% annually, then the real rate of interest is about 11% a year.

That means the government cannot stimulate the economy by means of monetary policy. Small businesses and struggling farmers in particular crave lower interest rates as a lifeline. How can the government engineer negative nominal interest rates to keep real rates low when prices are falling?

Also people are more likely to hang on to their money as its purchasing power grows year by year rather than spending it, just when the economy could really do with a buying splurge to expand the market.

For all these reasons the economy will not reach a stable state where, in Mellon’s words, ‘all the rottenness has been purged out of the system’. Deflation will instead take the economy, “With hideous ruin and combustion, down / To bottomless perdition, there to dwell”, like Satan in Paradise Lost (Book I, lines 46-7).

If the capitalists have the tools to stop deflation happening, then they will intervene. The question is: can they? What effect will their policies have?

The Japanese deflation

Evidence of the effects of deflation, and of the ineffectiveness of government policy intended to prevent it, comes from Japan. In the 1950s and 1960s the Japanese economy achieved rates of growth higher than any capitalist economy had ever attained before. Competitors saw Japan as sweeping all before it on the world economy, conquering one export market after another.

In the 1980s it became clear that Japan was afflicted by a financial bubble. Its origins do not concern us here but it was associated, like the more recent bubble, with artificially low interest rates. Japanese banks had their arms twisted to lend more money. The loans were often secured by land as collateral. This was the prime cause of the land price bubble after 1985. More lending increased the demand for land, so its price went up. So people borrowed still more money to buy land, in order to borrow even more.

The bubble became particularly evident in property prices. The Nikkei share index was also in the stratosphere. Towards the end of the 1980s the total price of real property in Japan was reckoned to be worth more than the land in the whole of the rest of the world!

There had been a steady fall in the rate of profit even before the bubble burst. One reason for this was the enormous increase in costs caused by soaring rents and the rising price of land that had to be paid for by capitalists. In the end a rise in interest rates in late 1989 was enough to prick the bubble. Share prices collapsed. Land prices collapsed.

Huge debts, incurred during the bubble, remained unpaid and unpayable. The banks, massively overextended, began to deleverage, screwing the rest of the economy down as they went. The panic began on December 31st 1989. More than a decade of stagnation followed.

Over the next few years asset prices fell in Japan as much as they had done worldwide in the Great Depression. House prices fell to a tenth of their top level. Commercial property was worth a hundredth of what it had been in the bubble. Over the decade the Nikkei lost three quarters of its ‘value.’ From a peak of 40,000 it was down to15,000 in 1992 and 12,000 by 2001.

The marvellous Japanese industrial machine continued to function, but the country never again achieved the growth rates of earlier decades, despite successive rounds of fiscal stimulus. The government spent 100 trillion yen in ten years. All this stimulus achieved was to ratchet up the national debt. The Japanese central bank also tried monetary policy. Interest rates stood at just 0.5% by 1995.

The whole debt-deflation mechanism described by Irving Fisher continued to grind away at the ‘Japanese economic miracle’. Investment was stagnant – no higher in 2002 than it had been in 1990.

So deflation can be a disaster. Once the process of deflation has begun, government policy can be ineffective to reverse it, as the Japanese experience shows. That is why governments intervene to try to prevent it starting.

  • The      Japanese experience shows that government policy can be completely      ineffective in the face of deflationary pressures.

The deflation/inflation dilemma

There is also a downside to the government intervening in order to offset the worst effects of the downturn and the danger of deflation, as they did at the end of 2008.

Quite simply capital is preserved, not destroyed. So capitalism is not healed, healthy and ready to gallop in the next steeplechase of boom and slump. The progress of recovery is slow. It continually demands stimuli such as injections of credit in order to get moving. Credit produces bubbles. This is one reason for the super-bubble in modern capitalism that Soros mentions. (Soros-The crash of 2008 and what it means)

In order to prevent the economy collapsing the government may intervene by allowing the pumping up of credit, for instance by cutting interest rates. As quickly as one bubble bursts, another is blown up. The bursting of the house price bubble after 2006 was inevitable. Yet, as soon as the banks got up off the floor, they have been pumping money on to the stock exchanges of the ‘emerging’ economies. Countries such as Brazil and India have been growing quite strongly as of the summer of 2011 and their stock markets bounced back. They have been aided by a flow of funds from the advanced capitalist countries where profitable investment opportunities are harder to find. Here are some warning signs from the Financial Times.

Bubble fears as emerging markets soar by Stefan Wagstyl and David Oakley (07.10.10): “Robert Zoellick, World Bank president, has talked of currency ‘tensions’ and ‘the risk of bubbles’. The IMF, in its global financial stability report, said: ‘The prospect of heavy capital inflows would be destabilising.’”

Emerging markets at risk from a gigantic bubble by Peter Tasker (18.10.10): “The degree of euphoria surrounding some emerging economies is already troubling. The Indian and Indonesian stock markets are trading at price earnings ratios of over 40 times, based on ten-year average earnings.” (That means it would take forty years to get your money back.)  “You would surely need a hundred years of fortitude to buy Mexico’s recently-issued 100-year bond at a yield of 5.6 per cent. Bubble and bust in China, on which the world is now so dependent for growth and optimism, would likely tank the commodities markets, set off a second round of deflation, and end the emerging markets boom in the most spectacular way possible.”

These people are incurable. Is it the case that ‘here we go again’?

  • The process of deflation associated with massive destruction of capital can become a vicious circle from which capitalism cannot escape.
  • If the      government intervenes to try to prevent deflation, they may prevent      adequate capital destruction that will eventually prepare the way for a full      recovery.
  • If capital      is not destroyed thoroughly a new speculative bubble can be blown and a      tendency to inflation created.

Regulating capitalism?

Joseph Stiglitz is one of the few economists who consistently predicted the crash. Stiglitz attributes the Great Recession to a combination of recklessness and a failure to regulate that recklessness (Freefall, Penguin 2010). Stiglitz has been right before and been ignored before. He is right this time and all the signs are that he will be ignored again.

The deregulatory drive attained an unstoppable momentum with the complete ideological victory of neoliberalism. Regulation was seen as cramping the style of capitalism red in tooth and claw.

After the Second World War global capital flows were carefully regulated in all the major capitalist countries. These regulations were progressively torn up as the post-War boom proceeded. The US Glass-Steagall Act that regulated the banks (passed as part of Roosevelt’s New Deal) was swept away in 1999 under Clinton’s Presidency. A wall of money and massive Congressional lobbying removed the last obstacle to unfettered freedom of finance. Arguably that paved the way for the present disaster.

Has capitalism got a death wish? Why not re-regulate when evidence of the damage caused by deregulation is all around? It needs repeating that the capitalist system is anarchic. The capitalist class does not work to a strategic plan. They respond to stimuli. Profit is their key stimulus. In an atmosphere of euphoria, all constraints are swept aside. As one broker explained, while the herd is making money you have to be part of that herd.  Because the capitalist class is the ruling class, they usually get what they want. When they wanted deregulation they got it, whether it was good for their system or not.

Regulation is only implemented when it doesn’t damage the essential interests of the financiers.  The handcuffs that Roosevelt apparently imposed on the US banks in 1933 in the form of the Glass-Steagall Act didn’t really hurt at all, for the simple reason that the banking system had already largely collapsed or was in a coma. By that time 9,000 banks had gone to the wall in the USA.

Roosevelt’s banking acts introduced a system of federal deposit insurance, a guarantee for depositors that their money would be safe. The acts separated high street banks, which were severely restricted in the risks they could take with depositors’ money, from investment banks, which remained uninsured and in principle would be allowed to go to the wall. The investments banks were by this time flat on their backs. Risk taking was the last thing on their minds in 1933. Survival was all-important. Roosevelt’s initiatives sound bold. Really he was bolting the stable door after the horse had bolted.

Only a year ago the bankers were hate figures, reviled by millions for ruining innocent people’s lives with their mad and incompetent gambling. Though not a complete picture of the nature of the present capitalist crisis, this was all substantially true so far as it went. It is incredible the extent to which the capitalist press and opinion formers have tried to use the fiscal crisis of the state – an inevitable phase in the capitalist crisis – to switch the blame away from the bankers and on to the public debt and the public sector. They have been partially successful in this, at least for a period of time. In a crisis consciousness can change rapidly, and it can and will turn around again just as quickly.

Only a year ago the cry went up, ‘never again!’ Never again would the banks hold the rest of us to ransom. They should not be allowed to be ‘too big to fail.’ As we have pointed out the problem was that the banks were really too interconnected to fail and too important to capitalism to fail. There was the rub. The banks could blackmail the rest of the capitalist class with all too plausible stories of complete economic meltdown

The call for re-regulation of the footloose and fancy free financial institutions that were the trigger for the crisis faces stiff resistance from vested interests. Reinhart and Rogoff actually attribute the frequency and seriousness of financial crises to financial liberalisation. “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously, as they did in the 1990s, but historically.” (This Time is Different p.155)

In the USA the biggest slap on the wrists to a bank has been applied to Goldman Sachs. The bank admitted to misleading customers on the quality of mortgage backed securities. They have been fined $550m. This is the loss of just two weeks’ profits. (Dominic Rushe-Resurgent Wall Street winning lobby battle, Guardian 27.06.11) It doesn’t hurt at all.

All over the world the bankers have evaded regulation and have been restored to their privileged position. The City of London has grown too big and parts of it are ‘socially useless’, commented Adair Turner, Chair of the Financial Services Authority, in exasperation. Right first time, Lord Turner. Still they got their way. Froud, Moran, Nilsson and Williams describe in detail (Opportunity lost, in Socialist Register 2011, pp.98-119) how the financiers ran rings round the New Labour ministers. While critical of the Macmillan Committee of 1931, the Radcliffe Committee of 1959 and the Wilson Committee of 1980 (all on finance) the authors observe how, in the Wigley (2008) and Bischoff (2009) Reports:

“Non-City groups were not included or consulted in the information gathering, problem-defining phase or subsequently in the drafting of the two reports about the benefits of finance.” (p.109)

In effect the City investigated itself, with not even a token trade unionist on the Committees.  Not surprisingly, it gave itself a clean bill of health. Bischoff decided that finance represented value for money. How?

“Bischoff added up taxes paid and collected by finance without considering the costs of bailing out the financial system.” (ibid p.210) This is the sort of dodgy accounting that brought the banks, and the rest of the economy, to the brink of ruin in the first place!  After this sleight of hand, no wonder the report concluded, “Financial services are critical to the UK’s future.”

The banks continue to be effectively unregulated. Though the article is fascinating as a description of how the British establishment works, the complete success of finance capital in shredding any proposed regulatory restrictions is mainly on account of  the spinelessness of Gordon Brown and Alistair Darling as representatives of New Labour. They were all hapless creatures of the establishment who could not conceive of an alternative to the rule of finance capital. In this respect they behaved like establishment politicians all over the world, as servants to the big banks and to capitalism.

So the banks got away scot free. This is true of the upper management, those who were solely responsible for the catastrophic decisions that led to the credit crunch. But there have been mass redundancies among ordinary bank workers in the UK and elsewhere over the past year. Those who have lost their jobs are the ordinary working class finance workers who had no part in the crazy revels of the speculative boom. They are the ones to pay the price.

The Tory-led government has continued the traditions of New Labour in grovelling to finance capital. They have effectively ditched the Walker Review on pay and bonuses in the banking sector. Their proposal for a bankers’ levy has been trimmed back and is likely to garner just 0.1% of bank profits.

It seems that capitalism as a whole could benefit from curbing the ‘animal spirits’ of the financial entrepreneurs. All the major capitalist powers swore in 2008 not to let the guilty bankers off the hook. It has become quite clear by 2011 that the financial interests have been able to fend off these pressures to behave themselves and face regulatory restrictions down.

Here’s how. In the USA lobbying has been intense. Gillian Tett quotes Larry Summers, Obama’s chief economic adviser, as estimating that, “The financial sector is currently funding an average of four lobbyists, to the tune of $1m or so, for every member of the House (including those who have nothing to do with finance)” (Financial Times 29.10.10). If this is not outright corruption, then it comes close. This is how political decision-making is arrived at in a capitalist democracy.

Bank profits are back. Bonuses are back. The rest of us look to years of austerity in the future, but the banks have been saved. Governments lumbered the people with huge public debts, largely to bail out the banks and because of the disastrous effects the banks’ conduct has had on the rest of the economy. All over the world they have now foresworn intervening in the financial arena and are letting the banks carry on exactly as they did before.

  • Regulating the banks has been abandoned. They are      back in the driving seat.

Protectionism?

We know that the Great Depression was made worse by the tendencies to protectionism that became manifest as the economic crash proceeded. The protectionist legislation, such as the Smoot-Hawley Act raising tariffs on imports which was passed in the USA in 1930, was not the cause of the Great Depression. It came too late for that. But protectionism did make the crisis worse.

If capitalism grows and world trade grows, then a rising tide raises all boats. But in a crisis the national ruling class does not only turn on ‘its own’ working class. It also tries to foist the burden onto other countries. And that makes it worse for everyone.

“As long as everything goes well competition acts…as a practical freemasonry of the capitalist class, so that they all share in the common booty …But as soon as it is no longer a question of division of profit, but rather of loss, each seeks as far as he can to restrict his own share of this loss and pass it on to someone else.” (Capital Volume III, p.361)

So far we have not seen an equally serious protectionist trend as happened in the 1930s. Indeed we have heard loud declarations as to the virtues of free trade and the need for all capitalist nations to work together and co-operate. Beware! This might be taken as a warning signal. We always hear these exhortations from the great and the good, specially on the eve of a trade war.

The form that the tendency to protectionism may take is currency manipulation rather than tariff barriers, as happened in the 1930s. The financial press has been running headlines about ‘currency wars’ all through the past year. Arguments, spats and sabre-rattling between the trading nations will continue. We have also seen attempts to manipulate currencies between the USA and China, while the US Congress has approved measures that may be regarded as covert protectionism.

In late 2010 the US Fed decided to launch a second round of quantitative easing (printing money). They injected a further $600bn into the economy, even though they didn’t know whether the first stimulus had ‘worked’. Trade rivals believe that pumping out dollars will depreciate the US currency, make US goods cheaper and their own products dearer on world markets and thus provide the USA with an unfair trade advantage. They are not happy.

If the world economy continues to recover, then the protectionist voices will become less strident for the time being. National antagonisms, which occur because of the combined and uneven development of world capitalism, will be a continued source of friction. In particular the global imbalance between China and the USA will remain a secular feature of the world economy and a permanent source of conflict. But the decisive difference with the 1930s is that world trade has now turned up and therefore a full-scale trade war is unlikely this time around.

  • Protectionist voices will fade if and when the      recovery develops, but, like the recovery, that process will be slow.

The fate of the Euro

The fate of the Euro remains insecure. Economic trends are not inexorable forces. They can be interfered with and reversed by human action, in particular by government, which is an important economic player in the twenty-first century. Here we discuss the role of ‘mistake’ and apparently accidental factors in politics and human affairs.

Marx did not have a problem in recognising the part played in economic events by mistaken ideas and stupid people. He cited the Bank Acts of 1844 and later which were based on an erroneous economic theory – the quantity theory of money – and a mistaken application of the theory to the constitution of the central bank. As a result of these factors, whenever a crisis broke out the Bank Acts had to be suspended. At first sight this seems to suggest that the root of the problem of the governance of the Bank of England was an inadequate understanding of political economy. This interpretation would be one of the purest subjective idealism. The problem of the malfunctioning Bank Acts in turn was really rooted in conflicts of interest between the policy-makers of the time.

Likewise we have been critical of the way the leading European Union decision-makers have responded to the Euro crisis that blew up in Greece and then in Ireland. We do not wish to give the impression that the situation was not resolved more decisively just because Merkel, Sarkozy and the others were a bit thick. The problem was that they were concerned above all with the national interests of Germany and France and not that of the EU as a whole. Capitalism is an anarchic system. Different capitalists have different interests from one another. That means that even the members of the ruling class may disagree with one another. So it is difficult, and may be impossible, for them to agree on a common policy.

Merkel may have seemed unwise when she has raised in public the question of Irish and Greek bondholders taking a ‘haircut’ (loss). Certainly the bond markets took fright as a result, and that made it much more difficult for the Eurozone leaders to implement the Irish and Greek ‘rescues’. But the question of default is a genuine dilemma for the Eurozone decision-makers. There is no one right course for capitalism to follow, and in any case the European powers may have conflicting interests on the question.

Merkel was reacting to a possible action in the German constitutional court and problems within her own struggling coalition. These parochial interests were more important to her than the future of the Euro, because they were about her survival as a political leader. That is typical. There were occasions in 2010 and 2011, and they may recur in the future, when the chaotic nature of the decision-making process in the Eurozone, could take the Euro to the brink of shipwreck.

The Euro is a unique institution. It is a currency without a country. A government, even under capitalism, has ways of influencing the level of economic activity within their economy and therefore of safeguarding its national currency.  As we’ve noted these economic levers are usually listed as fiscal and monetary policy. Fiscal policy within the EU is nationally determined. There is no common Eurozone wide or EU wide fiscal policy. Despite continual allegations of waste of EU funds, the Europe Union disposes of few resources and employs relatively few workers. At one time it had fewer employees than Kent County Council. It disburses considerable regional and agricultural subsidies to the member countries, but that is another matter.

When a government, like that of the USA, implements an expansionary fiscal policy by cutting taxes or spending more money, that may be expected to have an impact throughout the country. That cannot happen at present within the Eurozone. Instead of being able to pursue an active fiscal policy, Eurozone members are constrained in principle by rules on the maximum deficit and government debt they may run.

Not only that. The US has a common system of federal taxes and benefits. As a result if one state such as Michigan becomes economically depressed, the local citizens will automatically pay less tax and receive more benefits from the federal government. That will act as a bit of a cushion for the people of Michigan. These automatic stabilisers act to reduce economic volatility within the country. There is no such redistributive mechanism within the Eurozone. The message a country gets from its partners if in difficulties is, ‘you’re on your own.’

It should not be forgotten that the policy of European monetary union is driven by a hard neoliberal ideology. ‘Why should governments intervene to try to alleviate unemployment? Capitalism, left to itself, will generate the jobs. Even if it doesn’t, government intervention will only make the situation worse.’ That’s the sentiment at the top.

This nonsense is repeated in the arena of monetary policy. The European Central Bank does not have a growth target. Its sole brief is to keep inflation down. Presumably, so long as the money supply is stable, they think private capitalism will deliver optimal economic results.

The fact that the Euro has no real defences, or rather that these are being developed by the authorities on the hoof in the teeth of a crisis, makes the single currency very vulnerable. The idea of a European bond, with the whole weight of the Eurozone behind it, has been vetoed for the time being. On the other hand the ECB has been shamefacedly buying up sovereign debt in 2010 and 2011, as a clandestine way of propping up its weaker members from further attack.

Since the world economy is recovering, on the balance of probabilities the Euro should survive this crisis, though there is no doubt that some peripheral countries will remain in intensive care for some years to come. This is not a hard and fast prediction. Capitalism is an irrational system, as we have seen many times in the course of this book. Waves of speculation and what Keynes called “animal spirits” play their part and are quite capable of sweeping away the whole Euro project.

The authorities all over the world will have to take the situation seriously, as the collapse of the Euro would be a global calamity that could plunge the world economy into a double dip recession. Another serious world economic crisis in a few years ahead, which is quite possible, could sink the Euro altogether or severely reduce the area covered by the single currency.

The EU and Eurozone authorities ought to be able to manage an economic recovery in the Eurozone and European Union as a whole over the next few years, though there may well be stresses and strains. Greece, for instance, may have to be taken through an orderly default. This would involve recognition that the Greek economy could snap under the pressures imposed upon it. Default could also be the result of class struggle. The Greek working class is rightly furious at having to shoulder the burdens heaped upon them by the tax-dodging Greek ruling class. The problem involved in an orderly restructuring of Greek public debt is that this means that the French and German banks in particular will have to take a hit. The Euro presents a knotty problem that won’t go away soon.

  • The problems of the Eurozone      flow from its flawed design and architecture as well as the economic      crisis.
  • The Euro crisis remains the      most visible flashpoint for the world economy. This crisis is the one      thing that could even cause it to relapse from its present hesitant      recovery over the next couple of years.

 

 

 

 

 

 

 

 

Part 7: Economic perspectives

Over the course of the narrative we have identified two distinct periods since the Second World War. The first was the golden age of the post-War boom which came to an end with the recession of 1973-4. The second was the more difficult period thereafter, sometimes called the neoliberal era. That period came to an end in 2008 in the Great Recession, with wholesale state intervention in the economy aimed at saving capitalism. We are entering a new era. What will be its characteristic features? We seem to be entering a period of what may be permanent slower growth and higher unemployment – an age of austerity.

Chapter 7.1: What the crisis has cost so far and what it will cost in the end

Any assessment of what the crisis has cost us needs to end with the words ‘so far.’ If the ruling class get their way we could be paying for their crisis for years and years. Here are some findings.

Reinhart and Rogoff

In the book This Time is Different, Reinhart and Rogoff have made a quantitative analysis of hundreds of financial crises going back to the run on Florentine banks in 1340, and tried to factor in the effect of additional factors,. The authors are orthodox economists. They see financial crises (as they call them) as often caused by accidental factors rather than inevitable under capitalism. They chronicle the financial fluctuations and panics without perceiving them as just the form of appearance of a crisis of capitalism, as the Great Recession undoubtedly was and is.

 

They are emphatic that the costs of a banking crisis cannot be reduced to the direct costs of bailing out the banks (which are huge). In this they are right. They explain:

 

“This nearly universal focus on opaque calculations of bailout costs is both misguided and incomplete. It is misguided because there are no widely agreed-upon guidelines for calculating these estimates. It is incomplete because the fiscal consequences of banking crises reach far beyond the more immediate bailout costs. These consequences mainly result from the significant adverse impact that the crisis has on government revenues (in nearly all cases) and the fact that in some episodes the fiscal policy reaction to the crisis has also involved substantial fiscal stimulus packages.”  (p.164)

 

Despite these words of warning from serious number crunchers, we shall try to give a preliminary measure of what the crisis has cost us all, or at least drive home the seriousness of the situation facing working people everywhere in the future.

 

Reinhart and Rogoff differentiate between the general run of post-World War II crises, and what they call Great Depression crises, of particular severity, which are of course the nearest comparison with what we are grappling with today. They show that the big ones last an average of 4.1 years rather than 1.7 years. (p.234)

 

They also take up the fiscal legacy of crises, and work out the historical average real public debt in the three years following a banking crisis as 186.3% of what it was in the year of the crisis (an average 86%  increase). (p.232)

 

As regards crises involving sovereign default, debt restructuring and near default avoided by international bailout packages they see an average 15% decline in GDP from peak to trough, with the effects lasting for more than five years.

 

So this is a summary of their conclusions on the consequences of ‘Great Depression’ crises:

 

  • At least four years of austerity
  • Public debt almost doubling
  • A 15% fall in GDP over more than five years

 

This is what is in store for us based on past experience. This is the likely cost of the Great Recession, a classic crisis of capitalism.

 

Andrew Haldane

 

We are all appalled at the enormous amounts stumped up to save the banks from their own stupidity. But this is peanuts compared with the total costs we are likely to incur. Andrew Haldane has calculated that:

 

“World output is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms that translates into losses of $4 trillion” (for the world economy) “and £140 billion” (for Britain). These are losses for just one year!

 

“As” (evidence given in Haldane’s paper) “shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP.” If this is right the crisis has lost us between one and five year’s output for ever. Haldane goes on:

 

“Put in money terms, that is output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers ‘astronomical’ would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. ‘Economical’ might be a better description.”

He calls his paper The $100 billion question, and finds out the title he dreamed up is a gross underestimate. The cost of the crisis to Britain alone could eventually be as much as the fruits of the economic activities of more than 60 million people for five years.

Christopher Dow

Christopher Dow also demonstrates that losses to GDP in major recessions can be grievous and longstanding.  His book looks in detail at five major recessions in the UK over the last century. He shows in Major recessions that output fell by 10.6% in 1920-21, 12.6% in 1929-33, 8.1% in 1973-5, 10.6% in 1979 and 12.4% in 1989-93.

Moreover he emphasises it is unlikely that, in a major recession, after experiencing the shock the economy will just bounce back into action as if nothing had happened. This is called a V-shaped recession, and some optimists are hoping that is what we will experience in the near future. In fact it is already clear that the recession has done permanent damage to future growth prospects and that the economic outlook is far from sunny:

“The asymmetric shape of a major recession is held to result from two mechanisms. First it is easier to shatter confidence than to restore it…Second, a major recession of demand results in a downward displacement of the path of capacity growth.” (Major recessions, p.374)

In other words the economy will be permanently shunted on to a lower and slower flight path. Losses from the crisis will be correspondingly bigger. Dow divides the 1920-95 time frame of his book into three periods: the interwar period, the post-War boom and the time from 1973 to 1995. He shows the difference in growth patterns between the golden age and the other two periods is that during the post-War boom the country experienced no serious recessions. Such recessions in effect hole the economic ship below the water line and reduce growth prospects for a whole generation:

“The three major recessions since 1973, taken together, could well have reduced output to 25 per cent below what it would otherwise have been, and thus could have reduced government tax revenue in real terms, as compared with the previous trend, on at least this scale.” (ibid p.403)

These major recessions hit the government finances too (as Reinhart and Rogoff also noted). Government debt thus fell much slower after 1975, despite the bonanzas of North Sea oil and privatisation receipts: “The main reason” (why the debt ratio ceased to fall as rapidly) “was that, chiefly because of the big recessions, nominal debt now started to rise considerably more rapidly.” (ibid p.410)

The Reinharts

Carmen M. Reinhart and Vincent R. Reinhart summarise their conclusions in After the Fall, written in August 2010. This is all part of a body of work by the Reinharts and Kenneth Rogoff that attempts to analyse the present crisis in the light of the past. They draw similar conclusions to Dow from a wider international body of evidence. They compare the situation to that of the Great Depression.

 

“Our main results can be summarized as follows:

 

“Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. The median post-financial crisis GDP growth decline in advanced economies is about 1 percent…

 

“What singles out the Great Depression, however, is not a sustained slowdown in growth as much as a massive initial output decline. In about half of the advanced economies in our sample, the level of real GDP remained below the 1929 pre-crisis level from 1930 to 1939. During the first three years following the 2007 U.S. subprime crisis (2008-2010), median real per capita GDP income levels for all the advanced economies is about 2 percent lower than it was in 2007…” (It’s still lower in most countries after four years in 2011 – MB)

 

“In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher. In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009…

 

“The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.”

 

Lower growth for a decade; a collapse in output; unemployment significantly higher for ten years. We face a future of austerity as far ahead as the eye can see.

 

  • A comparison with the past, and an analysis of      present trends, show that we face a decade of austerity.

 

An age of austerity

 

In their book This Time is Different Carmen Reinhart and Kenneth Rogoff deal with the shape of the recovery. As they comment, “V-shaped recoveries in equity prices are far more common than V-shaped recoveries in real housing prices or employment” (p.239). This is unfortunate, since most of us are much more interested in our chances of a job and our living standards than the price of shares. We can rule out a V-shaped recovery as a serious prospect already from the slow pace of recovery. All the serious economists see doom and gloom ahead for years to come.

 

It seems the world economy will be faced with being knocked down onto a lower and slower flight path for the indefinite future on account of the crisis. This is quite apart from the crushing burden of state debt inflicted by the Great Recession. In The Age of Deleveraging, Gary Shilling notes that with deleveraging comes slow economic growth. He details nine reasons why real GDP will rise only about 2% annually in the years ahead  —  far below the 3.3% growth it takes just to keep the unemployment rate stable. Shilling had been notable in earlier years (for instance in Irrational Exuberance, 2000) in warning against the prevailing market euphoria. He has got it right in the past.

Shilling shows that the private sector is now definitely suffering a hangover on account of previously bingeing on credit. Saving will become the order of the day for households and firms. This is already happening. Meanwhile the banks are recapitalising. This amounts to unwinding all the excess leverage of the previous decade. Protectionism may grow under such gloomy conditions. Finally vicious cuts in government spending will further depress the outlook. His forecast is that the end of the spree will cut 1.5 percentage points off the 3.7% GDP growth rate of the relatively prosperous 1982–2000 years. He concludes, “These nine economic growth-slowing forces make 2.0% annual advances in real GDP in coming years reasonable, maybe even optimistic.”

Growth of 2% a year is not enough to restore full employment. In the summer of 2011 even that figure looks optimistic.

  • The world economy has been      permanently weakened. It will not just bounce back into full recovery.

What chance of a boom?

At the time of writing (the summer of 2011) the world economy has technically been in recovery for more than two years. For this reason the prospect of a double dip recession is receding. The obvious weak point that could challenge this prognosis is the fate of the Euro, discussed separately.

At the same time it must be recognised that the world economy, after a weak and lopsided boom, has suffered the most severe recession since the Second World War. It is severely weakened as a result. A recovery is under way, but there is no sign of a return to full employment. Where might a full recovery come from?

For most capitalist countries the condition of their economy is similar. This is the picture:

  • Consumption is reviving from the depths of 2008-9. Its      growth is severely constrained by the fact that households are      deleveraging, paying off debts rather than running up more credit. This      process of trying to getting back in the black is likely to continue for some      years Consumers have been burned by the speculative dance and then by the      recession.
  • Government spending cuts, which are likely to      maintain mass unemployment for years to come, will further hurt      consumption. As we pointed out earlier, consumption is the least volatile      element of national income. A real revival of consumption is likely to come      on the back of a boom elsewhere in the economy, probably in the investment      sector. But…
  • Investment is flat on its back and likely to remain so. Though      profits have revived, capacity utilisation in the USA is only running at      75%. Capital destruction has a way to go before a big investment boom will      start. British firms also have cash coming out of their ears that they      have no plans to invest.
  • Exports. ‘Export or die’ was the old motto. Countries      can export their way out of trouble. No doubt for some capitalist nations      exports will provide a fillip. But one country’s export is another’s      import. For the system as a whole exporting is a zero sum game.

The plans to cut public spending will further harm investment and consumption, since all the elements of national income are interdependent. Cuts will slow the recovery.  This is not the perspective for a healthy boom.

One common thread running throughout this work is that, though there have been common trends and laws of motion at work as long as the capitalist system has been in existence, history does not repeat itself exactly. With all the qualifications it might be worth looking at the 1973-4 crisis and its aftermath as a guide to perspectives for the future. There was never a complete recovery of economic health after 1974 and the recession was followed only five years later by another serious downturn. A similar pattern to the 1970s could well occur only a few years down the line once the economy has, it seems, successfully recovered. The twin crises of that period seriously brought the continued existence of capitalism into question.

Since the collapse of Stalinism after 1989 capitalism has seemed to the overwhelming majority of the population to be the only game in town. Whatever the political consequences of the Great Recession, and they have by no means been played out yet, the massive waste and injustice we have seen is bound to have produced a profound questioning of the system in the minds of millions of working people all over the world.

  • The economy is in slow      recovery. This is fragile.
  • Another recession soon would      have devastating consequences.

Growing out of debt?

It is argued that, when the economy gets going again, all the economic difficulties like government deficits will disappear. How do countries cut down the public debt? In theory they could just grow out of debt. If GDP grows and the debt remains the same size, then it gets progressively smaller as a proportion of GDP. It’s happened before.

In all the major capitalist countries the national debt sank quite dramatically after the Second World War because the economy grew. That is not the prospect that confronts the capitalist world now. We are confronted by years of austerity. It is quite possible that we will face another, even more serious, recession in a few years time. Full employment and the prosperity of yore seem to have gone for good. In a situation of slow and halting growth at best, the major capitalist countries will not be able to grow out of debt.

In any case the G20 meeting in June 2010 committed the governments involved to wage war on their national debt rather than concentrate on growing. The present round of global cuts, which is aimed at reducing the government deficit and debt, risks strangling the recovery by creating more redundancies and cutting living standards.

Take the case of Britain. Martin Wolf explains that the national debt to GDP ratio Britain confronts at present is by no means unprecedented. The average debt to GDP ratio has been 112% for the whole period from 1688 (when the debt was founded) to the present. (Financial Times 21.10.10) Yet the Tory dominated coalition is ringing the alarm bells as the ratio creeps up to 75% of national income. In fact the coalition’s austerity policies are likely to hamstring and constrain economic growth further, and slow the repayment of the debt as a result.

Every other capitalist government is trying to do the same, outdoing one another in their attempts to load austerity upon their citizens. For some capitalists, the public sector provides an important market. For the system as a whole, public expenditure makes capitalism more stable by providing a floor below which economic activity cannot plunge. It maintains a modest level of spending throughout the economy, pays wages and buys in services. Now the Tories in Britain and the rest of the G20 governments want to smash that floor.

But the fundamental problem for all the main capitalist countries is that capitalism continues to be in crisis. The recession is (technically) over. The crisis goes on. All the authoritative commentators we quoted in earlier in this Chapter see that problems stretch ahead for years to come. After the heart attack it has just suffered we cannot expect miracles of athleticism from the system in the future.

  • Capitalism grew out of its public debt burden in the      past. Slow growth in future means it won’t do so this time.

The BRICs

Commentators have noted that large parts of the world appear to have made a complete recovery from the great Recession. That is particularly the case for China which, after consciously adjusting policy to a sudden loss of export markets as a result of the recession, stormed ahead with growth rates of 8-10% p.a. as if nothing had happened. India, Brazil and other ‘emerging economies’ are also growing strongly. (The term is used for what were formerly called less developed countries.)

Our concern is principally with the heartlands of modern capitalism. These are still the metropolitan countries – the USA, European Union and Japan. Together these three are responsible for more than 60% of world of world output. Their fate is by and large the fate of world capitalism. The peripheral capitalist economies are mainly dependent upon them for markets and for growth prospects. By contrast China, by far the biggest, most important and most dynamic of the emerging economies is responsible for just 8% of global production.

To turn briefly to the case of China, there is a widespread misperception that the country is totally dependent on export earnings to explain its astonishing growth record. In effect China is seen as a vast sweat shop used by private capitalist firms from the advanced capitalist countries to export to the rest of the world. If this were the case then China would be completely dependent upon the performance of rest of the world economy and would grind to a halt in the case of economic crisis. This has not happened.

There are two things wrong with the conventional picture. First economic growth is powered by Chinese firms, mainly publicly owned. Secondly investment in China is the driving force of economic take-off, not exports to the rest of the world. Though China is integrated into the international division of labour, the Great Recession has shown that the country is pursuing its own trajectory, not helplessly dependent upon events in the advanced capitalist countries.

Jonathan Anderson (in Is China export-led?) estimates net exports as being responsible for about 9% of GDP. The Chinese authorities themselves announce that investment has made up about 40% of national income in recent years. The Chinese Xinhua News Agency announced recently that, “Investment accounted for 92.3 percent of China’s Gross Domestic Product (GDP) growth in 2009.” Anderson’s 2007 paper gave advance notice that China’s economic performance would not be totally dependent on that of the advanced capitalist countries.

The development of the so-called BRICs (Brazil, Russia, India and China) has been trumpeted as a phenomenon of great importance. But it deserves separate analysis. In passing it might be mentioned that we have sympathy with the view that the concept of the BRICs is a ‘broker’s fantasy’. Thank you, Alex Callinicos (Bonfire of illusions, p.116). Even if the BRICs are really a unified economic phenomenon, and their rise is preordained and irresistible, that would be a secular trend rather than a fundamental factor in the present cyclical crisis of capitalism, which is our principal object of study.

In fact Brazil and Russia are wholly dependent on commodity exports for their recent spurt of growth. China seems set to become the biggest exporter of manufactures in the world. India has a huge home market, but seems very dependent on the export of services to the advanced capitalist countries. To be sure, all these countries are growing quite fast by historic capitalist standards, but all for different reasons. Combined and uneven development is after all a basic feature of capitalist growth and development.

  • The BRICs are important in their own right, but      world economic development is still dominated by the imperialist      heartlands.

Chapter 7.2: Problems ahead

The destruction of capital

Marx was well aware that capitalism destroys capital continually and remorselessly as it accumulates. Never let it be said that capitalism uses resources efficiently. It advances by destroying the value of the means of production in its path.  This devaluation or moral depreciation of capital occurs because of the continuous rise in productivity spurred on by competition between capitalists. So machinery, and other fixed capital, has to be scrapped as it has become out of date long before it is worn out. If constant capital cannot allow the capitalist to compete with rivals who have retooled with the latest equipment, then it has to go

Marx quoted Babbage, a polymath who wrote extensively on the role and importance of machinery in the nineteenth century, with a startling example of this depreciation. “The improvements…which took place not long ago in frames for making patent-nets were so great, that a machine, in good repair, which had cost £1,200, sold a few years after for £60.” (Marx-Engels Collected Works Volume 33, p.350).

All this did not benefit the workforce one jot. Equipment had to be worked 24 hours a day by shifts of  workers to transfer all the value out of that expensive constant capital to the tulle (the final product)  before the machine became scrap metal. As Marx comments on this process:

“John Stuart Mill says in his Principles of Political Economy: ‘it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being.’ That is, however, by no means the aim of the application of machinery under capitalism…The machine is a means for producing surplus value.” (Capital Volume I, p.492)

Under capitalism innovation can often prove to be the ruin of the inventor:

“The far greater cost of operating an establishment based on a new invention as compared to later establishments arising from its very bones. This is so very true that the trail-blazers generally go bankrupt, and only those who later buy the buildings, machinery, etc., at a cheaper price, make money out of it. It is, therefore, generally the most worthless and miserable sort of money-capitalists who draw the greatest profit out of all new developments of the universal labour of the human spirit and their social application through combined labour.” (Capital Volume III p.199)

Here is a more recent example of the process that Marx called moral depreciation:

“From 1977 to 1984, venture capital firms invested almost $400 million in 43 different manufacturers of Winchester disk drives…including 21 startup or early stage investments….During the middle part of 1983, the capital markets assigned a value in excess of $5 billion to 12 publicly traded, venture capital based hard disk drive manufacturers…However by 1984 the value assigned to those same 12 manufacturers had declined..to only $1.4bn.”  (Sahlman and Stevenson Capital Market Myopia, cited in Railroading Economics by Michael Perelman, pp.54-5)

It seems that even this regular destruction of the productive forces is not enough in the event of a crisis. As the Communist Manifesto declares, in a slump:

“The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises.” (Communist Manifesto, p.8)

Take the case of the boom that crashed in 2001. Earlier we reported Robert Brenner’s account of the massive build up of overcapacity in the ICT sector:

“Between 1995 and 2000, industrial capacity in information technology quintupled, accounting by itself for roughly half of the quadrupling of the industrial capacity that took place in the manufacturing sector as a whole, which also smashed all records. As a consequence the gain in profitability deriving from the increased productivity growth was counterbalanced by the decline in profitability that resulted from growing over-supply” (What is Good for Goldman Sachs is Good for America, p.31)

What happened to all this surplus capital? It has disappeared as surely as if the earth had opened to swallow it up. The Financial Times reckoned after the debacle that only 1 or 2% of the fibre optic cable buried underground had ever been turned on (cited in Chris Harman – Zombie capitalism, p.286). The inflated share prices of new technology firms set up during the boom also went south. Their resources disappeared for a song in sales of bankrupt assets. Many of these firms had never paid a dividend and never would.

The classic statement of the need for more capital to be destroyed in a crisis in order for the recovery to come is from Andrew Mellon, US Treasury Secretary after the Wall Street crash; “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he ranted. “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, lead a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Joseph Schumpeter was another advocate of ‘creative destruction’  Business cycles, he declares, “Are not like tonsils, separate things that might be treated by themselves but are, like the beat of the heart, of the essence of the organism that displays them.” (Business Cycles, quoted in Perelman-Railroading economics, p.60) In other words, just put up with it.

The greatest and most wanton destruction of capital in human history took place as a result of the Second World War. The War was followed by an enormous secular boom, based precisely on this capital destruction.

Of course the political conditions for the survival of capitalism after 1945 had first to be established. “The political failure of the Stalinists and the social democrats, in Britain and Western Europe, created the political climate for a recovery of capitalism.” (Ted Grant – Will there be a slump?)

Grant goes on, “The effects of the war, in the destruction of consumer and capital goods, created a big market (war has effects similar to, but deeper than, a slump in the destruction of capital). These effects, according to United Nations’ statisticians, only disappeared in 1958.”

The War of course physically destroyed capital physically. A slump destroys the value of capital. In doing so, it should prepare the conditions for a new upturn.

Throughout the Great Depression productive forces, not to mention people’s livelihoods and lives, were recklessly squandered as part of this ‘healing’ process. But capitalism was not cured till the Second World War broke out. The 1930s saw capitalism in mortal danger. The ruling class felt thereafter that it could not stand idly by and wait for the interminable time it took for the system to heal itself through deflation. Since the Second World War the capitalist class has intervened actively in the economy to stop it hitting rock bottom.

They have done so for two reasons: politically it was too dangerous to leave things alone. The working class would draw the conclusion in increasing numbers that capitalism was a failed system. The other reason they have intervened is because there is no reason to believe capitalism need ever necessarily recover from a serious and prolonged bout of deflation.

  • Capitalism continuously devalues capital as it      accumulates.
  • Marx observes that this process cheapens the      elements of constant capital, and it is a factor offsetting the tendency      for the rate of profit to fall.
  • In a recession further capital destruction is needed      in order to prepare the conditions for a new boom.
  • The Second World War, by destroying capital on the      grand scale, prepared the conditions for the post-War boom.

Deflation

Deflation is what happens when the Mellons of the world allow the rest of world capitalism to go hang, by allowing capital destruction without limit. It does not offer a healing process. This was discovered by Irving Fisher during the 1930s. Fisher is famous principally for coming out with possibly the most ludicrous prediction in the entire canon of neoclassical economics, when he declared in 1929, “Stock prices have reached what looks like a permanently high plateau.”

Haunted by this comment thereafter, he developed the theory of debt-deflation in order to try to restore his credibility as an economist. In effect, he claimed, capitalism in crisis can go into a vicious circle of decline. As the economy slides down, incomes fall and wealth declines. But debts maintain their value. If prices are actually falling (as they were at about 10% a year in the worst years of the Great Depression) then debtors have to shell out more and more of their earnings to pay for the debts they built up in the good years. The debts become insupportable. They consume the debtors, who lose everything with no salvation in sight.

Deflation causes other distortions. If prices are falling, why keep your money in a bank? Savings will be worth more next year than this year even if you keep them in a sock. On the other hand interest rates demanded by the banks are high enough to discourage capitalists who want to borrow in order to invest. If nominal rates are just 1% and prices are falling by 10% annually, then the real rate of interest is about 11% a year.

That means the government cannot stimulate the economy by means of monetary policy. Small businesses and struggling farmers in particular crave lower interest rates as a lifeline. How can the government engineer negative nominal interest rates to keep real rates low when prices are falling?

Also people are more likely to hang on to their money as its purchasing power grows year by year rather than spending it, just when the economy could really do with a buying splurge to expand the market.

For all these reasons the economy will not reach a stable state where, in Mellon’s words, ‘all the rottenness has been purged out of the system’. Deflation will instead take the economy, “With hideous ruin and combustion, down / To bottomless perdition, there to dwell”, like Satan in Paradise Lost (Book I, lines 46-7).

If the capitalists have the tools to stop deflation happening, then they will intervene. The question is: can they? What effect will their policies have?

The Japanese deflation

Evidence of the effects of deflation, and of the ineffectiveness of government policy intended to prevent it, comes from Japan. In the 1950s and 1960s the Japanese economy achieved rates of growth higher than any capitalist economy had ever attained before. Competitors saw Japan as sweeping all before it on the world economy, conquering one export market after another.

In the 1980s it became clear that Japan was afflicted by a financial bubble. Its origins do not concern us here but it was associated, like the more recent bubble, with artificially low interest rates. Japanese banks had their arms twisted to lend more money. The loans were often secured by land as collateral. This was the prime cause of the land price bubble after 1985. More lending increased the demand for land, so its price went up. So people borrowed still more money to buy land, in order to borrow even more.

The bubble became particularly evident in property prices. The Nikkei share index was also in the stratosphere. Towards the end of the 1980s the total price of real property in Japan was reckoned to be worth more than the land in the whole of the rest of the world!

There had been a steady fall in the rate of profit even before the bubble burst. One reason for this was the enormous increase in costs caused by soaring rents and the rising price of land that had to be paid for by capitalists. In the end a rise in interest rates in late 1989 was enough to prick the bubble. Share prices collapsed. Land prices collapsed.

Huge debts, incurred during the bubble, remained unpaid and unpayable. The banks, massively overextended, began to deleverage, screwing the rest of the economy down as they went. The panic began on December 31st 1989. More than a decade of stagnation followed.

Over the next few years asset prices fell in Japan as much as they had done worldwide in the Great Depression. House prices fell to a tenth of their top level. Commercial property was worth a hundredth of what it had been in the bubble. Over the decade the Nikkei lost three quarters of its ‘value.’ From a peak of 40,000 it was down to15,000 in 1992 and 12,000 by 2001.

The marvellous Japanese industrial machine continued to function, but the country never again achieved the growth rates of earlier decades, despite successive rounds of fiscal stimulus. The government spent 100 trillion yen in ten years. All this stimulus achieved was to ratchet up the national debt. The Japanese central bank also tried monetary policy. Interest rates stood at just 0.5% by 1995.

The whole debt-deflation mechanism described by Irving Fisher continued to grind away at the ‘Japanese economic miracle’. Investment was stagnant – no higher in 2002 than it had been in 1990.

So deflation can be a disaster. Once the process of deflation has begun, government policy can be ineffective to reverse it, as the Japanese experience shows. That is why governments intervene to try to prevent it starting.

  • The      Japanese experience shows that government policy can be completely      ineffective in the face of deflationary pressures.

The deflation/inflation dilemma

There is also a downside to the government intervening in order to offset the worst effects of the downturn and the danger of deflation, as they did at the end of 2008.

Quite simply capital is preserved, not destroyed. So capitalism is not healed, healthy and ready to gallop in the next steeplechase of boom and slump. The progress of recovery is slow. It continually demands stimuli such as injections of credit in order to get moving. Credit produces bubbles. This is one reason for the super-bubble in modern capitalism that Soros mentions. (Soros-The crash of 2008 and what it means)

In order to prevent the economy collapsing the government may intervene by allowing the pumping up of credit, for instance by cutting interest rates. As quickly as one bubble bursts, another is blown up. The bursting of the house price bubble after 2006 was inevitable. Yet, as soon as the banks got up off the floor, they have been pumping money on to the stock exchanges of the ‘emerging’ economies. Countries such as Brazil and India have been growing quite strongly as of the summer of 2011 and their stock markets bounced back. They have been aided by a flow of funds from the advanced capitalist countries where profitable investment opportunities are harder to find. Here are some warning signs from the Financial Times.

Bubble fears as emerging markets soar by Stefan Wagstyl and David Oakley (07.10.10): “Robert Zoellick, World Bank president, has talked of currency ‘tensions’ and ‘the risk of bubbles’. The IMF, in its global financial stability report, said: ‘The prospect of heavy capital inflows would be destabilising.’”

Emerging markets at risk from a gigantic bubble by Peter Tasker (18.10.10): “The degree of euphoria surrounding some emerging economies is already troubling. The Indian and Indonesian stock markets are trading at price earnings ratios of over 40 times, based on ten-year average earnings.” (That means it would take forty years to get your money back.)  “You would surely need a hundred years of fortitude to buy Mexico’s recently-issued 100-year bond at a yield of 5.6 per cent. Bubble and bust in China, on which the world is now so dependent for growth and optimism, would likely tank the commodities markets, set off a second round of deflation, and end the emerging markets boom in the most spectacular way possible.”

These people are incurable. Is it the case that ‘here we go again’?

  • The process of deflation associated with massive destruction of capital can become a vicious circle from which capitalism cannot escape.
  • If the      government intervenes to try to prevent deflation, they may prevent      adequate capital destruction that will eventually prepare the way for a full      recovery.
  • If capital      is not destroyed thoroughly a new speculative bubble can be blown and a      tendency to inflation created.

Regulating capitalism?

Joseph Stiglitz is one of the few economists who consistently predicted the crash. Stiglitz attributes the Great Recession to a combination of recklessness and a failure to regulate that recklessness (Freefall, Penguin 2010). Stiglitz has been right before and been ignored before. He is right this time and all the signs are that he will be ignored again.

The deregulatory drive attained an unstoppable momentum with the complete ideological victory of neoliberalism. Regulation was seen as cramping the style of capitalism red in tooth and claw.

After the Second World War global capital flows were carefully regulated in all the major capitalist countries. These regulations were progressively torn up as the post-War boom proceeded. The US Glass-Steagall Act that regulated the banks (passed as part of Roosevelt’s New Deal) was swept away in 1999 under Clinton’s Presidency. A wall of money and massive Congressional lobbying removed the last obstacle to unfettered freedom of finance. Arguably that paved the way for the present disaster.

Has capitalism got a death wish? Why not re-regulate when evidence of the damage caused by deregulation is all around? It needs repeating that the capitalist system is anarchic. The capitalist class does not work to a strategic plan. They respond to stimuli. Profit is their key stimulus. In an atmosphere of euphoria, all constraints are swept aside. As one broker explained, while the herd is making money you have to be part of that herd.  Because the capitalist class is the ruling class, they usually get what they want. When they wanted deregulation they got it, whether it was good for their system or not.

Regulation is only implemented when it doesn’t damage the essential interests of the financiers.  The handcuffs that Roosevelt apparently imposed on the US banks in 1933 in the form of the Glass-Steagall Act didn’t really hurt at all, for the simple reason that the banking system had already largely collapsed or was in a coma. By that time 9,000 banks had gone to the wall in the USA.

Roosevelt’s banking acts introduced a system of federal deposit insurance, a guarantee for depositors that their money would be safe. The acts separated high street banks, which were severely restricted in the risks they could take with depositors’ money, from investment banks, which remained uninsured and in principle would be allowed to go to the wall. The investments banks were by this time flat on their backs. Risk taking was the last thing on their minds in 1933. Survival was all-important. Roosevelt’s initiatives sound bold. Really he was bolting the stable door after the horse had bolted.

Only a year ago the bankers were hate figures, reviled by millions for ruining innocent people’s lives with their mad and incompetent gambling. Though not a complete picture of the nature of the present capitalist crisis, this was all substantially true so far as it went. It is incredible the extent to which the capitalist press and opinion formers have tried to use the fiscal crisis of the state – an inevitable phase in the capitalist crisis – to switch the blame away from the bankers and on to the public debt and the public sector. They have been partially successful in this, at least for a period of time. In a crisis consciousness can change rapidly, and it can and will turn around again just as quickly.

Only a year ago the cry went up, ‘never again!’ Never again would the banks hold the rest of us to ransom. They should not be allowed to be ‘too big to fail.’ As we have pointed out the problem was that the banks were really too interconnected to fail and too important to capitalism to fail. There was the rub. The banks could blackmail the rest of the capitalist class with all too plausible stories of complete economic meltdown

The call for re-regulation of the footloose and fancy free financial institutions that were the trigger for the crisis faces stiff resistance from vested interests. Reinhart and Rogoff actually attribute the frequency and seriousness of financial crises to financial liberalisation. “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously, as they did in the 1990s, but historically.” (This Time is Different p.155)

In the USA the biggest slap on the wrists to a bank has been applied to Goldman Sachs. The bank admitted to misleading customers on the quality of mortgage backed securities. They have been fined $550m. This is the loss of just two weeks’ profits. (Dominic Rushe-Resurgent Wall Street winning lobby battle, Guardian 27.06.11) It doesn’t hurt at all.

All over the world the bankers have evaded regulation and have been restored to their privileged position. The City of London has grown too big and parts of it are ‘socially useless’, commented Adair Turner, Chair of the Financial Services Authority, in exasperation. Right first time, Lord Turner. Still they got their way. Froud, Moran, Nilsson and Williams describe in detail (Opportunity lost, in Socialist Register 2011, pp.98-119) how the financiers ran rings round the New Labour ministers. While critical of the Macmillan Committee of 1931, the Radcliffe Committee of 1959 and the Wilson Committee of 1980 (all on finance) the authors observe how, in the Wigley (2008) and Bischoff (2009) Reports:

“Non-City groups were not included or consulted in the information gathering, problem-defining phase or subsequently in the drafting of the two reports about the benefits of finance.” (p.109)

In effect the City investigated itself, with not even a token trade unionist on the Committees.  Not surprisingly, it gave itself a clean bill of health. Bischoff decided that finance represented value for money. How?

“Bischoff added up taxes paid and collected by finance without considering the costs of bailing out the financial system.” (ibid p.210) This is the sort of dodgy accounting that brought the banks, and the rest of the economy, to the brink of ruin in the first place!  After this sleight of hand, no wonder the report concluded, “Financial services are critical to the UK’s future.”

The banks continue to be effectively unregulated. Though the article is fascinating as a description of how the British establishment works, the complete success of finance capital in shredding any proposed regulatory restrictions is mainly on account of  the spinelessness of Gordon Brown and Alistair Darling as representatives of New Labour. They were all hapless creatures of the establishment who could not conceive of an alternative to the rule of finance capital. In this respect they behaved like establishment politicians all over the world, as servants to the big banks and to capitalism.

So the banks got away scot free. This is true of the upper management, those who were solely responsible for the catastrophic decisions that led to the credit crunch. But there have been mass redundancies among ordinary bank workers in the UK and elsewhere over the past year. Those who have lost their jobs are the ordinary working class finance workers who had no part in the crazy revels of the speculative boom. They are the ones to pay the price.

The Tory-led government has continued the traditions of New Labour in grovelling to finance capital. They have effectively ditched the Walker Review on pay and bonuses in the banking sector. Their proposal for a bankers’ levy has been trimmed back and is likely to garner just 0.1% of bank profits.

It seems that capitalism as a whole could benefit from curbing the ‘animal spirits’ of the financial entrepreneurs. All the major capitalist powers swore in 2008 not to let the guilty bankers off the hook. It has become quite clear by 2011 that the financial interests have been able to fend off these pressures to behave themselves and face regulatory restrictions down.

Here’s how. In the USA lobbying has been intense. Gillian Tett quotes Larry Summers, Obama’s chief economic adviser, as estimating that, “The financial sector is currently funding an average of four lobbyists, to the tune of $1m or so, for every member of the House (including those who have nothing to do with finance)” (Financial Times 29.10.10). If this is not outright corruption, then it comes close. This is how political decision-making is arrived at in a capitalist democracy.

Bank profits are back. Bonuses are back. The rest of us look to years of austerity in the future, but the banks have been saved. Governments lumbered the people with huge public debts, largely to bail out the banks and because of the disastrous effects the banks’ conduct has had on the rest of the economy. All over the world they have now foresworn intervening in the financial arena and are letting the banks carry on exactly as they did before.

  • Regulating the banks has been abandoned. They are      back in the driving seat.

Protectionism?

We know that the Great Depression was made worse by the tendencies to protectionism that became manifest as the economic crash proceeded. The protectionist legislation, such as the Smoot-Hawley Act raising tariffs on imports which was passed in the USA in 1930, was not the cause of the Great Depression. It came too late for that. But protectionism did make the crisis worse.

If capitalism grows and world trade grows, then a rising tide raises all boats. But in a crisis the national ruling class does not only turn on ‘its own’ working class. It also tries to foist the burden onto other countries. And that makes it worse for everyone.

“As long as everything goes well competition acts…as a practical freemasonry of the capitalist class, so that they all share in the common booty …But as soon as it is no longer a question of division of profit, but rather of loss, each seeks as far as he can to restrict his own share of this loss and pass it on to someone else.” (Capital Volume III, p.361)

So far we have not seen an equally serious protectionist trend as happened in the 1930s. Indeed we have heard loud declarations as to the virtues of free trade and the need for all capitalist nations to work together and co-operate. Beware! This might be taken as a warning signal. We always hear these exhortations from the great and the good, specially on the eve of a trade war.

The form that the tendency to protectionism may take is currency manipulation rather than tariff barriers, as happened in the 1930s. The financial press has been running headlines about ‘currency wars’ all through the past year. Arguments, spats and sabre-rattling between the trading nations will continue. We have also seen attempts to manipulate currencies between the USA and China, while the US Congress has approved measures that may be regarded as covert protectionism.

In late 2010 the US Fed decided to launch a second round of quantitative easing (printing money). They injected a further $600bn into the economy, even though they didn’t know whether the first stimulus had ‘worked’. Trade rivals believe that pumping out dollars will depreciate the US currency, make US goods cheaper and their own products dearer on world markets and thus provide the USA with an unfair trade advantage. They are not happy.

If the world economy continues to recover, then the protectionist voices will become less strident for the time being. National antagonisms, which occur because of the combined and uneven development of world capitalism, will be a continued source of friction. In particular the global imbalance between China and the USA will remain a secular feature of the world economy and a permanent source of conflict. But the decisive difference with the 1930s is that world trade has now turned up and therefore a full-scale trade war is unlikely this time around.

  • Protectionist voices will fade if and when the      recovery develops, but, like the recovery, that process will be slow.

The fate of the Euro

The fate of the Euro remains insecure. Economic trends are not inexorable forces. They can be interfered with and reversed by human action, in particular by government, which is an important economic player in the twenty-first century. Here we discuss the role of ‘mistake’ and apparently accidental factors in politics and human affairs.

Marx did not have a problem in recognising the part played in economic events by mistaken ideas and stupid people. He cited the Bank Acts of 1844 and later which were based on an erroneous economic theory – the quantity theory of money – and a mistaken application of the theory to the constitution of the central bank. As a result of these factors, whenever a crisis broke out the Bank Acts had to be suspended. At first sight this seems to suggest that the root of the problem of the governance of the Bank of England was an inadequate understanding of political economy. This interpretation would be one of the purest subjective idealism. The problem of the malfunctioning Bank Acts in turn was really rooted in conflicts of interest between the policy-makers of the time.

Likewise we have been critical of the way the leading European Union decision-makers have responded to the Euro crisis that blew up in Greece and then in Ireland. We do not wish to give the impression that the situation was not resolved more decisively just because Merkel, Sarkozy and the others were a bit thick. The problem was that they were concerned above all with the national interests of Germany and France and not that of the EU as a whole. Capitalism is an anarchic system. Different capitalists have different interests from one another. That means that even the members of the ruling class may disagree with one another. So it is difficult, and may be impossible, for them to agree on a common policy.

Merkel may have seemed unwise when she has raised in public the question of Irish and Greek bondholders taking a ‘haircut’ (loss). Certainly the bond markets took fright as a result, and that made it much more difficult for the Eurozone leaders to implement the Irish and Greek ‘rescues’. But the question of default is a genuine dilemma for the Eurozone decision-makers. There is no one right course for capitalism to follow, and in any case the European powers may have conflicting interests on the question.

Merkel was reacting to a possible action in the German constitutional court and problems within her own struggling coalition. These parochial interests were more important to her than the future of the Euro, because they were about her survival as a political leader. That is typical. There were occasions in 2010 and 2011, and they may recur in the future, when the chaotic nature of the decision-making process in the Eurozone, could take the Euro to the brink of shipwreck.

The Euro is a unique institution. It is a currency without a country. A government, even under capitalism, has ways of influencing the level of economic activity within their economy and therefore of safeguarding its national currency.  As we’ve noted these economic levers are usually listed as fiscal and monetary policy. Fiscal policy within the EU is nationally determined. There is no common Eurozone wide or EU wide fiscal policy. Despite continual allegations of waste of EU funds, the Europe Union disposes of few resources and employs relatively few workers. At one time it had fewer employees than Kent County Council. It disburses considerable regional and agricultural subsidies to the member countries, but that is another matter.

When a government, like that of the USA, implements an expansionary fiscal policy by cutting taxes or spending more money, that may be expected to have an impact throughout the country. That cannot happen at present within the Eurozone. Instead of being able to pursue an active fiscal policy, Eurozone members are constrained in principle by rules on the maximum deficit and government debt they may run.

Not only that. The US has a common system of federal taxes and benefits. As a result if one state such as Michigan becomes economically depressed, the local citizens will automatically pay less tax and receive more benefits from the federal government. That will act as a bit of a cushion for the people of Michigan. These automatic stabilisers act to reduce economic volatility within the country. There is no such redistributive mechanism within the Eurozone. The message a country gets from its partners if in difficulties is, ‘you’re on your own.’

It should not be forgotten that the policy of European monetary union is driven by a hard neoliberal ideology. ‘Why should governments intervene to try to alleviate unemployment? Capitalism, left to itself, will generate the jobs. Even if it doesn’t, government intervention will only make the situation worse.’ That’s the sentiment at the top.

This nonsense is repeated in the arena of monetary policy. The European Central Bank does not have a growth target. Its sole brief is to keep inflation down. Presumably, so long as the money supply is stable, they think private capitalism will deliver optimal economic results.

The fact that the Euro has no real defences, or rather that these are being developed by the authorities on the hoof in the teeth of a crisis, makes the single currency very vulnerable. The idea of a European bond, with the whole weight of the Eurozone behind it, has been vetoed for the time being. On the other hand the ECB has been shamefacedly buying up sovereign debt in 2010 and 2011, as a clandestine way of propping up its weaker members from further attack.

Since the world economy is recovering, on the balance of probabilities the Euro should survive this crisis, though there is no doubt that some peripheral countries will remain in intensive care for some years to come. This is not a hard and fast prediction. Capitalism is an irrational system, as we have seen many times in the course of this book. Waves of speculation and what Keynes called “animal spirits” play their part and are quite capable of sweeping away the whole Euro project.

The authorities all over the world will have to take the situation seriously, as the collapse of the Euro would be a global calamity that could plunge the world economy into a double dip recession. Another serious world economic crisis in a few years ahead, which is quite possible, could sink the Euro altogether or severely reduce the area covered by the single currency.

The EU and Eurozone authorities ought to be able to manage an economic recovery in the Eurozone and European Union as a whole over the next few years, though there may well be stresses and strains. Greece, for instance, may have to be taken through an orderly default. This would involve recognition that the Greek economy could snap under the pressures imposed upon it. Default could also be the result of class struggle. The Greek working class is rightly furious at having to shoulder the burdens heaped upon them by the tax-dodging Greek ruling class. The problem involved in an orderly restructuring of Greek public debt is that this means that the French and German banks in particular will have to take a hit. The Euro presents a knotty problem that won’t go away soon.

  • The problems of the Eurozone      flow from its flawed design and architecture as well as the economic      crisis.
  • The Euro crisis remains the      most visible flashpoint for the world economy. This crisis is the one      thing that could even cause it to relapse from its present hesitant      recovery over the next couple of years.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part 7: Economic perspectives

Over the course of the narrative we have identified two distinct periods since the Second World War. The first was the golden age of the post-War boom which came to an end with the recession of 1973-4. The second was the more difficult period thereafter, sometimes called the neoliberal era. That period came to an end in 2008 in the Great Recession, with wholesale state intervention in the economy aimed at saving capitalism. We are entering a new era. What will be its characteristic features? We seem to be entering a period of what may be permanent slower growth and higher unemployment – an age of austerity.

Chapter 7.1: What the crisis has cost so far and what it will cost in the end

Any assessment of what the crisis has cost us needs to end with the words ‘so far.’ If the ruling class get their way we could be paying for their crisis for years and years. Here are some findings.

Reinhart and Rogoff

In the book This Time is Different, Reinhart and Rogoff have made a quantitative analysis of hundreds of financial crises going back to the run on Florentine banks in 1340, and tried to factor in the effect of additional factors,. The authors are orthodox economists. They see financial crises (as they call them) as often caused by accidental factors rather than inevitable under capitalism. They chronicle the financial fluctuations and panics without perceiving them as just the form of appearance of a crisis of capitalism, as the Great Recession undoubtedly was and is.

 

They are emphatic that the costs of a banking crisis cannot be reduced to the direct costs of bailing out the banks (which are huge). In this they are right. They explain:

 

“This nearly universal focus on opaque calculations of bailout costs is both misguided and incomplete. It is misguided because there are no widely agreed-upon guidelines for calculating these estimates. It is incomplete because the fiscal consequences of banking crises reach far beyond the more immediate bailout costs. These consequences mainly result from the significant adverse impact that the crisis has on government revenues (in nearly all cases) and the fact that in some episodes the fiscal policy reaction to the crisis has also involved substantial fiscal stimulus packages.”  (p.164)

 

Despite these words of warning from serious number crunchers, we shall try to give a preliminary measure of what the crisis has cost us all, or at least drive home the seriousness of the situation facing working people everywhere in the future.

 

Reinhart and Rogoff differentiate between the general run of post-World War II crises, and what they call Great Depression crises, of particular severity, which are of course the nearest comparison with what we are grappling with today. They show that the big ones last an average of 4.1 years rather than 1.7 years. (p.234)

 

They also take up the fiscal legacy of crises, and work out the historical average real public debt in the three years following a banking crisis as 186.3% of what it was in the year of the crisis (an average 86%  increase). (p.232)

 

As regards crises involving sovereign default, debt restructuring and near default avoided by international bailout packages they see an average 15% decline in GDP from peak to trough, with the effects lasting for more than five years.

 

So this is a summary of their conclusions on the consequences of ‘Great Depression’ crises:

 

  • At least four years of austerity
  • Public debt almost doubling
  • A 15% fall in GDP over more than five years

 

This is what is in store for us based on past experience. This is the likely cost of the Great Recession, a classic crisis of capitalism.

 

Andrew Haldane

 

We are all appalled at the enormous amounts stumped up to save the banks from their own stupidity. But this is peanuts compared with the total costs we are likely to incur. Andrew Haldane has calculated that:

 

“World output is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms that translates into losses of $4 trillion” (for the world economy) “and £140 billion” (for Britain). These are losses for just one year!

 

“As” (evidence given in Haldane’s paper) “shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP.” If this is right the crisis has lost us between one and five year’s output for ever. Haldane goes on:

 

“Put in money terms, that is output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers ‘astronomical’ would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. ‘Economical’ might be a better description.”

He calls his paper The $100 billion question, and finds out the title he dreamed up is a gross underestimate. The cost of the crisis to Britain alone could eventually be as much as the fruits of the economic activities of more than 60 million people for five years.

Christopher Dow

Christopher Dow also demonstrates that losses to GDP in major recessions can be grievous and longstanding.  His book looks in detail at five major recessions in the UK over the last century. He shows in Major recessions that output fell by 10.6% in 1920-21, 12.6% in 1929-33, 8.1% in 1973-5, 10.6% in 1979 and 12.4% in 1989-93.

Moreover he emphasises it is unlikely that, in a major recession, after experiencing the shock the economy will just bounce back into action as if nothing had happened. This is called a V-shaped recession, and some optimists are hoping that is what we will experience in the near future. In fact it is already clear that the recession has done permanent damage to future growth prospects and that the economic outlook is far from sunny:

“The asymmetric shape of a major recession is held to result from two mechanisms. First it is easier to shatter confidence than to restore it…Second, a major recession of demand results in a downward displacement of the path of capacity growth.” (Major recessions, p.374)

In other words the economy will be permanently shunted on to a lower and slower flight path. Losses from the crisis will be correspondingly bigger. Dow divides the 1920-95 time frame of his book into three periods: the interwar period, the post-War boom and the time from 1973 to 1995. He shows the difference in growth patterns between the golden age and the other two periods is that during the post-War boom the country experienced no serious recessions. Such recessions in effect hole the economic ship below the water line and reduce growth prospects for a whole generation:

“The three major recessions since 1973, taken together, could well have reduced output to 25 per cent below what it would otherwise have been, and thus could have reduced government tax revenue in real terms, as compared with the previous trend, on at least this scale.” (ibid p.403)

These major recessions hit the government finances too (as Reinhart and Rogoff also noted). Government debt thus fell much slower after 1975, despite the bonanzas of North Sea oil and privatisation receipts: “The main reason” (why the debt ratio ceased to fall as rapidly) “was that, chiefly because of the big recessions, nominal debt now started to rise considerably more rapidly.” (ibid p.410)

The Reinharts

Carmen M. Reinhart and Vincent R. Reinhart summarise their conclusions in After the Fall, written in August 2010. This is all part of a body of work by the Reinharts and Kenneth Rogoff that attempts to analyse the present crisis in the light of the past. They draw similar conclusions to Dow from a wider international body of evidence. They compare the situation to that of the Great Depression.

 

“Our main results can be summarized as follows:

 

“Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. The median post-financial crisis GDP growth decline in advanced economies is about 1 percent…

 

“What singles out the Great Depression, however, is not a sustained slowdown in growth as much as a massive initial output decline. In about half of the advanced economies in our sample, the level of real GDP remained below the 1929 pre-crisis level from 1930 to 1939. During the first three years following the 2007 U.S. subprime crisis (2008-2010), median real per capita GDP income levels for all the advanced economies is about 2 percent lower than it was in 2007…” (It’s still lower in most countries after four years in 2011 – MB)

 

“In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. The rise in unemployment is most marked for the five advanced economies, where the median unemployment rate is about 5 percentage points higher. In ten of the fifteen post-crisis episodes, unemployment has never fallen back to its pre-crisis level, not in the decade that followed nor through end-2009…

 

“The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.”

 

Lower growth for a decade; a collapse in output; unemployment significantly higher for ten years. We face a future of austerity as far ahead as the eye can see.

 

  • A comparison with the past, and an analysis of      present trends, show that we face a decade of austerity.

 

An age of austerity

 

In their book This Time is Different Carmen Reinhart and Kenneth Rogoff deal with the shape of the recovery. As they comment, “V-shaped recoveries in equity prices are far more common than V-shaped recoveries in real housing prices or employment” (p.239). This is unfortunate, since most of us are much more interested in our chances of a job and our living standards than the price of shares. We can rule out a V-shaped recovery as a serious prospect already from the slow pace of recovery. All the serious economists see doom and gloom ahead for years to come.

 

It seems the world economy will be faced with being knocked down onto a lower and slower flight path for the indefinite future on account of the crisis. This is quite apart from the crushing burden of state debt inflicted by the Great Recession. In The Age of Deleveraging, Gary Shilling notes that with deleveraging comes slow economic growth. He details nine reasons why real GDP will rise only about 2% annually in the years ahead  —  far below the 3.3% growth it takes just to keep the unemployment rate stable. Shilling had been notable in earlier years (for instance in Irrational Exuberance, 2000) in warning against the prevailing market euphoria. He has got it right in the past.

Shilling shows that the private sector is now definitely suffering a hangover on account of previously bingeing on credit. Saving will become the order of the day for households and firms. This is already happening. Meanwhile the banks are recapitalising. This amounts to unwinding all the excess leverage of the previous decade. Protectionism may grow under such gloomy conditions. Finally vicious cuts in government spending will further depress the outlook. His forecast is that the end of the spree will cut 1.5 percentage points off the 3.7% GDP growth rate of the relatively prosperous 1982–2000 years. He concludes, “These nine economic growth-slowing forces make 2.0% annual advances in real GDP in coming years reasonable, maybe even optimistic.”

Growth of 2% a year is not enough to restore full employment. In the summer of 2011 even that figure looks optimistic.

  • The world economy has been      permanently weakened. It will not just bounce back into full recovery.

What chance of a boom?

At the time of writing (the summer of 2011) the world economy has technically been in recovery for more than two years. For this reason the prospect of a double dip recession is receding. The obvious weak point that could challenge this prognosis is the fate of the Euro, discussed separately.

At the same time it must be recognised that the world economy, after a weak and lopsided boom, has suffered the most severe recession since the Second World War. It is severely weakened as a result. A recovery is under way, but there is no sign of a return to full employment. Where might a full recovery come from?

For most capitalist countries the condition of their economy is similar. This is the picture:

  • Consumption is reviving from the depths of 2008-9. Its      growth is severely constrained by the fact that households are      deleveraging, paying off debts rather than running up more credit. This      process of trying to getting back in the black is likely to continue for some      years Consumers have been burned by the speculative dance and then by the      recession.
  • Government spending cuts, which are likely to      maintain mass unemployment for years to come, will further hurt      consumption. As we pointed out earlier, consumption is the least volatile      element of national income. A real revival of consumption is likely to come      on the back of a boom elsewhere in the economy, probably in the investment      sector. But…
  • Investment is flat on its back and likely to remain so. Though      profits have revived, capacity utilisation in the USA is only running at      75%. Capital destruction has a way to go before a big investment boom will      start. British firms also have cash coming out of their ears that they      have no plans to invest.
  • Exports. ‘Export or die’ was the old motto. Countries      can export their way out of trouble. No doubt for some capitalist nations      exports will provide a fillip. But one country’s export is another’s      import. For the system as a whole exporting is a zero sum game.

The plans to cut public spending will further harm investment and consumption, since all the elements of national income are interdependent. Cuts will slow the recovery.  This is not the perspective for a healthy boom.

One common thread running throughout this work is that, though there have been common trends and laws of motion at work as long as the capitalist system has been in existence, history does not repeat itself exactly. With all the qualifications it might be worth looking at the 1973-4 crisis and its aftermath as a guide to perspectives for the future. There was never a complete recovery of economic health after 1974 and the recession was followed only five years later by another serious downturn. A similar pattern to the 1970s could well occur only a few years down the line once the economy has, it seems, successfully recovered. The twin crises of that period seriously brought the continued existence of capitalism into question.

Since the collapse of Stalinism after 1989 capitalism has seemed to the overwhelming majority of the population to be the only game in town. Whatever the political consequences of the Great Recession, and they have by no means been played out yet, the massive waste and injustice we have seen is bound to have produced a profound questioning of the system in the minds of millions of working people all over the world.

  • The economy is in slow      recovery. This is fragile.
  • Another recession soon would      have devastating consequences.

Growing out of debt?

It is argued that, when the economy gets going again, all the economic difficulties like government deficits will disappear. How do countries cut down the public debt? In theory they could just grow out of debt. If GDP grows and the debt remains the same size, then it gets progressively smaller as a proportion of GDP. It’s happened before.

In all the major capitalist countries the national debt sank quite dramatically after the Second World War because the economy grew. That is not the prospect that confronts the capitalist world now. We are confronted by years of austerity. It is quite possible that we will face another, even more serious, recession in a few years time. Full employment and the prosperity of yore seem to have gone for good. In a situation of slow and halting growth at best, the major capitalist countries will not be able to grow out of debt.

In any case the G20 meeting in June 2010 committed the governments involved to wage war on their national debt rather than concentrate on growing. The present round of global cuts, which is aimed at reducing the government deficit and debt, risks strangling the recovery by creating more redundancies and cutting living standards.

Take the case of Britain. Martin Wolf explains that the national debt to GDP ratio Britain confronts at present is by no means unprecedented. The average debt to GDP ratio has been 112% for the whole period from 1688 (when the debt was founded) to the present. (Financial Times 21.10.10) Yet the Tory dominated coalition is ringing the alarm bells as the ratio creeps up to 75% of national income. In fact the coalition’s austerity policies are likely to hamstring and constrain economic growth further, and slow the repayment of the debt as a result.

Every other capitalist government is trying to do the same, outdoing one another in their attempts to load austerity upon their citizens. For some capitalists, the public sector provides an important market. For the system as a whole, public expenditure makes capitalism more stable by providing a floor below which economic activity cannot plunge. It maintains a modest level of spending throughout the economy, pays wages and buys in services. Now the Tories in Britain and the rest of the G20 governments want to smash that floor.

But the fundamental problem for all the main capitalist countries is that capitalism continues to be in crisis. The recession is (technically) over. The crisis goes on. All the authoritative commentators we quoted in earlier in this Chapter see that problems stretch ahead for years to come. After the heart attack it has just suffered we cannot expect miracles of athleticism from the system in the future.

  • Capitalism grew out of its public debt burden in the      past. Slow growth in future means it won’t do so this time.

The BRICs

Commentators have noted that large parts of the world appear to have made a complete recovery from the great Recession. That is particularly the case for China which, after consciously adjusting policy to a sudden loss of export markets as a result of the recession, stormed ahead with growth rates of 8-10% p.a. as if nothing had happened. India, Brazil and other ‘emerging economies’ are also growing strongly. (The term is used for what were formerly called less developed countries.)

Our concern is principally with the heartlands of modern capitalism. These are still the metropolitan countries – the USA, European Union and Japan. Together these three are responsible for more than 60% of world of world output. Their fate is by and large the fate of world capitalism. The peripheral capitalist economies are mainly dependent upon them for markets and for growth prospects. By contrast China, by far the biggest, most important and most dynamic of the emerging economies is responsible for just 8% of global production.

To turn briefly to the case of China, there is a widespread misperception that the country is totally dependent on export earnings to explain its astonishing growth record. In effect China is seen as a vast sweat shop used by private capitalist firms from the advanced capitalist countries to export to the rest of the world. If this were the case then China would be completely dependent upon the performance of rest of the world economy and would grind to a halt in the case of economic crisis. This has not happened.

There are two things wrong with the conventional picture. First economic growth is powered by Chinese firms, mainly publicly owned. Secondly investment in China is the driving force of economic take-off, not exports to the rest of the world. Though China is integrated into the international division of labour, the Great Recession has shown that the country is pursuing its own trajectory, not helplessly dependent upon events in the advanced capitalist countries.

Jonathan Anderson (in Is China export-led?) estimates net exports as being responsible for about 9% of GDP. The Chinese authorities themselves announce that investment has made up about 40% of national income in recent years. The Chinese Xinhua News Agency announced recently that, “Investment accounted for 92.3 percent of China’s Gross Domestic Product (GDP) growth in 2009.” Anderson’s 2007 paper gave advance notice that China’s economic performance would not be totally dependent on that of the advanced capitalist countries.

The development of the so-called BRICs (Brazil, Russia, India and China) has been trumpeted as a phenomenon of great importance. But it deserves separate analysis. In passing it might be mentioned that we have sympathy with the view that the concept of the BRICs is a ‘broker’s fantasy’. Thank you, Alex Callinicos (Bonfire of illusions, p.116). Even if the BRICs are really a unified economic phenomenon, and their rise is preordained and irresistible, that would be a secular trend rather than a fundamental factor in the present cyclical crisis of capitalism, which is our principal object of study.

In fact Brazil and Russia are wholly dependent on commodity exports for their recent spurt of growth. China seems set to become the biggest exporter of manufactures in the world. India has a huge home market, but seems very dependent on the export of services to the advanced capitalist countries. To be sure, all these countries are growing quite fast by historic capitalist standards, but all for different reasons. Combined and uneven development is after all a basic feature of capitalist growth and development.

  • The BRICs are important in their own right, but      world economic development is still dominated by the imperialist      heartlands.

Chapter 7.2: Problems ahead

The destruction of capital

Marx was well aware that capitalism destroys capital continually and remorselessly as it accumulates. Never let it be said that capitalism uses resources efficiently. It advances by destroying the value of the means of production in its path.  This devaluation or moral depreciation of capital occurs because of the continuous rise in productivity spurred on by competition between capitalists. So machinery, and other fixed capital, has to be scrapped as it has become out of date long before it is worn out. If constant capital cannot allow the capitalist to compete with rivals who have retooled with the latest equipment, then it has to go

Marx quoted Babbage, a polymath who wrote extensively on the role and importance of machinery in the nineteenth century, with a startling example of this depreciation. “The improvements…which took place not long ago in frames for making patent-nets were so great, that a machine, in good repair, which had cost £1,200, sold a few years after for £60.” (Marx-Engels Collected Works Volume 33, p.350).

All this did not benefit the workforce one jot. Equipment had to be worked 24 hours a day by shifts of  workers to transfer all the value out of that expensive constant capital to the tulle (the final product)  before the machine became scrap metal. As Marx comments on this process:

“John Stuart Mill says in his Principles of Political Economy: ‘it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being.’ That is, however, by no means the aim of the application of machinery under capitalism…The machine is a means for producing surplus value.” (Capital Volume I, p.492)

Under capitalism innovation can often prove to be the ruin of the inventor:

“The far greater cost of operating an establishment based on a new invention as compared to later establishments arising from its very bones. This is so very true that the trail-blazers generally go bankrupt, and only those who later buy the buildings, machinery, etc., at a cheaper price, make money out of it. It is, therefore, generally the most worthless and miserable sort of money-capitalists who draw the greatest profit out of all new developments of the universal labour of the human spirit and their social application through combined labour.” (Capital Volume III p.199)

Here is a more recent example of the process that Marx called moral depreciation:

“From 1977 to 1984, venture capital firms invested almost $400 million in 43 different manufacturers of Winchester disk drives…including 21 startup or early stage investments….During the middle part of 1983, the capital markets assigned a value in excess of $5 billion to 12 publicly traded, venture capital based hard disk drive manufacturers…However by 1984 the value assigned to those same 12 manufacturers had declined..to only $1.4bn.”  (Sahlman and Stevenson Capital Market Myopia, cited in Railroading Economics by Michael Perelman, pp.54-5)

It seems that even this regular destruction of the productive forces is not enough in the event of a crisis. As the Communist Manifesto declares, in a slump:

“The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises.” (Communist Manifesto, p.8)

Take the case of the boom that crashed in 2001. Earlier we reported Robert Brenner’s account of the massive build up of overcapacity in the ICT sector:

“Between 1995 and 2000, industrial capacity in information technology quintupled, accounting by itself for roughly half of the quadrupling of the industrial capacity that took place in the manufacturing sector as a whole, which also smashed all records. As a consequence the gain in profitability deriving from the increased productivity growth was counterbalanced by the decline in profitability that resulted from growing over-supply” (What is Good for Goldman Sachs is Good for America, p.31)

What happened to all this surplus capital? It has disappeared as surely as if the earth had opened to swallow it up. The Financial Times reckoned after the debacle that only 1 or 2% of the fibre optic cable buried underground had ever been turned on (cited in Chris Harman – Zombie capitalism, p.286). The inflated share prices of new technology firms set up during the boom also went south. Their resources disappeared for a song in sales of bankrupt assets. Many of these firms had never paid a dividend and never would.

The classic statement of the need for more capital to be destroyed in a crisis in order for the recovery to come is from Andrew Mellon, US Treasury Secretary after the Wall Street crash; “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” he ranted. “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, lead a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Joseph Schumpeter was another advocate of ‘creative destruction’  Business cycles, he declares, “Are not like tonsils, separate things that might be treated by themselves but are, like the beat of the heart, of the essence of the organism that displays them.” (Business Cycles, quoted in Perelman-Railroading economics, p.60) In other words, just put up with it.

The greatest and most wanton destruction of capital in human history took place as a result of the Second World War. The War was followed by an enormous secular boom, based precisely on this capital destruction.

Of course the political conditions for the survival of capitalism after 1945 had first to be established. “The political failure of the Stalinists and the social democrats, in Britain and Western Europe, created the political climate for a recovery of capitalism.” (Ted Grant – Will there be a slump?)

Grant goes on, “The effects of the war, in the destruction of consumer and capital goods, created a big market (war has effects similar to, but deeper than, a slump in the destruction of capital). These effects, according to United Nations’ statisticians, only disappeared in 1958.”

The War of course physically destroyed capital physically. A slump destroys the value of capital. In doing so, it should prepare the conditions for a new upturn.

Throughout the Great Depression productive forces, not to mention people’s livelihoods and lives, were recklessly squandered as part of this ‘healing’ process. But capitalism was not cured till the Second World War broke out. The 1930s saw capitalism in mortal danger. The ruling class felt thereafter that it could not stand idly by and wait for the interminable time it took for the system to heal itself through deflation. Since the Second World War the capitalist class has intervened actively in the economy to stop it hitting rock bottom.

They have done so for two reasons: politically it was too dangerous to leave things alone. The working class would draw the conclusion in increasing numbers that capitalism was a failed system. The other reason they have intervened is because there is no reason to believe capitalism need ever necessarily recover from a serious and prolonged bout of deflation.

  • Capitalism continuously devalues capital as it      accumulates.
  • Marx observes that this process cheapens the      elements of constant capital, and it is a factor offsetting the tendency      for the rate of profit to fall.
  • In a recession further capital destruction is needed      in order to prepare the conditions for a new boom.
  • The Second World War, by destroying capital on the      grand scale, prepared the conditions for the post-War boom.

Deflation

Deflation is what happens when the Mellons of the world allow the rest of world capitalism to go hang, by allowing capital destruction without limit. It does not offer a healing process. This was discovered by Irving Fisher during the 1930s. Fisher is famous principally for coming out with possibly the most ludicrous prediction in the entire canon of neoclassical economics, when he declared in 1929, “Stock prices have reached what looks like a permanently high plateau.”

Haunted by this comment thereafter, he developed the theory of debt-deflation in order to try to restore his credibility as an economist. In effect, he claimed, capitalism in crisis can go into a vicious circle of decline. As the economy slides down, incomes fall and wealth declines. But debts maintain their value. If prices are actually falling (as they were at about 10% a year in the worst years of the Great Depression) then debtors have to shell out more and more of their earnings to pay for the debts they built up in the good years. The debts become insupportable. They consume the debtors, who lose everything with no salvation in sight.

Deflation causes other distortions. If prices are falling, why keep your money in a bank? Savings will be worth more next year than this year even if you keep them in a sock. On the other hand interest rates demanded by the banks are high enough to discourage capitalists who want to borrow in order to invest. If nominal rates are just 1% and prices are falling by 10% annually, then the real rate of interest is about 11% a year.

That means the government cannot stimulate the economy by means of monetary policy. Small businesses and struggling farmers in particular crave lower interest rates as a lifeline. How can the government engineer negative nominal interest rates to keep real rates low when prices are falling?

Also people are more likely to hang on to their money as its purchasing power grows year by year rather than spending it, just when the economy could really do with a buying splurge to expand the market.

For all these reasons the economy will not reach a stable state where, in Mellon’s words, ‘all the rottenness has been purged out of the system’. Deflation will instead take the economy, “With hideous ruin and combustion, down / To bottomless perdition, there to dwell”, like Satan in Paradise Lost (Book I, lines 46-7).

If the capitalists have the tools to stop deflation happening, then they will intervene. The question is: can they? What effect will their policies have?

The Japanese deflation

Evidence of the effects of deflation, and of the ineffectiveness of government policy intended to prevent it, comes from Japan. In the 1950s and 1960s the Japanese economy achieved rates of growth higher than any capitalist economy had ever attained before. Competitors saw Japan as sweeping all before it on the world economy, conquering one export market after another.

In the 1980s it became clear that Japan was afflicted by a financial bubble. Its origins do not concern us here but it was associated, like the more recent bubble, with artificially low interest rates. Japanese banks had their arms twisted to lend more money. The loans were often secured by land as collateral. This was the prime cause of the land price bubble after 1985. More lending increased the demand for land, so its price went up. So people borrowed still more money to buy land, in order to borrow even more.

The bubble became particularly evident in property prices. The Nikkei share index was also in the stratosphere. Towards the end of the 1980s the total price of real property in Japan was reckoned to be worth more than the land in the whole of the rest of the world!

There had been a steady fall in the rate of profit even before the bubble burst. One reason for this was the enormous increase in costs caused by soaring rents and the rising price of land that had to be paid for by capitalists. In the end a rise in interest rates in late 1989 was enough to prick the bubble. Share prices collapsed. Land prices collapsed.

Huge debts, incurred during the bubble, remained unpaid and unpayable. The banks, massively overextended, began to deleverage, screwing the rest of the economy down as they went. The panic began on December 31st 1989. More than a decade of stagnation followed.

Over the next few years asset prices fell in Japan as much as they had done worldwide in the Great Depression. House prices fell to a tenth of their top level. Commercial property was worth a hundredth of what it had been in the bubble. Over the decade the Nikkei lost three quarters of its ‘value.’ From a peak of 40,000 it was down to15,000 in 1992 and 12,000 by 2001.

The marvellous Japanese industrial machine continued to function, but the country never again achieved the growth rates of earlier decades, despite successive rounds of fiscal stimulus. The government spent 100 trillion yen in ten years. All this stimulus achieved was to ratchet up the national debt. The Japanese central bank also tried monetary policy. Interest rates stood at just 0.5% by 1995.

The whole debt-deflation mechanism described by Irving Fisher continued to grind away at the ‘Japanese economic miracle’. Investment was stagnant – no higher in 2002 than it had been in 1990.

So deflation can be a disaster. Once the process of deflation has begun, government policy can be ineffective to reverse it, as the Japanese experience shows. That is why governments intervene to try to prevent it starting.

  • The      Japanese experience shows that government policy can be completely      ineffective in the face of deflationary pressures.

The deflation/inflation dilemma

There is also a downside to the government intervening in order to offset the worst effects of the downturn and the danger of deflation, as they did at the end of 2008.

Quite simply capital is preserved, not destroyed. So capitalism is not healed, healthy and ready to gallop in the next steeplechase of boom and slump. The progress of recovery is slow. It continually demands stimuli such as injections of credit in order to get moving. Credit produces bubbles. This is one reason for the super-bubble in modern capitalism that Soros mentions. (Soros-The crash of 2008 and what it means)

In order to prevent the economy collapsing the government may intervene by allowing the pumping up of credit, for instance by cutting interest rates. As quickly as one bubble bursts, another is blown up. The bursting of the house price bubble after 2006 was inevitable. Yet, as soon as the banks got up off the floor, they have been pumping money on to the stock exchanges of the ‘emerging’ economies. Countries such as Brazil and India have been growing quite strongly as of the summer of 2011 and their stock markets bounced back. They have been aided by a flow of funds from the advanced capitalist countries where profitable investment opportunities are harder to find. Here are some warning signs from the Financial Times.

Bubble fears as emerging markets soar by Stefan Wagstyl and David Oakley (07.10.10): “Robert Zoellick, World Bank president, has talked of currency ‘tensions’ and ‘the risk of bubbles’. The IMF, in its global financial stability report, said: ‘The prospect of heavy capital inflows would be destabilising.’”

Emerging markets at risk from a gigantic bubble by Peter Tasker (18.10.10): “The degree of euphoria surrounding some emerging economies is already troubling. The Indian and Indonesian stock markets are trading at price earnings ratios of over 40 times, based on ten-year average earnings.” (That means it would take forty years to get your money back.)  “You would surely need a hundred years of fortitude to buy Mexico’s recently-issued 100-year bond at a yield of 5.6 per cent. Bubble and bust in China, on which the world is now so dependent for growth and optimism, would likely tank the commodities markets, set off a second round of deflation, and end the emerging markets boom in the most spectacular way possible.”

These people are incurable. Is it the case that ‘here we go again’?

  • The process of deflation associated with massive destruction of capital can become a vicious circle from which capitalism cannot escape.
  • If the      government intervenes to try to prevent deflation, they may prevent      adequate capital destruction that will eventually prepare the way for a full      recovery.
  • If capital      is not destroyed thoroughly a new speculative bubble can be blown and a      tendency to inflation created.

Regulating capitalism?

Joseph Stiglitz is one of the few economists who consistently predicted the crash. Stiglitz attributes the Great Recession to a combination of recklessness and a failure to regulate that recklessness (Freefall, Penguin 2010). Stiglitz has been right before and been ignored before. He is right this time and all the signs are that he will be ignored again.

The deregulatory drive attained an unstoppable momentum with the complete ideological victory of neoliberalism. Regulation was seen as cramping the style of capitalism red in tooth and claw.

After the Second World War global capital flows were carefully regulated in all the major capitalist countries. These regulations were progressively torn up as the post-War boom proceeded. The US Glass-Steagall Act that regulated the banks (passed as part of Roosevelt’s New Deal) was swept away in 1999 under Clinton’s Presidency. A wall of money and massive Congressional lobbying removed the last obstacle to unfettered freedom of finance. Arguably that paved the way for the present disaster.

Has capitalism got a death wish? Why not re-regulate when evidence of the damage caused by deregulation is all around? It needs repeating that the capitalist system is anarchic. The capitalist class does not work to a strategic plan. They respond to stimuli. Profit is their key stimulus. In an atmosphere of euphoria, all constraints are swept aside. As one broker explained, while the herd is making money you have to be part of that herd.  Because the capitalist class is the ruling class, they usually get what they want. When they wanted deregulation they got it, whether it was good for their system or not.

Regulation is only implemented when it doesn’t damage the essential interests of the financiers.  The handcuffs that Roosevelt apparently imposed on the US banks in 1933 in the form of the Glass-Steagall Act didn’t really hurt at all, for the simple reason that the banking system had already largely collapsed or was in a coma. By that time 9,000 banks had gone to the wall in the USA.

Roosevelt’s banking acts introduced a system of federal deposit insurance, a guarantee for depositors that their money would be safe. The acts separated high street banks, which were severely restricted in the risks they could take with depositors’ money, from investment banks, which remained uninsured and in principle would be allowed to go to the wall. The investments banks were by this time flat on their backs. Risk taking was the last thing on their minds in 1933. Survival was all-important. Roosevelt’s initiatives sound bold. Really he was bolting the stable door after the horse had bolted.

Only a year ago the bankers were hate figures, reviled by millions for ruining innocent people’s lives with their mad and incompetent gambling. Though not a complete picture of the nature of the present capitalist crisis, this was all substantially true so far as it went. It is incredible the extent to which the capitalist press and opinion formers have tried to use the fiscal crisis of the state – an inevitable phase in the capitalist crisis – to switch the blame away from the bankers and on to the public debt and the public sector. They have been partially successful in this, at least for a period of time. In a crisis consciousness can change rapidly, and it can and will turn around again just as quickly.

Only a year ago the cry went up, ‘never again!’ Never again would the banks hold the rest of us to ransom. They should not be allowed to be ‘too big to fail.’ As we have pointed out the problem was that the banks were really too interconnected to fail and too important to capitalism to fail. There was the rub. The banks could blackmail the rest of the capitalist class with all too plausible stories of complete economic meltdown

The call for re-regulation of the footloose and fancy free financial institutions that were the trigger for the crisis faces stiff resistance from vested interests. Reinhart and Rogoff actually attribute the frequency and seriousness of financial crises to financial liberalisation. “Periods of high international capital mobility have repeatedly produced international banking crises, not only famously, as they did in the 1990s, but historically.” (This Time is Different p.155)

In the USA the biggest slap on the wrists to a bank has been applied to Goldman Sachs. The bank admitted to misleading customers on the quality of mortgage backed securities. They have been fined $550m. This is the loss of just two weeks’ profits. (Dominic Rushe-Resurgent Wall Street winning lobby battle, Guardian 27.06.11) It doesn’t hurt at all.

All over the world the bankers have evaded regulation and have been restored to their privileged position. The City of London has grown too big and parts of it are ‘socially useless’, commented Adair Turner, Chair of the Financial Services Authority, in exasperation. Right first time, Lord Turner. Still they got their way. Froud, Moran, Nilsson and Williams describe in detail (Opportunity lost, in Socialist Register 2011, pp.98-119) how the financiers ran rings round the New Labour ministers. While critical of the Macmillan Committee of 1931, the Radcliffe Committee of 1959 and the Wilson Committee of 1980 (all on finance) the authors observe how, in the Wigley (2008) and Bischoff (2009) Reports:

“Non-City groups were not included or consulted in the information gathering, problem-defining phase or subsequently in the drafting of the two reports about the benefits of finance.” (p.109)

In effect the City investigated itself, with not even a token trade unionist on the Committees.  Not surprisingly, it gave itself a clean bill of health. Bischoff decided that finance represented value for money. How?

“Bischoff added up taxes paid and collected by finance without considering the costs of bailing out the financial system.” (ibid p.210) This is the sort of dodgy accounting that brought the banks, and the rest of the economy, to the brink of ruin in the first place!  After this sleight of hand, no wonder the report concluded, “Financial services are critical to the UK’s future.”

The banks continue to be effectively unregulated. Though the article is fascinating as a description of how the British establishment works, the complete success of finance capital in shredding any proposed regulatory restrictions is mainly on account of  the spinelessness of Gordon Brown and Alistair Darling as representatives of New Labour. They were all hapless creatures of the establishment who could not conceive of an alternative to the rule of finance capital. In this respect they behaved like establishment politicians all over the world, as servants to the big banks and to capitalism.

So the banks got away scot free. This is true of the upper management, those who were solely responsible for the catastrophic decisions that led to the credit crunch. But there have been mass redundancies among ordinary bank workers in the UK and elsewhere over the past year. Those who have lost their jobs are the ordinary working class finance workers who had no part in the crazy revels of the speculative boom. They are the ones to pay the price.

The Tory-led government has continued the traditions of New Labour in grovelling to finance capital. They have effectively ditched the Walker Review on pay and bonuses in the banking sector. Their proposal for a bankers’ levy has been trimmed back and is likely to garner just 0.1% of bank profits.

It seems that capitalism as a whole could benefit from curbing the ‘animal spirits’ of the financial entrepreneurs. All the major capitalist powers swore in 2008 not to let the guilty bankers off the hook. It has become quite clear by 2011 that the financial interests have been able to fend off these pressures to behave themselves and face regulatory restrictions down.

Here’s how. In the USA lobbying has been intense. Gillian Tett quotes Larry Summers, Obama’s chief economic adviser, as estimating that, “The financial sector is currently funding an average of four lobbyists, to the tune of $1m or so, for every member of the House (including those who have nothing to do with finance)” (Financial Times 29.10.10). If this is not outright corruption, then it comes close. This is how political decision-making is arrived at in a capitalist democracy.

Bank profits are back. Bonuses are back. The rest of us look to years of austerity in the future, but the banks have been saved. Governments lumbered the people with huge public debts, largely to bail out the banks and because of the disastrous effects the banks’ conduct has had on the rest of the economy. All over the world they have now foresworn intervening in the financial arena and are letting the banks carry on exactly as they did before.

  • Regulating the banks has been abandoned. They are      back in the driving seat.

Protectionism?

We know that the Great Depression was made worse by the tendencies to protectionism that became manifest as the economic crash proceeded. The protectionist legislation, such as the Smoot-Hawley Act raising tariffs on imports which was passed in the USA in 1930, was not the cause of the Great Depression. It came too late for that. But protectionism did make the crisis worse.

If capitalism grows and world trade grows, then a rising tide raises all boats. But in a crisis the national ruling class does not only turn on ‘its own’ working class. It also tries to foist the burden onto other countries. And that makes it worse for everyone.

“As long as everything goes well competition acts…as a practical freemasonry of the capitalist class, so that they all share in the common booty …But as soon as it is no longer a question of division of profit, but rather of loss, each seeks as far as he can to restrict his own share of this loss and pass it on to someone else.” (Capital Volume III, p.361)

So far we have not seen an equally serious protectionist trend as happened in the 1930s. Indeed we have heard loud declarations as to the virtues of free trade and the need for all capitalist nations to work together and co-operate. Beware! This might be taken as a warning signal. We always hear these exhortations from the great and the good, specially on the eve of a trade war.

The form that the tendency to protectionism may take is currency manipulation rather than tariff barriers, as happened in the 1930s. The financial press has been running headlines about ‘currency wars’ all through the past year. Arguments, spats and sabre-rattling between the trading nations will continue. We have also seen attempts to manipulate currencies between the USA and China, while the US Congress has approved measures that may be regarded as covert protectionism.

In late 2010 the US Fed decided to launch a second round of quantitative easing (printing money). They injected a further $600bn into the economy, even though they didn’t know whether the first stimulus had ‘worked’. Trade rivals believe that pumping out dollars will depreciate the US currency, make US goods cheaper and their own products dearer on world markets and thus provide the USA with an unfair trade advantage. They are not happy.

If the world economy continues to recover, then the protectionist voices will become less strident for the time being. National antagonisms, which occur because of the combined and uneven development of world capitalism, will be a continued source of friction. In particular the global imbalance between China and the USA will remain a secular feature of the world economy and a permanent source of conflict. But the decisive difference with the 1930s is that world trade has now turned up and therefore a full-scale trade war is unlikely this time around.

  • Protectionist voices will fade if and when the      recovery develops, but, like the recovery, that process will be slow.

The fate of the Euro

The fate of the Euro remains insecure. Economic trends are not inexorable forces. They can be interfered with and reversed by human action, in particular by government, which is an important economic player in the twenty-first century. Here we discuss the role of ‘mistake’ and apparently accidental factors in politics and human affairs.

Marx did not have a problem in recognising the part played in economic events by mistaken ideas and stupid people. He cited the Bank Acts of 1844 and later which were based on an erroneous economic theory – the quantity theory of money – and a mistaken application of the theory to the constitution of the central bank. As a result of these factors, whenever a crisis broke out the Bank Acts had to be suspended. At first sight this seems to suggest that the root of the problem of the governance of the Bank of England was an inadequate understanding of political economy. This interpretation would be one of the purest subjective idealism. The problem of the malfunctioning Bank Acts in turn was really rooted in conflicts of interest between the policy-makers of the time.

Likewise we have been critical of the way the leading European Union decision-makers have responded to the Euro crisis that blew up in Greece and then in Ireland. We do not wish to give the impression that the situation was not resolved more decisively just because Merkel, Sarkozy and the others were a bit thick. The problem was that they were concerned above all with the national interests of Germany and France and not that of the EU as a whole. Capitalism is an anarchic system. Different capitalists have different interests from one another. That means that even the members of the ruling class may disagree with one another. So it is difficult, and may be impossible, for them to agree on a common policy.

Merkel may have seemed unwise when she has raised in public the question of Irish and Greek bondholders taking a ‘haircut’ (loss). Certainly the bond markets took fright as a result, and that made it much more difficult for the Eurozone leaders to implement the Irish and Greek ‘rescues’. But the question of default is a genuine dilemma for the Eurozone decision-makers. There is no one right course for capitalism to follow, and in any case the European powers may have conflicting interests on the question.

Merkel was reacting to a possible action in the German constitutional court and problems within her own struggling coalition. These parochial interests were more important to her than the future of the Euro, because they were about her survival as a political leader. That is typical. There were occasions in 2010 and 2011, and they may recur in the future, when the chaotic nature of the decision-making process in the Eurozone, could take the Euro to the brink of shipwreck.

The Euro is a unique institution. It is a currency without a country. A government, even under capitalism, has ways of influencing the level of economic activity within their economy and therefore of safeguarding its national currency.  As we’ve noted these economic levers are usually listed as fiscal and monetary policy. Fiscal policy within the EU is nationally determined. There is no common Eurozone wide or EU wide fiscal policy. Despite continual allegations of waste of EU funds, the Europe Union disposes of few resources and employs relatively few workers. At one time it had fewer employees than Kent County Council. It disburses considerable regional and agricultural subsidies to the member countries, but that is another matter.

When a government, like that of the USA, implements an expansionary fiscal policy by cutting taxes or spending more money, that may be expected to have an impact throughout the country. That cannot happen at present within the Eurozone. Instead of being able to pursue an active fiscal policy, Eurozone members are constrained in principle by rules on the maximum deficit and government debt they may run.

Not only that. The US has a common system of federal taxes and benefits. As a result if one state such as Michigan becomes economically depressed, the local citizens will automatically pay less tax and receive more benefits from the federal government. That will act as a bit of a cushion for the people of Michigan. These automatic stabilisers act to reduce economic volatility within the country. There is no such redistributive mechanism within the Eurozone. The message a country gets from its partners if in difficulties is, ‘you’re on your own.’

It should not be forgotten that the policy of European monetary union is driven by a hard neoliberal ideology. ‘Why should governments intervene to try to alleviate unemployment? Capitalism, left to itself, will generate the jobs. Even if it doesn’t, government intervention will only make the situation worse.’ That’s the sentiment at the top.

This nonsense is repeated in the arena of monetary policy. The European Central Bank does not have a growth target. Its sole brief is to keep inflation down. Presumably, so long as the money supply is stable, they think private capitalism will deliver optimal economic results.

The fact that the Euro has no real defences, or rather that these are being developed by the authorities on the hoof in the teeth of a crisis, makes the single currency very vulnerable. The idea of a European bond, with the whole weight of the Eurozone behind it, has been vetoed for the time being. On the other hand the ECB has been shamefacedly buying up sovereign debt in 2010 and 2011, as a clandestine way of propping up its weaker members from further attack.

Since the world economy is recovering, on the balance of probabilities the Euro should survive this crisis, though there is no doubt that some peripheral countries will remain in intensive care for some years to come. This is not a hard and fast prediction. Capitalism is an irrational system, as we have seen many times in the course of this book. Waves of speculation and what Keynes called “animal spirits” play their part and are quite capable of sweeping away the whole Euro project.

The authorities all over the world will have to take the situation seriously, as the collapse of the Euro would be a global calamity that could plunge the world economy into a double dip recession. Another serious world economic crisis in a few years ahead, which is quite possible, could sink the Euro altogether or severely reduce the area covered by the single currency.

The EU and Eurozone authorities ought to be able to manage an economic recovery in the Eurozone and European Union as a whole over the next few years, though there may well be stresses and strains. Greece, for instance, may have to be taken through an orderly default. This would involve recognition that the Greek economy could snap under the pressures imposed upon it. Default could also be the result of class struggle. The Greek working class is rightly furious at having to shoulder the burdens heaped upon them by the tax-dodging Greek ruling class. The problem involved in an orderly restructuring of Greek public debt is that this means that the French and German banks in particular will have to take a hit. The Euro presents a knotty problem that won’t go away soon.

  • The problems of the Eurozone      flow from its flawed design and architecture as well as the economic      crisis.
  • The Euro crisis remains the      most visible flashpoint for the world economy. This crisis is the one      thing that could even cause it to relapse from its present hesitant      recovery over the next couple of years.

 

 

 

 

 

 

 

 

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Part 6

Part 6: What can the state do about the crisis?

Now we have reviewed the Marxist theory of crisis and compared it against the reality of the Great Recession, we need to look at how the crisis impacts on the different parts of national income. This is preliminary to a survey of government policy options intended to deal with the economic disaster. The effectiveness or otherwise of fiscal and monetary policy, and of different exchange rate regimes will be assessed. The contribution of the Keynesian and monetarist schools and their proposed remedies can then be weighed up.

Chapter 6.1: National income and the crisis

The expression national income (NI) is used quite casually throughout this book to describe the value of the flow of goods and services produced in a country over a period of time, usually a year. Gross domestic product (GDP) and gross national product (GNP) are used as equivalent to national income, and to one another. There are differences between GNP and GDP, but they are unimportant here.

National income, viewed by looking at total expenditure in the economy, is conventionally decomposed by statisticians into four elements: Government spending (G), Investment (I), Exports, (X) and Consumption (C). By ‘exports’ we mean net exports (exports minus imports), but we are trying to keep the analysis as simple as possible.

Statisticians label each element of national income as one of the above elements and in effect file them into the box they fit best. So the four elements always add up to one hundred per cent. This is just an accounting identity – it is true by definition.

Government spending

Though government spending is essential for the maintenance and infrastructure of the capitalist system, and makes a lucrative market for big sections of the capitalist class, it does not directly produce surplus value (The exception to this is when the state owned and ran productive industries such as steel. This is now marginal in most capitalist countries.) The capitalists therefore systematically downplay and disregard the usefulness of government spending in a cavalier fashion, specially in a crisis when their priority is economising in a short-sighted fashion at all costs.

It is worth analysing government expenditure in more detail. Some is spent on welfare benefits. These are a cost of the capitalist system, which produces unemployment as naturally as it produces coca cola.

Much is laid out on services such as health and education. The capitalist system benefits enormously from a healthy and educated working class, but no capitalist institution has found a way to provide these services comprehensively to the mass of the people while making money out of their provision at the same time. All capitalist nations have had to have recourse to state provision of these services for the masses.

Finally the state invests, for instance on infrastructure. Public investment by definition does not directly generate surplus value. But government investment produces use values that greatly enhance the productivity of the private capitalist sector. Martin Wolf rages against the stupidity and short-sightedness of the UK coalition government in the Financial Times (12.11.10), because this is the part of state spending they are particularly anxious to cut:

“This is penny wise, pound foolish. The public sector does not only borrow; it also creates assets (or not). If, as is the case in the UK, the government slashes investment to cut borrowing, is it helping the economy or even the public finances in the longer term? Yet investment has, once again, been slashed more brutally than any other important area of spending.”

  • Government      spending is not just ‘waste’. It is an essential underpinning for the      capitalist system.

Investment

If we see that national income has not expanded at all in recent years, that is because capital ceased to accumulate during the Great Recession, and production was thrown back. We need to know why that was the case. Economists are well aware that the most volatile component of GDP is investment. We shall see a little later the effect that the collapse of investment had on the Great Depression of 1929-33. But once again in the present, the recession has had its most dramatic effect upon investment. Here are the UK figures for 2009:

“Business investment fell 23.5 per cent last year, by far the largest decline since records began in the late 1960s. Manufacturing investment collapsed by 32.3 per cent and service sector investment plunged 29.9 per cent. Construction investment is down 21 per cent over last year, and 53 per cent from its peak.” (Fall in investment underlines growth fears. Daniel Pimlott in the Financial Times 26.03.10 commenting on the Office for National Statistics report for 2009)

This collapse in investment is bound to have knock-on effects by depressing consumption as workers lose their jobs. It makes industry ill-equipped to export and slows down the economy generally. This will in turn hit government receipts from tax and bump up spending on benefits and other recession-related subsidies, making the crisis of government finance more severe.

It is clear from the above explanation that the principal effect of the Great Recession in dragging down national income in all the major capitalist countries was through the collapse in investment. Similar figures can be recorded for the other major countries affected by the downturn, It is quite difficult to work out at this stage whether the recession started in the investment sector or not, because of the interdependence of all the components of national income. But it was here that it hit hardest.

This was also the case in the 1930s. Charles Kindleberger shows that, “Gross domestic investment in the United States amounted to $16 billion in 1929; it fell to $1 billion in 1932 and net investment to -$6.6 billion. Inventories declined, durable goods wore out, depreciation reduced fixed capital.” (The World in Depression, 1929-1939, p.191), Investment fell much more severely than consumption. This is the normal pattern of economic recession.

  • Investment is the most volatile      part of national income. Investment surges power booms and investment      collapses lead to slumps.

Exports

Kindleberger fleshes out his analysis of the Great Depression by noting that, in the case of less developed countries, exports are actually the driving force of economic development. So, in the metropolitan heartlands of capitalism, investment is key, but for the dependent economies their impetus for growth must come from outside in order to stimulate their export industries. That is the transmission mechanism of the crisis as well as of growth. Exports are the most volatile sector of less developed country GDP. It was the loss of their export markets in the advanced capitalist countries that devastated their economies in the 1930s:

“Business decline in industrial countries spread to the less developed countries of the world, primarily by means of reduced exports. In these economies the level of exports is generally a critical autonomous variable in the determination of national income – more important than investment, which is often dependent on export sales, and surely more than government expenditure.” (ibid p.188)

The volatility of the export sector, and the shattering effect it can have on the rest of the economy, has been shown in the Great Recession. In the last quarter of 2008 world exports fell by 10%, an annual rate of 40%. For Germany the annualised rate for that quarter was 80%! On the other hand in 2011 the German economy has been turning in a stellar export performance which is lifting its economy much faster than those of its European trading partners.

  • Exports are also volatile,      and overseas markets are particularly important for less developed      countries.

Consumption

Consumption is the biggest element of GDP. It has been as much as 70% of the total in recent years. In modern capitalist economies it is roughly equivalent to workers’ wages, since the working class is a big majority of the population and they spend most of the money they receive. Consumption is the most stable sector of national income, passively adapting to the more dynamic driving forces of the economy. In the USA national income fell by 31% between 1929 and 1933 at constant prices (Prices fell steadily over the period.). Devastating as this was to the livelihoods of millions, it was a much smaller fall than the collapse of investment.

  • Though the biggest component      of national income, consumption is relatively stable and responds to the      changes in other elements of GDP.

Chapter 6.2: Government economic policy options

What can governments do?

Government is a much bigger player in the capitalist economy than it was when Marx was writing. The state is a significant spender and provider of goods and services. It also plays a vital regulatory function. For instance, without the government laying down what side of the road motorists should drive on or what size a standard electric plug should be, a society composed only of markets would dissolve into chaos.

We ignore here the coercive role of the state in defending the interests of the ruling capitalist class. That is central, and from its effective monopoly of force the state gets legitimacy and can carry out all its ancillary functions. We are concerned with its economic role, and particularly to what extent it can effectively pursue counter-cyclical policies.

Conventional economic theory ascribes two policy levers that the state can use to influence the working of a capitalist economy. These are fiscal and monetary policy. Fiscal policy (from the Latin fiscus, meaning the Roman treasury) is supposed to work on the level of economic output by the government altering its taxing and spending plans. People entirely ignorant of the modern capitalist economy may assume that the government only spends exactly as much as it gets in taxes and other receipts, that is that it balances its budget.

This is by no means necessarily the case. The government can run a surplus, meaning that it pays off part of the national debt that has been built up historically. This is a contractionary fiscal policy, since it is effectively taking money out of people’s pockets. Or it can run a deficit by spending more than it gets in, leading to deeper indebtedness. It can do this by cutting taxes or by increasing public expenditure. Both of these count as an expansionary fiscal policy, since they effectively put more money in people’s pockets.  If the government increases government spending or reduces taxes, it is believed by Keynesians that this will have a knock-on, ‘multiplier’ effect on economic activity.

How should the government pay for the deficit? It could do so by borrowing, usually by issuing bonds. This would increase the national debt. It is not necessarily inflationary any more than one person lending money to another must increase the general level of prices. On the other hand the government could pay for the deficit by simply printing money, which may well increase inflationary pressures. This is an aspect of monetary policy, which is dealt with later. (Chapter 6.4: Monetarism)

It can be argued quite forcefully that most governments are now so deep in debt as a result of the recession and the cost of bailing out the banks that discretionary fiscal policy is no longer really an option. Countries are head over heels in debt; could they borrow still more money? But expansionary fiscal policy remains a theoretical possibility. We need to look at whether it could be effective.

The other lever available to the government to affect the level of economic activity is monetary policy. In recent years this has been achieved by altering interest rates. It is believed that raising interest rates will reduce some economic activity, while cutting rates will cause the economy to grow faster.

It can also be argued persuasively that interest rates are now so low in most capitalist countries that further reducing interest rates would likewise be ineffective in stimulating the economy. The Keynesian adage has it that ‘you can pull on a piece of string’ (by raising interest rates), ‘but you can’t push on a piece of string’ by reducing them. So neither expansionary fiscal nor monetary policy is likely to work at present! If so, it is surely an indictment of capitalism that it is unable to solve its own problems.

In the past the monetary authorities, under the influence of the right wing economist Milton Friedman, believed that they could directly target the money supply. This monetarist policy was abandoned in the 1980s, principally because it was a complete fiasco as we shall see.

  • There are possibilities,      but also limits, for governments trying to affect the level of economic      activity in a capitalist economy.

The problem with the Euro

The Euro is a single currency that has been adopted by seventeen countries in the European Union (EU) since 1999. Overwhelmingly the years since 1999 were prosperous – till recently – and national antagonisms within the Eurozone have been muted as a result. So the Euro has survived without a major test – till the present.

There were and are arguments in favour of being part of the Eurozone. Certainly Germany has found the Euro to be an excellent monetary mechanism for building trade surpluses with their trading partners in the European Union.

The Euro has the might of the German economy behind it. Low inflation, radiating out from Germany, would prevail throughout the Eurozone as well. That was the theory. After all the functionaries of the European Central Bank (ECB) were the direct successors of the officials who ran the famously austere German central bank and the Deutschmark.

Also countries such as Greece were supposed to be guaranteed the right to borrow at low interest rates. The rate of interest would, after all, be set by the ECB. In principle there would be one interest rate throughout the Eurozone. Since holding national bonds denominated in Euros would be ‘as safe as houses’, governments in Greece, Portugal and the rest of the peripheral zone would be able to finance themselves at low rates. That was the theory. The reality proved to be different when crisis struck.

Since the EU as an entity is a bigger economy than the USA, membership of the Eurozone was seen by small countries as offering some protection from being tossed helplessly on the waves by world economic forces. This expectation also proved completely wrong.

The real problem for governments is that membership of the Eurozone is an additional restraint on government action. It involves giving up the important levers of fiscal and monetary policy to try to control the economy. It also rules out devaluation as an option. It actually makes small member states in particular more helplessly dependent on outside events.

Kenneth Rogoff explains in the Financial Times how the fiscal crisis was exacerbated by the illusory protection of the Euro (05.05.10):

“Euro members were allowed to have their cake and eat it, too. Instead of starting to hit a ceiling of 90 per cent of GDP as might a ‘normal’ developing country, Greece could run its public debt to more than 115 per cent of GDP. Even more stunning a figure is Greece’s total external debt to GDP, which is more than 170 per cent, counting both public and private debt. Prof Reinhart and I find that most emerging markets run into trouble at external debt levels of merely 60 per cent of GDP. Indeed the external debt levels of Spain, Portugal and Ireland are all sky high if one were to judge them by emerging market standards.”

The article goes on, “In our book” (Reinhart and Rogoff-This time is different) “on financial history, Prof Reinhart and I find that international banking crises are almost inevitably followed by sovereign debt crises. Will the Euro prove to be a firewall against this process, or a debt machine that fuels it?”

Devaluation

Before the introduction of the single currency, EU countries running a deficit had the option of devaluing their currency if it was fixed, or allow it to depreciate if it was floating. In either case the Drachma, Lire or Peseta would become cheaper compared with the Deutschmark. So would their exports. This would make it easier for Greek, Italian or Spanish capitalists to export to Germany. This is not a comprehensive solution to a country’s lack of competiveness. It can provide a quick fix. It can get the authorities, and the national capitalist class, out of a hole for the time being. Its consequences are not so good for the national working class. Imported goods will be more expensive when denominated in the local currency, and the cost of living will rise.

Once a country has agreed to adopt the Euro the option of devaluation is blocked off, in principle for ever. The currencies of the Eurozone have become in effect permanently fused together.

  • Devaluation      is only ever a quick fix for a country in difficulties, but it is ruled      out by membership of the Euro.

Deflation

If devaluation is ruled out, then the only other way to gain competitiveness is by deflation. This means that the entire working class has to take cuts in living standards. Eventually, it is believed the price and wage levels will fall so far that the country will gain competiveness. How to get fit by starving to death! Apart from being extremely painful, this is not a very realistic solution.

Winston Churchill was the Chancellor of the Exchequer (finance minister) in the 1920s who decided to return Britain to the gold standard at an overvalued rate. The gold standard was a form of fixed exchange rate like the Euro. Tory Prime Minister Baldwin made it clear that deflation was the way to adjust the price level. “Every worker in the country has got to take a cut in their standard of living,” he declared. To achieve their aim the ruling class provoked the General Strike of 1926. Even after their victory, the pressures put upon the UK economy by deflation proved unbearable. Britain was bombed out of the gold standard in the crisis of 1931. The pound was floated (devalued).

Ultimately a sustained policy of deflation is usually insupportable. It is also ineffective. Mussolini, armed with a fascist dictatorship, was able to drive down workers’ living standards in Italy in response to the Great Depression. This policy did not lead to an economic recovery.

  • Deflation      is a ‘solution’ to problems of competitiveness that has been shown over      and over again to be both painful and ineffective.

Chapter 6.3: Keynesianism

What is Keynesian economics?

Keynesianism became the dominant school of macroeconomics in the years after the Second World War. Whether what was adopted by the economics profession was the pure milk of Keynes’ theory or what his close collaborator Joan Robinson called “bastard Keynesianism” is not particularly important for our purposes here (Joan Robinson was right).

In the 1930s Keynes confronted a long period of stagnation within capitalism. He argued that the level of output was determined by aggregate demand and that demand was stagnant. In a situation with unused resources like the Great Depression in the 1930s Keynes advocated an expansionary fiscal policy. He advocated that the government spend money in order to create jobs and stimulate the economy. He did not think monetary policy would be as effective in the circumstances of the Great Depression, since interest rates were then quite low, as they are now. Keynes wanted above all to save capitalism from itself. He was not a socialist.

The widespread adoption of Keynesian economics after the War, and the prolonged post-War boom, spread the iimpression that Keynes’ policy prescriptions meant that capitalism could be tamed and controlled. Keynes’ policies were not used to avert a recession, which was not on the horizon and which most people thought had disappeared into history. Policy levers and instruments were used to attempt to fine tune the economy. Of course this was all an illusion, as the 1973-4 recession showed.

One of the conundrums economic policy-makers are confronted with under capitalism is what effect their policies will actually have upon the economy. In particular they need to know whether an expansionary policy will increase output or evaporate in rising prices. Likewise, if they are confronted with inflation, they need to know whether contractionary policy will cure the problem by bringing down the rate of price increases, cause unemployment or both.

A puzzling feature of the economy in the 1970s to the orthodox economists was the co-existence of inflation and unemployment – stagflation, as it was called. Keynesians believed that they could control the pace at which the economy grew. If it was run too fast, so that all resources were in use, the effect would be inflation. If it was not allowed to grow fast enough, unemployment would be the result. But the mixed signals they were getting suggested that the economy was growing simultaneously too fast and too slow! In reality they could not control the capitalist economy.

So Keynesian analysis failed in the 1970s and mass unemployment returned. Were expansionary policies actually tried? In the case of the UK the answer is a clear ‘no’. Britain emerged from the Second World War with a massive government debt to pay for the War effort. At one point the debt was more than 250% of GDP. In that situation the main aims of both Labour and Conservative governments after the War were to slim the national debt down and repay it over time.

Effectively post-War governments were running a contractionary fiscal policy, taking money out of the people’s pockets rather than pumping it in. Writing in the Economic Journal in 1968 R.C.O. Matthews pointed out, “Throughout the post-War period, the government, so far from injecting demand into the system…has persistently had a large surplus.” He went on, “The explanation of the rise in investment must lie at the heart of the rise in the level of economic activity.”

Christopher Dow, a Keynesian, agrees. Speaking more generally of the post-War boom, he comments, “Governments had accepted responsibility for maintaining a high level of demand and employment. But governments were never called on to do much to achieve this aim…The continuation of high employment cannot therefore be attributed directly to government policy.” (Dow-Major Recessions)

Some commentators have seen the recent U-turn on government intervention as a return to Keynes. This is quite wrong. Action to save the banks has been seen as a pragmatic emergency measure by governments of all political persuasions. Governments have indeed intervened massively to save capitalism with our money. They have suddenly abandoned apparently deeply held beliefs that free markets are best and that state intervention is always harmful.

Actually governments have in the past been slaves to the interests of the capitalists, not to ideology. The capitalist class needed the banks to be bailed out. The Troubled Asset Recovery Programme (TARP) in the USA and equivalent projects elsewhere are not classic Keynesian interventions. They have no effect on aggregate demand and they are not intended to. Buying up toxic assets and in effect burying them in the ground diverts resources from other areas of the economy and creates a strain on the system.

Yet there seemed no limit as to the amount that governments were prepared to blow on bailing out the banks. The inevitable result of this massively expensive rescue is to load up the public debt. Now the representatives of the system return to their old watchword – after the money has all gone: ‘Cut back government spending. Keep state interference out of the economy’. Having clocked up this enormous bill, they argue that we must all tighten our belts in order to trim the government deficits and pay off the national debts.

  • Keynesian      measures do not work to save capitalism from crisis. They have been      abandoned for that reason.
  • Recent      measures to bail out the banks are not a return to Keynesianism but a      panic stricken response to the emergency.

Public works

Keynesianism is based on the proposition that the level of aggregate demand determines the level of economic activity. If that is really the case, then the government should be able to control the capitalist economy. Expansionary fiscal and monetary policy should serve to restore full employment in the event of a crisis. It has been clearly demonstrated over past decades that the capitalist economy is out of government control. This is because the critical determinant of growth under capitalism is actually the rate of profit. The profit rate in turn has its effect in the first place on the level of investment.

If the government is to create resources, in order to pay for public works for instance, where will it get them from? It must come from the capitalists or the workers. If it comes from the capitalists, that will hit the rate of profit, investment and output. If the money comes from the workers, that is robbing Peter to pay Paul. If the workers are taxed to create public works or other expansionary fiscal measures, all that is happening is that demand is being shifted around in the economy, cutting one market to create another. Demand is not being increased overall.

Keynesians have argued that the government should not raise taxes on either workers or capitalists but borrow instead. In effect they should spend money they haven’t got. By priming the pump when there are unused resources in the economy, idle workers and capital are brought into action, output is increased and so are the tax receipts of the government. If this fiscal tweak indeed has a multiplier effect on output, then it has sometimes been argued that the boost could eventually pay for itself by returning money to the treasury equal to the stimulus originally laid out.

If we accept the basic premises of Keynesian economics, then public works should get the economy moving. But Marxists do not accept that output is demand determined. We know that for the capitalists the decisive incentive to invest is profit. And public works don’t raise the rate of profit. In a crisis, what the capitalists need are profitable markets. Merely providing them with a potential market is no use if profits are still on the floor. And the very process of providing a market through government spending is likely to cut profits further.

In fact the capitalists have a contradictory attitude towards the working class as a market. As far as the workers who toil for other capitalists are concerned, they would be all in favour of their getting the most generous wages possible. After all, it’s not their money. And these workers would indeed by spending their wage rises, directly or indirectly, expand the market for the goods that the capitalists want to sell.

It’s a different matter when it comes to ‘their own’ workforce. They are not seen as a market to be wooed. They are workers to be exploited. Their wages must be reduced. That is the way to maximise profits. Now you might think this contradictory attitude towards workers as consumers would put the capitalist class collectively in a spin. Not a bit of it. The attitude of the capitalist class as a whole to the working class is the same as their attitude to their own workforce. After all they are collectively their own workforce. They need to be squeezed to the utmost, specially in a crisis.

Keynesian economics doesn’t work because it misunderstands the dynamics of the system. Profits are decisive, rather than markets. When capitalism comes into crisis the response of the ruling class is to attack the workers, not to conciliate them. Because profits are the driving force of the system, the capitalists are desperate to restore the rate of profit at all costs. Since profits are the unpaid labour of the working class, that means an attack on workers’ living standards.

Critics may argue that Roosevelt’s New Deal in the 1930s showed that, in desperation, the powers that be may launch a quite ambitious programme of public works in order to mop up the worst of the unemployment created by their system. It is quite true that, though the capitalists may aspire to crack down on the workers, they may be forced to offer concessions instead because of their political weakness. Capitalism was widely called into question in the 1930s in the USA on account of the deprivations wrought by the Great Depression, no doubt about it. After 1934 the workers were on the march. A huge working class movement, organising the mass production workers into unions, industrial unionism, swept across the country.

Roosevelt rode the radical mood of the 1930s skilfully on behalf of the capitalist class. His aim was to institute reforms in order to preserve the rule of capital. But it is not true that the New Deal worked to restore full employment. Unemployment in 1939 at 17.2 million was actually higher than it had been in 1936 (17 million). Only the outbreak of the Second World War, in exchanging one horror for another, gave everyone in the States the opportunity of a job.

There is an overwhelming case for a mass programme of useful public works to mop up unemployment; but it is a socialist case. A programme of public works will have to be fought for by the working class against the opposition of the ruling class.

  • The working      class needs emergency measures such as public works to create jobs. The      ruling class will resist such measures.
  • The New      Deal was the product of concessions from the capitalists. It did not      eliminate unemployment.

The Treasury view

Though Keynesian economics doesn’t work, that is not to say that their capitalist opponents are correct. Keynes criticised the ‘Treasury view’ that the best thing a government can do in a crisis is to balance the budget. This economic orthodoxy was imposed on Prime Minister Ramsay MacDonald’s minority Labour government in 1931. In order to balance the government budget and eliminate the deficit Labour was instructed to cut unemployment benefit and cut service and public sector workers’ pay. The wave of monetarist policies which swept across the capitalist world in the 1970s and 1980s was really just a revival of the Treasury view, of pre-Keynesian economics, the ‘true religion’ of the capitalist class.

The only way MacDonald and his fellow traitors could achieve what the ruling class felt they needed was to split from the Labour Party and go into coalition with the Tories and Liberals. But the policy of cutting wages and benefits didn’t work either; it didn’t create full employment. Actually the ruling class in a crisis are not principally interested in working towards full employment. They are determined to restore the rate of profit, and that means attacking working class living standards, including public services and public sector wages.

Contrary to the Treasury view, Keynes realised that there is a tendency for governments to run deficits in a recession in any case, as tax receipts dip and unemployment pay and other recession-related subsidies soar.  It is therefore a myth, nourished by the Treasury view, that there are two sorts of governments – spendthrifts and those that cut their coat according to their cloth. This was a myth that Thatcher found useful as well in her crusade against state spending and the organised working class in Britain in the 1980s. It is the same myth that the coalition government is dusting down in Britain once again in 2011. In fact this myth is the dominant ideology of the global capitalist class at present. The purpose of the myth is purely ideological. It is a justification for imposing all the burden of the crisis onto the working class.

Attempts to prematurely choke off recession-induced deficits in the past have served to choke off the recovery instead. The US economy got up off the floor after 1932 and began to recover. Unemployment fell (from an unprecedentedly high level) and output and government spending grew. So did the budget deficit which was about 5% of GDP in these years of slow and partial recovery. After his re-election in 1936 Roosevelt, influenced by advisers who held to the Treasury view, decided he had to balance the budget. It was a big mistake. Unemployment climbed upward again. Roosevelt was astute enough to quickly reverse government policy.

The Treasury view didn’t ‘work’ in Britain in 1931; it didn’t solve the crisis. It made things worse in the States five years later. Still we are hearing a barely modified version of the theory nearly eighty years afterwards.  Why? An all-out assault on the working class, and the gains they have won in the form of the welfare state, is the inevitable way the ruling class will respond in the teeth of the crisis. They will try to make the working class pay. In a crisis output falls. Someone has to take a cut. The capitalists are determined that it won’t be them. And this attitude doesn’t flow from simple vindictiveness. It arises from the nature of a system based on profit. It is the logic of capitalism.

  • The      Treasury view was the pre-Keynesian response to crisis. It called for the      government to balance the budget and impose austerity on the working      class.
  • The same      ideas are being unearthed now because they represent the interests of the      bosses.
  • Austerity      didn’t solve the problem of unemployment in the 1930s. It just made people      poorer. It will have the same effect today – if we let them get away with      it.

Chapter 6.4: Monetarism

The theory of monetarism

Keynesian economic analysis failed and was seen to have failed in the 1970s. The idea that the authorities could control the capitalist economy was shown to be an illusion. During the post-War boom a minority of right wing economists around Milton Friedman offered a different perspective. The monetarists argued (correctly) that the government could not guarantee full employment under capitalism. In fact they wanted to tear up the formal commitment that most capitalist governments had entered into to try to guarantee that everyone had the chance of a job. The long period of relatively full employment (in the advanced capitalist countries at least) had led to an enormous accession of power and self-confidence by the organised working class. Friedman and his gang welcomed the prospect of mass unemployment as an opportunity to cut the workers down to size.

Since, they said, the government could not influence the rate of growth of the economy they argued that the authorities should take measures against something they could affect – the rate of inflation. Friedman identified inflation as public enemy number one. The rate of inflation had been rising steadily since the Second World War. By the 1970s it was rising at 20% a year or more in some countries and was indeed a serious economic problem.

Inflation, in its turn, was said to be caused by an increase in the money supply. The monetarists adhered to the quantity theory of money. Ricardo adopted this theory from Hume. Marx sided with the post-Ricardians such as Tooke and the Banking School, who found that Ricardo was wrong on this point.

The quantity theory of money holds that there is a strict one to one relation between the supply of money and the price level. The only effect of pumping out more money is to raise prices. It stipulates that the sole and exclusive cause of inflation is an increase in the money supply.

The monetarists did not argue for discretionary monetary policy. They wanted strict rules on the supply of money issue that they declared would squeeze inflation out of the system, instead of the usual policy of targeting interest rates.

Some of them were stupid enough to argue that these tough policies would not cause unemployment even in the short term. This was because the quantity theory of money held that money was a ‘veil’ that had no effect on the real economy. In fact none of them cared about jobless workers. The Tory Chancellor Lamont, a convinced monetarist, argued in the 1990s that, “Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.”

  • Monetarism represents a return to pre-Keynesian      orthodox economics. The theory is preparation for an attack on the working      class.

Monetarism in practice

During the 1970s Keynesian economists were driven out of one academic redoubt after another. Monetarism swept all before it. It became the official philosophy of the Thatcher Tory government in Britain from 1979 and the guiding spirit of Reagan’s presidency at the same time. In fact the Callaghan Labour government that preceded Thatcher had been forcibly converted to monetarist policies by a capital outflow that provoked a sterling crisis in 1976. This forced the administration into the arms of the International Monetary Fund in exchange for an emergency loan. The IMF for its part demanded cuts and economic orthodoxy instead of the reform programme which Labour had been elected on in 1974. At Labour Party Conference in 1976 Callaghan bowed to international capital, and repudiated Keynesianism as a fool’s paradise:

“For too long, perhaps ever since the war, we [have] postponed facing up to fundamental choices and fundamental changes in our economy…. We’ve been living on borrowed time… The cosy world we were told would go on for ever, where full employment could be guaranteed by a stroke of the chancellor’s pen – that cosy world is gone.”

The significance of this admission is that it shows that economic orthodoxy is what the ruling class pursues in a crisis, because these are the policies that load the burden on to the working class. The ruling class will crush a government that tries to resist if they can. The capitalist class of the entire world repudiated Keynesianism in the teeth of the crisis during the 1970s and rearmed with monetarist orthodoxy. More recently we have seen exactly the same process as the G20 (group of 20 leading countries) in June 2010 repudiated measures of reflation and enthusiastically endorsed policies of harsh fiscal retrenchment and attacks on the working class in the name of cutting government deficits and debts.

But the monetarists had a problem in implementing the new religion when Thatcher came to office in 1979. Which measure of the money supply should they actually target? In Britain there was any number of different measures, including from M0 to M4. They were all moving at different speeds and sometimes in different directions. In the end the Conservatives decided to target sterling M3. They set targets to restrict its growth. These targets were consistently overshot in the early years of the Thatcher government. Restricting the money supply was supposed to be the way to control inflation. In the end inflation came down but the money supply continued to overshoot its target.  This was not a mere technical problem for monetary economists. It was advance warning that the central premises of the theory were bunkum intellectually – but useful politically to the ruling class.

The policy was accompanied by desperate attempts to cut government spending. This amounted in Keynesian terms to a ferocious fiscal squeeze. This was another reason for the rise in unemployment under Thatcher.

There were also unintended consequences of the monetarist policy. If the supply and demand for money are conceived by economists as like a simple demand and supply diagram in a textbook, with interest as the ‘price’ of money, attempting to throttle the money supply had the inevitable consequence of putting up interest rates. At one point in the first Thatcher administration of 1979-83 bank rate was 17%. These interest rates had a devastating effect on industry. Firms that were teetering on the edge of bankruptcy in the midst of a world recession were confronted with the prospect of borrowing at prohibitive rates.

On top of that, high interest rates attracted hot money into London. Rising interest rates drove sterling up on the foreign exchanges. Sterling tanked at $1.56 in 1976. It recovered to $2.05 in May 1979 when Thatcher was elected. The pound went from $2.05 to $2.42 in little more than a year under the Tory government. British exports were priced out of one overseas market after another. Unemployment soared from 1.2 million to more than 3 million and manufacturing output fell by 17% in two years. This was in part because of the world recession, but partly on account of government policy. The world recession bit first and deepest in Thatcher’s Britain, partly because of monetarist policies.

Thatcher actually gloried in the mass unemployment she had helped to create. It was undermining the power of the working class movement. The revival in the rate of profit after its nadir in 1982 was partly because of the increase in the rate of exploitation made possible by the labour shake-out, the use of mass unemployment as a weapon against the employed workers and the one-sided war on the working class on the shop floor. It was also partly because of the massive capital destruction caused by the recession. Millions of workers not only lost their jobs. The factories where they had earned their living were destroyed.

Monetarist theory and policy was effectively ridiculed by Labour’s Nicholas Kaldor in the 1980s in speeches in the House of Lords, of all places. He noted that the money supply usually expanded from the end of November in preparation for the pre-Christmas shopping rush. ‘Did that show that the increase in the money supply causes Christmas, as monetarist theory would suggest?’ he asked. Of course the pre-Christmas rise in the money supply is to accommodate a spending rush the authorities know is likely to happen anyway. This example shows that the money supply may be demand-determined. If so, that turns the whole of monetarist theory into nonsense.

In the end the central tenet of monetarism was abandoned. The Monetary Policy Committee of the Bank of England has targeted the interest rate, not the money supply in recent years. Interest rates influence the demand for money, not the supply. But the harsh economic orthodoxy that underpinned monetarist principles remains.

Gordon Brown moved in 1997 that interest rates should be set by the Bank of England rather than by the democratically elected government. That decision embeds the monetarist premise that monetary policy is best left to the experts following rules, and that monetary policy cannot and should not be used to try to create jobs s part of an activist economic policy. So we see that monetarism still represents the interests and beliefs of the ruling class.

  • The adoption of monetarism was part of increasing      attacks on the working class in a harsher economic climate.

Governments lose control

Further evidence that the stable, automatic relationship between monetary aggregates and economic activity assumed by the monetarists is wrong was provided more recently in the credit crunch. The monetarists predict that all the authorities have to do is pull the right monetary levers in order to work their magic. In the course of the credit crunch the money supply went bonkers.

The London Inter Bank Offered Rate (LIBOR) is a pretty recondite concept in monetary economics. The TED-spread is its direct equivalent in the USA. The banks lend money to one another all the time, purely for housekeeping purposes. Loans are short term, often overnight. LIBOR or TED-spread is the rate at which they borrow from each other, and it is usually low, predictable and stable. Since the commercial banks are ultimately borrowing from the government via the central bank, loans are risk-free and rates of interest low. Normally it is a fraction of a per cent above the rate at which the banks can borrow from the central bank. Though this latter rate has gone through some name changes, it is usually called bank rate.

As we point out in the section earlier, one of the levers that the government uses to influence the level of activity in the economy is monetary policy. This is usually conducted by adjusting interest rates. Bank rate is the apex at the pyramid of interest rates in the economy. It is assumed that, by adjusting bank rate, the whole structure of interest rates can be raised or lowered.

Suddenly during the credit crunch LIBOR started to misbehave. It soared above bank rate. This meant that the government lost control of one of its principal mechanisms for steering the economy. It was like driving a car whose steering wheel no longer worked. Once more the stable, predictable relationship that monetarists assume exists between the money supply and the rest of the economy went hopelessly out of kilter.

  • Intellectually and practically monetarism has been a      failure. Politically it has been a useful weapon for the capitalists.

Quantitative easing

Since the Great Recession, targeting the money supply rather than interest rates has been revived as an emergency measure of monetary policy under the title of ‘quantitative easing.’ The reason for this new approach is because interest rates are so low that reducing them still further will not have much of an effect in stimulating the economy. Quantitative easing (QE) is really just printing money. Of course in the twenty-first century the printing presses do not actually roll. The money is created electronically. The central bank buys bonds with money. Where does it get the money from? It creates it out of nothing. The result is that more money is injected into the economy.

In early 2009 the Bank of England pumped £200bn into the British economy. The Fed followed suit with a $1.25trn injection in the USA. What happened to all this money? We don’t really know. Some of the American dollars ended up in some very strange and murky places, as we saw in Part 1: What happened in the Great Recession.

The reader may be astounded to know that, having injected vast quantities of purchasing power into the economy, the authorities don’t actually know if QE works and, if it does, how. It is the economic equivalent of witchcraft. What seems to have happened is that this ‘free’ money issued has been hoovered up by the banks, who have papered their vaults with it (deleveraging is the technical term for this), and of course enhanced their profits enormously by lending the money on to selected borrowers at a respectable rate of interest.

Quantitative easing shares the monetarist belief that there is a mechanical way for the government to control the money supply. In reality, as we saw when we discussed the fate of the London Inter Bank Offered Rate (LIBOR) during the credit crunch, the authorities are no longer in complete control of interest rates and the money supply, it they ever were. The government can pump money into the economy till the cows come home. If the banks refuse to lend, no increase in the money supply will be forthcoming.

As we know banks effectively create money by lending out more to the public. But at the moment they are desperately deleveraging. This means that they have belatedly discovered that their credit lines were overextended, and are unraveling their commitments as fast as they can. The banks can create money when they want to; at the moment they don’t want to. They have severed the link that is supposed to exist between government control of the money supply and the credit creation mechanism.

Unfortunately for the rest of us, the banks are denying they have any obligation to working class consumers or to small business people, who have been brought to the edge of despair by the crisis precipitated by the banks themselves.  Now the banks are depriving them of the succour of emergency loans.

Having tried once to no certain effect, in late 2010 the Fed launched a second round of quantitative easing, called QE2. ‘If at first you don’t succeed, try, try, and try again’ seems to be their motto. Insiders suggested that the $600bn to be injected is peanuts if it was really intended to relaunch the US economy into a boom.

Trade rivals believe that this monetary creation would have the effect of making US goods cheaper and their own products dearer on world markets by depreciating the dollar. This would provide the USA with an unfair trade advantage. So it is all part of the ‘currency wars’, the present form of protectionist manoeuvring on the world market. Some of the money created by quantitative easing probably found its way into the hands of the speculators, fuelling the boom in food and energy prices taking place in 2011. In the insecure atmosphere of the fragile recovery both deflationary pressures and the prospect of inflation loom.

So far the policy of QE seems to have been unclear rather than catastrophic. It is possible that, in conjunction with the battery of other emergency measures taken by the authorities in the course of the crisis, it has made the situation better than it would otherwise have been. On the other hand it might have been completely ineffective.

Critics who have predicted levels of inflation like those of Zimbabwe in recent years or Weimar Germany in 1923 have come away disappointed. There is a serious debate to be had as to whether the world economy faces a prospect of inflation or deflation in the next few years. We shall take that up in Economic Perspectives.

  • The adoption of quantitative easing is a sign of      desperation on the part of the authorities. Nobody knows if it works and,      if so, how.

 

 

 

 

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Part 5

Part 5: Marxism and the Great Recession

Once Marx has explained how the movement in the rate of profit is the mainspring of economic crisis (Chapter 3.7), he can introduce the ancillary factors that play their role in preparing for the individuality and complexity of any particular capitalist crisis. These are discussed in Chapter 3.8. In Part 4 we have dealt with the monetary side to the crisis.

We have presented the theory. How does it stand up to the test of analysing the Great Recession?

 

 

Chapter 5.1: Rate of profit and crisis

Determinants of Investment Demand

It is widely recognised by economists and economic historians that investment is the most volatile component of national income. A collapse in investment is therefore a characteristic feature of capitalist crisis. There are two neoclassical explanations as to why investment demand should be volatile.

The first is the accelerator theory of investment, which states that the actual level of investment is related to changes in consumption. Relatively small rises in consumption can require a complete step-up in the level of investment. Likewise a small fall in consumption can cause an accelerated scrapping of investment plans. This is all very well so far as it goes, but it is a purely mechanical principle that offers no clue as to why recessions take place when they do.

The second, neoclassical explanation of investment demand is that it is said to be sensitive to changes in interest rates. If the rate of interest is higher, then capitalists are supposed to be less willing to invest since they are not sure that they will recoup their investment. (It is assumed they borrow to invest.) The level of investment in the economy will be lower as a result. We have seen earlier that there is no clear connection between interest rates and the level of investment in the economy.

If we never the less take the neoclassical theory of investment as our starting point, we may find the beginnings of an explanation for the collapse of investment in a slump. The capitalists are supposed, according to the theory, to base their investment decision on the cost of borrowing as against the potential benefits from the investment. But what are the benefits if not profits?  And what is interest but a share of the surplus value?  So, even if we accept the neoclassical theory, the investment decision is based on a comparison of the rate of profit to be gained from the investment as against the price in interest to be paid. In fact the rate of profit is the decisive determinant of investment demand.

The neoclassical theory states that the capitalist borrows at the prevailing rate of interest in order to invest. This is not what happens, at least in Britain and the USA. Most investment is from retained profits. And, of course, all investment comes in the end from profits. Without higher profits, higher investment cannot happen. If profits are not gained, they cannot be invested. So profit is the decisive indicator to capitalists as to whether to invest or not, not the rate of interest.

  • Investment is the most volatile      element of national income, soaring in a boom and collapsing in a      recession.
  • The level of investment is      determined by the rate of profit.

The role of the rate of profit

There is of course no mechanical, one to one, relationship between the rate of profit and the accumulation of capital. But the rate of profit is a forward indicator of the flow of investment. Capitalists will be stimulated by a rise in profits to invest more, investment which can only take place over time. We also assume that, until rising profits are realised, they cannot actually be reinvested. Likewise a fall in profits means that the capitalists will have less to invest in the next round of production. The drop in profits is also a warning signal to capitalists that their investment outlay is in danger and may be lost. So they start to cut back rather than reinvest. Andrew Kliman in A crisis of capitalism finds a strong link between the rate of profit this year and investment next year:

“Variations in the rate of profit account for 82% of the variations in the rate of accumulation of the next year.

 

In a footnote he adds:

 

 “This means that, if there were no actual relationship between the rates of profit and accumulation, there would be less than one chance in 400 trillion that the observed relationship between them would be as strong as the one

we see here.”

Faced with these odds, we have to ask critics of the Marxist theory of the relation between profit and accumulation, in the words of Clint Eastwood playing Dirty Harry, “Do you feel lucky, punk?”

As explained in Chapter 3.7 there is a dialectical relationship between the rate and mass of profit.

When new markets open up, capitalists will scramble at the opportunity to make a greater mass of profits even if the rate of profit remains the same. In many cases opening up new markets will enable the capitalists to make a higher rate as well as a greater mass of profit. This is what happened in the case of the conquest of global markets by cotton goods produced by British power looms, as explained by Marx in Capital.

But if the rate of profit continues to fall throughout the economy then, despite the rise in the scale and size of capital, the mass of profit must follow suit, as Marx also explained.  As we pointed out earlier, the crash does not usually have to wait for an actual fall in the mass of profit. As the economy enters the danger zone of critically low profits, any number of other factors can push the system over the edge.

So far we have presented capitalist firms as if they are a uniform pack, all sharing the same rate of profit and all accumulating at the same rate. Of course this is not the case. Any capitalist industry has leading firms, with higher profits and growth rates, and laggards. The outbreak of crisis will have the effect of driving the marginal firms to the wall.

Here is Marx describing a process that we have seen in action over recent years. After dealing with the concentration of capital that takes place in a boom, and the fact that not everyone can keep up, he continues:

“This growing concentration leads in turn, at a certain level, to a new fall in the rate of profit. The mass of small fragmented capitals are thereby forced onto adventurous paths: speculation, credit swindles, share swindles, crises. The plethora is always basically reducible to a plethora of that capital for which the fall in the profit rate is not outweighed by its mass – and this is always the case with fresh offshoots of capital that are newly formed.” (Capital Volume III, p.359)

  • The rate of profit is a      forward indicator of the flow of investment
  • As long as the rate of      profit remains the same, opening of new markets will increase the mass of      profits and raise the level of accumulation.
  • Eventually the rate of      profit will fall, endangering the mass of profits for marginal capitals.

What has happened to the rate of profit?

We would like to present profit figures for the world economy. After all capitalism is a global system. But no such statistics exist. We might assume that, since the search for higher profit is the very force that causes a tendency for profit rates to equalise, a global rate of profit should exist or be in the process of formation. We know that money capital is restless and mobile all over the world, ready to chase that extra buck at the drop of a hat. But capitalism is not completely footloose and fancy free. Multinationals dominate the world economy, but most remain nationally rooted. So a global rate of profit is as yet by no means an accomplished fact. National rates of profit differ from one another, no doubt about it.

According to the US Bureau of Economic Analysis (BEA) National Income and Product Accounts, the rate and even the amount of profit in the USA turned down decisively by the end of 2006. This is a year before we experienced the first shock waves of the Great Recession. The BEA website gives numerous different measures of the rate of profit, but they all point the same way and turn down at the same time. The figures are given in Bottoming out in Part 1: What happened in the Great Recession.

We use the BEA figures for the USA at this point for three reasons. First the USA remains the dominant capitalist power in the world economy. Fashionable talk about countries such as China completely ‘decoupling’ from global developments that began in the USA was definitively disproved by the downturn. No country can entirely resist the gravitational pull of the crisis emanating from the States and its effect on the world economy. Talk of a challenge to US economic hegemony remains premature and is still some way from becoming a reality. Secondly the Great Recession began in the USA. Thirdly US economic statistics are the best in the world.

The BEA figures are of course not assessed in a Marxist manner. The rate of profit calculated by the BEA is calculated as a percentage of GDP. Marxists understand that capitalists are concerned with what they get back (profit) compared with what they put in (capital), so the rate of profit should be measured against the capital invested. We shall discuss later what the correct Marxist measure of the rate of profit should be. But most Marxist attempts to measure the rate of profit show exactly the same trends over time as the BEA’s analysis and the same turning points. (The actual rate of profit shown will be different, of course.)

Once a crash has occurred as a result of a collapse in the rate and mass of profit, the economy will not recover immediately even if profit rates start to rise. The BEA records profits as recovering since the beginning of 2009. By the summer of 2011 the rate of profit had recovered substantially in some sectors, but the economic recovery remained weak and limited. The dead weight of masses of surplus capital produced in the previous phase of overaccumulation will have to be destroyed and the excess capacity done away with before a healthy upswing can begin. US industry at this time was still only working at 75% of capacity. Large chunks of capitalist industry were still flat on their backs. The revival of profits in decisive sectors of industry had not yet reached the critical mass needed to power a new boom.

  • All the evidence shows that      the rate of profit turned down decisively in 2006, before the onset of      crisis.
  • Profits have revived since      2009, but masses of capital are still being destroyed.
  • Profits have not reached the      critical mass for a healthy boom.

Chapter 5.2: Debating the rate of profit

We will try to test Marxist theory against ‘the facts’. The facts in this case are the record of economic statistics. Economic statistics are drawn up, for the most part, by honest people. With few exceptions, none are Marxists. They don’t think in Marxist categories.

For instance we saw earlier how Marx divided the value of a commodity into constant capital, variable capital and surplus value. Variable capital is outlay on wages, constant capital on all the other costs and surplus value is rent, interest and profit. These categories are needed to work out the rate of profit in Marxist terms.

This division does not concern the capitalist, or the economic statistician. The individual capitalist is more concerned as to whether he recovers his capital at the end of the production period (which is true both of wages and raw materials costs – together called circulating capital) or whether it is tied up as fixed capital (which means it can take years to get his money back). These are the concepts captured in economic statistics. Marx’s categories just disappear from the statistical record. They can be quite difficult to recover.

Profit rate and profit share

The profit share can be measured as a proportion of national income.  National income is a flow of revenues usually measured over a year. For our purposes Net National Product can be regarded as the same as National Income (though there are differences which do not concern us here).  Deduct the share of wages and other factor income flows from national income as a whole and the profit share is what is left. It can be presented as P/Y, when profit is P and national income is Y.

The rate of profit is more difficult to work out than the share. It is shown as P/K where K is the capital stock. (This is the standard notation used in National Income calculations. Marx usually uses C as a symbol for constant capital.) It is necessary to make sure the source of the stock figures for K are compatible with the flow figures for Y, and that they are compiled in the same way.

For Marx the rate of profit is calculated against the entire capital stock, whether used up over a year or not. One way to work out the rate of profit is to multiply the profit share by the output/capital ratio (Y/K). P/Y x Y/K gives you P/K (dividing both denominator and numerator by Y).

  • It is important to distinguish the rate of      profit from the share of profit in national income.

The importance of profits

The late Andrew Glyn and his fellow authors first made their names by analysing the emerging crisis of capitalism in the 1970s in terms of a profits squeeze. To identify this profits squeeze they looked at the rate of profit, but also at the share of profit in the national income. More recently Robert Brenner, though disagreeing with the profits squeeze theorists, has also made the rate of profit central to his analysis of the problems of modern capitalism.

Glyn’s detailed findings are discussed in Chapter 2.2: The rate of profit after the Second World War, as are Robert Brenner’s conclusions. Briefly both the profits squeeze theorists and Brenner see movements in the rate of profit as a crucial determinant of the accumulation of capital and of the movement of the system from boom to slump. This is common ground. Where they disagree is on what causes these movements in the rate of profit.

The rate of profit has been the heartbeat of capitalism throughout the whole period we are investigating. Generally speaking, periods when the rate of profit has been high have been periods when investment has been high (a rapid rate of capital accumulation), and periods of relatively high employment. All these generalisations refer to the advanced capitalist countries. These are the only countries with consistent and accurate statistics for the whole period. But these, after all, are the heartlands of capitalism that contribute so much to the rhythms of global capital accumulation.

Let us look first at the arguments in Capitalism since 1945 (Armstrong, Glyn and Harrison). This in turn is based on earlier, pioneering works such as British capitalism, workers and the profits squeeze (Glyn and Sutcliffe). This team of authors were important in identifying and analysing the centrality of the profit rate in the evolution of global capitalism since the Second World War. Armstrong et al. also deal with the profit share (which is easier to measure than the rate of profit).

There is a difference between the profit rate and the profit share, but one important and obvious reason the profit share might increase or decrease is because the rate of profit has gone up or down – so there is also a connection. Glyn and Armstrong’s central thesis was that the profit share was squeezed by militant workers, and that this was the basic cause of the economic breakdown of the ‘golden years’ after World War II.

We now move on to Robert Brenner’s work. Brenner affirms the importance of the rate of profit to the dynamics of capitalism but he disagrees with the profits squeeze analysis. He also dismisses Marx’s explanation of the tendential fall in the profit rate in a single footnote on pages 11 and 12 of his 1998 contribution.

 Briefly, Brenner argues that, “The fall in aggregate profitability that was responsible for the long downturn was the result of not so much an autonomous vertical squeeze by labour on capital as of the overcapacity and overproduction which resulted from intensified, horizontal inter-capitalist competition.” (The economics of global turbulence 1998, p.8)

This explanation is inadequate. It is utterly feeble to conceive of competition between capitalists as the root cause of crisis. Marx explained, “That competition which results from the overproduction of capital would not cause a fall in the rate of profit.” (This is Brenner’s argument.) “Rather the reverse. Since the reduced rate of profit and the overproduction of capital spring from the same situation, a competitive struggle would now be unleashed.” (Capital Volume III p.361)

Marx does not dismiss competition between capitalists as a factor in the unfolding of the crisis. Rather he locates the intensification of competition in the objective situation facing the capitalist system.

Brenner wrote an article entitled The economics of global turbulence, which took up the whole issue of New Left Review issue 229, May/June 1998. He effectively updated his analysis in a book The boom and the bubble, published in 2002. A second edition of The economics of global turbulence appeared in 2006. Brenner’s writings are undoubtedly the most authoritative on the world economy within the Marxist tradition published over the last ten years or so, as Armstrong, Glyn and Harrison’s were for the earlier period. The statistical analysis of both sets of writing is unassailable in their honesty and rigour, though there are problems of interpretation which we discuss later.

  • The profits squeeze theorists’ identification of the importance of the falling rate of profit since the Second World War is an important contribution to our understanding of post-War capitalism.
  • Robert Brenner has also insisted on the centrality of the declining profit rate as an explanation for the ‘long downturn’ since the end of the post-War boom

The profits squeeze theorists and Brenner’s critique

Glyn et al. suggested that the profit share was falling because of the rising share of national income that went to wages. Class struggle explained the crisis! After all, the 1970s was a decade of sharply fought class struggle. For a time their explanation seemed to fit the facts, but some Marxists remained unconvinced.

Here is Brenner’s criticism of the profits squeeze thesis:

First ‘the universality of the long downturn’. “…none of the advanced capitalist economies was able to escape the long downturn. Neither the weakest economies with the strongest labour movements, like Great Britain, nor the strongest economies with the weakest labour movements, like Japan, remained immune.” (Brenner 1998, p.22)

Second ‘the simultaneity of the onset and various phases’. “The advanced capitalist economies experienced the onset of the long downturn at the same moment – between 1965 and 1973. These economies have, moreover, experienced the successive stages of the long downturn more or less in lock step, sustaining simultaneous recessions in 1970-1, 197-75, 1979-82 and from 1990-1.” (ibid p.22) How is it possible, asks Brenner, for the different course of the class struggle in different countries to produce these global trends?

Last, ‘the length of the downturn’. “Finally, the fact that the downturn has gone on for so very long would seem to be fatal for the supply-side approach.”…”it is almost impossible to believe that the assertion of workers’ power has been both so effective and so unyielding as to have caused the downturn to continue over a period of close to a quarter century.” (ibid p.22)

These are trenchant arguments. They are arguments in the spirit of Marx himself. Marx said, “To put it mathematically: the rate of accumulation is the independent, not the dependent variable; the rate of wages is the dependent, not the independent variable.” (Capital Volume I p. 770)

Marx realised that workers were in a stronger bargaining position with relatively full employment and could push wages up. They were under the cosh in a recession, with hundreds prepared to take their job for less pay if the alternative was unemployment. But the ups and downs of wages mirror the ups and downs of capitalism, they do not cause them.

  • The profits squeeze theorists mistakenly argued that profits were falling because of a rising share of national income going to wages.
  • Brenner supports their identification of the importance of the profit rate in the accumulation of capital but disagrees with the profits squeeze theory.

Chapter 5.3: Testing the Marxist theory of crisis

The shares of wages and profits

We disagree with Robert Brenner’s explanation for the fall in profits (see Brooks-Rate of profit and capitalist crisis). But it is his great merit that he has asked the right questions and put the problem of the rate of profit in the development of capitalism centre stage. He differentiates himself from the profits squeeze theorists and the underconsumptionist school. They both base their analysis on the share of national income going to profits.

Brenner argues in his book against the ‘profit-squeeze’ theorists who argued in the 1960s and 1970s that the share of profits was falling because it was being squeezed by the share of wages taken by a militant working class. Nobody thinks this is the cause of the present crisis. The ‘profits squeeze’ argument is the opposite of that of the underconsumptionist school (discussed later in What sort of capitalist crisis?) that wages are too low for capitalism to grow steadily. So for some theorists the workers are taking too much, leading to crisis, and for others the workers are taking too little with the same result. As we know, the response of the ruling class to the ‘restricted consumption’ of the masses in a crisis is that it is not restricted enough and it needs more restricting!

Both the underconsumptionists and the profits squeeze theorists concentrate on the share of wages and therefore of profits in national income. These are determined in part by the class struggle. Actually workers understand that they are in a more favourable bargaining position when there is relatively full employment and a boom. That is when it is easiest to fight for improved living standards and a higher share of output for the workers. In a slump struggles are more likely to be defensive.

In other words the boom-slump cycle is an important determinant of class struggle and therefore of the shares going to wages and profits. And the boom-slump cycle is determined by movements in the rate of profit. That is why Brenner makes the rate of profit, not the share of profits, central to his analysis.

The rate of profit evolves independently of the course of class struggle and partly determines its outcome. We see later that the share of wages, and therefore of profits, has been relatively stable as components of national income. In fact movements in the organic composition of capital have been the fundamental determinant of movements in the rate of profit. Brenner shows in detail, when he chronicles the course of the 1965 and 1973 recessions, that the steady fall in the rate of profit, irrespective of the share of national income going to labour and capital, caused the downturn that preceded the crisis by several years:

“Between 1965 and 1973, US manufacturers sustained a decline in the rate of return on their capital stock of over 40 per cent…the G-7 economies sustained a fall in their aggregate manufacturing profitability of about twenty-five per cent in those same years. Well before the oil crisis, then, the advanced economies as a whole were facing a significant problem of profitability.” (The Economics of Global Turbulence, p.99)

Brenner also argues against the view that ‘accidental’ factors such as the oil crisis precipitate a general crisis of capitalism. According to the logic of this argument capitalism has been afflicted by misfortunes and accidents on a regular basis for almost two hundred years. The periodicity of crisis, with or without the role of accidental factors, is something that needs to be explained, and movements in the rate of profit provide the key.

And, just to underline the point, Brenner emphasises, “The fact that the profitability crisis predates 1973 is significant, because it implies that the fall in profitability, coming as it did before the onset of the oil crisis, could not have been caused by it.” (ibid p.101)

  • Movements      in the rate of profit show the periodicity of capitalist crisis.
  • The rate of      profit is a more important explanatory variable of boom and slump than the      share of wages and profits.

Measuring the Marxist rate of profit

It should be understood from the outset that this section is by no means a definitive survey of this issue. It is intended to arm the general reader with an understanding of the problems and debates around the matter. The question is: how should the rate of profit be calculated? In particular should the costs against which profits are measured to derive the rate of profit be calculated at historic cost or current replacement cost?

Michel Husson asserts that the rate of profit has made a complete recovery from its nadir in 1982 and is now back to the levels of the post-War boom. Husson has the verbal support of Gerard Dumenil at a Research on Money and Finance Conference. Dumenil stated that the rate of profit remains high and is not the cause of the present crisis. Most other Marxist economists, including Andrew Kliman, record a sharp fall of the profit rate in 2006 immediately before the onset of crisis. Even Husson finds that, in the USA, “the rate of profit falls from 2007 onwards, and this before the crisis moreover” (Husson-The debate on the rate of profit).

 

How should we calculate the rate of profit? How should we calculate the cost of capital? Historic cost means calculating the costs of capital at the price originally paid for it. This is the normal procedure that has been taught to accountants for generations – costing assets at book value. After all, what matters to the capitalist is their return compared with how much they paid in the first place.

Andrew Kliman has tried to work out the rate of profit using a historic cost measure of the organic composition of capital (for instance in Kliman-The persistent fall in profitability underlying the current crisis: new temporalist evidence). Michel Husson uses current costs as the basis of his calculations (See Les coûts historiques d’Andrew Kliman).

Current cost means measuring capital at what it would cost to replace it at the moment of making the calculation. This incorporates a measure of depreciation. They come to very different conclusions. It seems that the assumptions you make to work out the rate of profit have an important impact on your findings..

Unfortunately organisations like the Bureau of Economic Analysis (BEA) mix up two things when they discuss depreciation. First there is wear and tear on capital equipment, physical depreciation. Then there is the fall in the socially necessary labour time required to produce capital goods because of rising productivity in the industries producing capital equipment. This cheapening of the elements of constant capital is one of the main counter-tendencies offsetting the tendency of the rate of profit to fall. Marx calls this process moral depreciation or devaluation, and it is obviously important to assess this correctly in working out the Marxist rate of profit.

Adopting an inaccurate measure of costs is likely to produce a difference in the magnitude and rate of profit declared during a bubble, such as the enormous one we experienced in the past boom. In such a case the whole system will be afflicted with fictitious asset prices and fictitious profits. That is surely what we saw when the assets of the banks and their profits melted away in the course of the Great Recession. Historic cost calculation should strip out the illusory effects of the bubble on the rate of profit. That is why we stress that this is in principle the right procedure to adopt. In practice though there are difficulties in measurement whichever method we adopt.

In fact Michael Roberts explains that, despite the technical difficulties, the same trend in profits is observable whatever method of cost calculation is used. So Husson is just plain wrong to argue that profits have undergone a complete recovery in the period since 1982. We marshal the evidence against his case in the next section. Roberts painstakingly and transparently presents the methods that lead to his conclusions. He sums up: “Fortunately, whether you use net or gross measures, it does not really change the trends and turning-points shown in graphic.” (The Great Recession 2009, p.35) Here net measures of costs means ‘after deducting depreciation’.

The obvious question to ask Husson is: if the rate of profit has been fully restored, why hasn’t the rate of accumulation also recovered to post-War boom levels? Why has the world economy only grown half as fast since the 1970s as it did before? Why has the basic driving wheel of capitalism ceased to work? As we saw in the section on Financialisation, Husson presents an ingenious but unconvincing explanation.

Other economists such as Fred Moseley, who also uses current replacement cost calculation, have not produced the same extraordinary results as Michel Husson. They do not accept that profit rates have been restored to those of the immediate post-War period. Apart from Andrew Kliman and Fred Moseley, Robert Brenner, Graham Turner, Alan Freeman, Michael Roberts and many others have charted movements in the rate of profit that are similar to the one we have outlined (see The Rate of Profit in the New Millennium below).

The Bureau of Economic Analysis figures on the trajectory of the profit rate in the USA also show a similar picture on their website to the movements we have portrayed. Their calculations, of course, assess the profit rate as a percentage of GDP, rather than against the capital stock invested. This is not a Marxist method, but it yields similar results to those like Roberts and Kliman who try to apply Marxist categories to economic statistics in analysing economic trends. There is a thicket of problems in doing this, and we do not intend to divert the reader away from the big picture.

Most results confirm the principle that the movement in profit rates is the main regulator of the accumulation of capital; and that the dramatic fall in profits is the harbinger and root cause of the capitalist crisis.

  • In      principle historic costs should be used to calculate the rate of profit.      There are all sorts of technical problems in working out the Marxist      profit rate.
  • In      practice, whichever method is used to assess costs, the vast majority of      researchers find that the rate of profit is generally much lower than      during the post-War boom.

The Rate of Profit in the New Millennium

Overproduction in a crisis is a fact. That fact can only be explained by reference to movements in the rate of profit. What really happened to the rate of profit in the twenty-first century?

Robert Brenner and authors attempting to use Marxist analysis (such as Andrew Kliman and Michael Roberts) have all come to similar conclusions. There was a collapse in profits associated with the 2001 recession. The rate of profit recovered in the subsequent boom until it collapsed in 2006. Never again did profits reach the recent high point of 1997.

Not a single authority can be found to suggest that profits fell on account of the crisis and after its onset.

 

  • Brenner himself in his ‘Afterword’ to the second edition of The Economics of Global Turbulence emphasises that 1997 was the peak year for profits in the era since the golden age of capitalism that ended in the recession of 1973-4.

 

  • Kliman (The persistent fall in profitability      underlying the current crisis: new temporalist evidence, pp. 23-4)    explains, “Finally there was a sharp      rise in profitability in the middle years of this decade. As we now know,      however, it was driven by an asset bubble and was not a sustained      recovery. Revised and updated BEA data indicate that the rate of profit      fell from a peak of 25% in 2006 to 17.9% in 2008.”
  • Kliman and      Roberts both emphasise that the staggering fall in the rate of profit preceded the onset of recession in      2007. Roberts backs up Kliman’s point. “The rate of profit rose from 2001      to 2005.  So does that mean the      Great Recession was not caused by declining profitability?  The answer is that by 2005, the value      rate of profit began to fall again.” (The      Great Recession 2009, p.264.)

 

  • Brenner also points out that boom turned into bust in the third quarter of 2006 as profit rates went on the turn. (What is good for Goldman Sachs is good for America, May 2009. Prologue to the Spanish edition of the Economics of Global Turbulence, p.71.):

 

“It is crucial to emphasise that the descent into recession was already well in progress before the outbreak of the financial crisis in July-August 2007. Nonfinancial profits peaked with housing prices in the middle of 2006 and then declined 10 per cent by the third quarter of 2007.”

 

  • We get the same view from George Economakis, Alexis Anastasiadis and Maria Markaki in An empirical investigation on the US economic performance from 1929 to 2008: They see US profits peaking in 2006 and conclude, “The recent financial crisis is a possible result of a ‘plethora’ of the profit seeking capitals in the financial sector” (in other words overaccumulation).

 

  • Fred Moseley too asserts that, “Mid 2006 was the peak of this current profit cycle.” (The long trend of profit p.1)

 

  • Michael Roberts (The Great Recession) records the rate of profit turning down decisively in 2005 rather than 2006, but that is a detail.

 

  • And Graham Turner (who we think does not regard himself as a Marxist) chips in, “Data published by the Bureau of Economic Analysis strongly supports the argument by those who claim the economic crisis of 2008 was attributable to a declining profit rate” – though his own position is more nuanced. (No way to run an economy, pp.130-1).

 

  • The official US BEA does indeed indicate on their website that the US rate of profit peaked in the third quarter of 2006 at 17.8% of GDP. By the second quarter of 2007 it was 15.9% and by the first quarter of 2009 it bottomed at 11.1%.

 

It is true that all these authors use different methods to calculate movements in the rate of profit. But they all show the same trend and the same turning point. It is also true that we are dealing with complex chains of causation in the economy.  The falling rate of profit cannot be seen as an immediate, but as an underlying cause of the Great Recession. All the same the evidence suggests quite strongly that the recession was caused at bottom by the fall in the rate of profit.

  • Most      economists agree that the rate of profit turned down decisively before the      crisis. This can therefore be seen as the underlying cause of the crisis.

It’s the organic composition of capital, stupid

The question of questions is, of course, why has the rate of profit fallen? We recorded in What happened in the Great Recession that there was a massive counter-offensive against the working class after the post-War rate of profit bottomed in 1982. This raised the rate of exploitation and thereby the rate of profit. We reported the findings of Michael Roberts that, as a result in the UK, “The lowest rate of surplus value was 55% in 1975. The rate of exploitation peaked in 1997 at 93%.”

Though this is quite a turnaround, and we believe the same drive to raise the rate of exploitation can be seen in other countries, this cannot be a solution to the ruling class for the inexorable tendency of the rate of profit to fall.

Marx was quite clear that, if the mass of machinery behind the elbow of each worker, the technical composition of capital, continued to rise then the organic composition, the value of constant capital compared with the outlay on variable capital, was bound to follow suit. The fall in the price of units of the elements of constant capital could not therefore indefinitely offset the tendential fall in the profit rate

“If one worker is in charge of 1,800 spindles instead of driving a spinning wheel, it would be quite ridiculous to ask why these 1,800 spindles are not as cheap as the single spinning wheel…Each individual machine confronting the worker is itself a colossal assembly of instruments which he formerly used singly, e.g. 1,800 spindles instead of one. But in addition the machine contains elements which the old instrument did not have. Despite the cheapening of individual elements, the price of the whole aggregate increase enormously and the {increase in] productivity consists in the continuous expansion of the machinery.” (Theories of Surplus Value Volume III pp.365-6)

As we had occasion to point out in Chapter 3.7, so long as the organic composition of capital continues to rise then the rate of profit must fall. Alan Freeman has confirmed this in What makes the US profit rate fall?

As we know for Marx the rate of profit is calculated by profit divided by costs. This is S/(C + V), where S is surplus value, V is variable capital and C is constant capital. The two main factors that may cause the rate of profit to change are changes in the rate of surplus value (S/V) and changes in the organic composition of capital (C/V)

Here are the notations and formulae we shall use:

  • P is profit
  • K is      capital
  • Y is output

The output-capital ratio (Y/K) is a proxy for the rate of profit. Freeman declares that the output-capital ratio corresponds to the maximum rate of profit when wages = 0 (workers are living on air), so all output goes to profit.

The other determinant of the rate of profit is the share of profits in output (P/Y). The wages share is inversely related to that of profits if the income in society is just divided into those two classes of revenue. So the profits share is a proxy for the rate of exploitation.

The rate of profit can be derived from the profit share and the output-capital ratio:

  • Rate of      profit is profit share times output-capital ratio
  • P/K = P/Y x      Y/K
  • If wages =      0, P/K = Y/K

Freeman shows that the share of national income going to profit is unimportant in practice. He begins by pointing out that, “The evidence overwhelmingly shows the output-capital ratio is a dominant cause of postwar movements in the US profit rate.” (p.2)

This is because:

“The long term rise in the organic composition of capital – to which the output capital ratio bears a simple and direct relation – is the most significant cause of the long term fall in the profit rate. The empirically dominant cause of all long term movements in the US profit rate between 1929 and 2000…is the ratio between output and capital stock.” (ibid p.9)

He goes on to prove it:

“The output-capital ratio…on its own accounts for 91.9 per cent in the variation in the profit rate between 1929 and 1965, and 75.7 per cent of the variation in the profit rate between 1929 and 1996. With the sole exception of the five years of decline from 1965 to 1970, it accounts for almost the whole variation in the profit rate since 1929.” (ibid p.8)

The output-capital ratio rises with a rising rate of profit and falls when profits fall. It shadows the rate of profit closely. As Freeman says, “The cause of the decline in the profit rate is technical progress,” depreciating the value of commodities through rising productivity (ibid p.14).

Why should the output-capital ratio fall?

“Empirically, capital stock is rarely less than eight times bigger than output. But it follows that even a one per cent reduction in the value of investments will result in an eight per cent loss of output.” (ibid p.15)

If the share of profits is unimportant and the output-capital ratio is the main determinant of the profit rate, then that is equivalent to saying that the rising organic composition of capital is decisive in determining variations in the rate of profit.

This is a striking confirmation of Marx’s analysis.

  • The reason for the fall in the rate of profit is overwhelmingly on account of the increasing organic composition of capital

Chapter 5.4: What sort of capitalist crisis?

Overproduction: a fact to be explained

The reason that overproduction seems to be a sufficient explanation for the crisis is because many capitalists experience its onset as a drying up of markets, as a realisation problem. They can’t sell their goods.

Marx explained that the equalisation of the rate of profit under capitalism is only ever a tendency, an approximation. Under capitalist competition there are leading firms within an industry making higher profits and laggards who are struggling. As the rate of profit declines generally throughout the system, the weakest firms face a collapse in their own profits. They stumble and fall. Other factors, such as movements in interest rates or raw materials prices, mentioned as ancillary factors earlier, may in practice push them over the edge.

When the weakest firms trip and fall, they can drag others down with them. This is because they provide a market for these other firms. In other words there is an unconscious division of labour imposed by the market, and the capitalists are mutually interdependent. The workers in the weaker firms find themselves unemployed. They too are a market for other capitalist firms.

The firms who supply those who have just collapsed do not have the option of selling their raw materials etc. at a loss or of giving commodities away to the newly unemployed workers, because they too are on the edge and they are after all in business to make a profit.

Overproduction seems, above all to the working class, to be a force of nature that just sweeps them up and dumps them on the dole. Many capitalists too perceive the crisis as an inability to sell their products. But, as Marx makes clear, overproduction is meaningless unless we realise that production is for profit. It provides no explanation as to why the crisis should break out when it does.

To return once more to Theories of Surplus Value Volume II, Marx explains:

“What then does overproduction of capital mean? Overproduction of value destined to produce surplus value… is the same as overproduction pure and simple…“Defined more closely, this means nothing more than that too much has been produced for the purpose of enrichment, or that too great a part of the product is intended not for consumption as revenue, but for making more money (for accumulation): ” (ibid p.533).

Marx makes it clear that he regards overproduction as the form of appearance of capitalist crisis, a type of crisis unique to the capitalist system. This was definitely the case in the depths of the Great Recession. Here is the evidence from 2008 and 2009:

“The world is awash with goods…For economists, over-capacity is a tricky concept. Human wants are unlimited, so how could the world ever produce too much of a good thing? The key is what people can pay: In many goods sectors, prices still aren’t low enough to bring forth enough buyers. There will have to be some combination of falling prices and destruction of productive capacity before supply and demand come back into balance.” (Newsweek, 04.02.09)

Why don’t the capitalists reduce the prices of their unsold goods so that the people can afford to pay for them? Marx had already answered that question long ago when he observed that production is for the sake of profit, not for the production of use values that people actually want. That is the reason for the paradox of poverty amid plenty.

The Newsweek article continues:

“That’s not to say the Obama Administration is on the wrong track with its nearly $900 billion-plus stimulus plan. But it’s important to have realistic expectations. The stimulus can ameliorate the downturn, but not prevent continued contractions in the sectors of the economy where global over-capacity is the most extreme. The world is able to make 90 million vehicles a year, but at the current rate of production, it’s making only about 66 million, according to estimates from market researcher CSM Worldwide. Global production of semiconductor wafers is running at only about 62% of capacity, estimates market researcher iSuppli.”

Business Week reports on the car industry:

“Having indulged in a global orgy of factory-building in recent years, the industry has the capacity to make an astounding 94 million vehicles each year. That’s about 34 million too many based on current sales, according to researcher CSM Worldwide, or the output of about 100 plants.” The article continues, “To become profitable, according to Michelle Hill of consulting firm Oliver Wyman, U.S. automakers will need to close at least a dozen of their 53 factories in North America in the next few years.” (Business Week, 31.12.08)

The excerpts from these articles provide us with no explanation whatsoever for why the crisis broke out when it did. All we are being presented with here is the facts of the crisis. At the time these articles were written, the situation was exactly as described. But why did this overproduction manifest itself in 2008 and 2009 rather than in 2003 or 2005? Why were they suddenly producing 34 million cars too many in 2008 and not in 2003? Why was it not obvious that too many car-making factories were being built while they were building them?  

What are the underlying dynamics of the movement from boom to slump? We are not told. Instead we are offered a snapshot of a sudden and unexpected irruption of overproduction, without any causal explanation.

The assertion that the crisis is caused by overproduction (overcapacity) offers no explanatory power at all. To declare that overproduction has occurred is like a detective finding a body in the library and exclaiming that the victim is dead. This may well be true – there is blood all over the floor and the victim has stopped breathing – but we expect more of the detective.  ‘She’s dead, she’s dead. I’ve solved it. She’s been murdered.’ should not exhaust his analytical powers. We expect him to tell us if she was killed by Colonel Mustard with the candle stick, or whatever – the cause of death.

Newsweek and Businessweek are here referring to overcapacity, the overproduction of capital goods. As we pointed out in Chapter 3.7 the crisis very often does break out first in the capital goods sector. Marx called the overproduction of capital overaccumulation. Whereas it is indeed a paradox that working people in a crisis cannot afford to buy things they want and need, the origin of the problem is much clearer in the case of capital goods. Who buys them? Capitalists, of course. Why should anyone want to buy an assembly line, a fork lift truck or a turret lathe? The only conceivable reason is to make money out of the unpaid labour of workers.

Overaccumulation exists because profit making opportunities have, for the time being, dried up. The capitalists are not buying capital goods, and not using the industrial capacity they have already bought, because they cannot turn a dollar out of it. Overproduction is only overproduction in relation to profit.

To make this clear, consider a society in transition to socialism and communism, where the main means of production have been expropriated and are in the hands of the working class, but where commodity production is still widespread. That was the situation outlined by Preobrazhensky in From N.E.P. to Socialism. [N.E.P. was the New Economic Policy adopted by the Soviet Union in the 1920s.] Overproduction remains a possibility, but production is no longer for profit. In such a case the Soviet government could abort the potential crisis by distributing the overproduced commodities free to the population:

“When overproduction occurred, say, in manufacturing industry, the state could distribute what ever could not be sold on the free market among the working class as a whole, crediting these goods to wages” (p.38). The capitalists could also eliminate a crisis of overproduction overnight by giving away unsaleable goods, if their system were not geared solely for profit.

  • Overaccumulation,      called overcapacity in the financial press, means the overproduction of      capital. This means that more capital has been produced than can be used      to make a profit.
  • To simply      attribute the crisis to overproduction gives no explanation as to why the      crisis breaks out when it does.
  • At the      critical moment a catastrophic fall in the profits of marginal firms can      produce a general crisis of the system.

Underconsumptionism

Marx said, in Capital Volume III, “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.” (Capital Volume III, p. 615) This quote is the foundation for the underconsumptionist school of crisis theory. We have already (Chapter 3.7) shown that this was not regarded as an adequate explanation of the occurrence of crisis by Marx and Engels.

There is no doubt that the working class can’t buy back all the goods they produce in a crisis. They can’t buy them all back in a boom either. The “restricted consumption of the masses” is actually a permanent characteristic of capitalism and a necessary feature of its development. For, if the workers were paid ‘the full fruits of their labour’, there would be no profit. What happens to this profit? Some is spent on personal consumption by the capitalist class, but the lion’s share is accumulated. That means that the money is spent on capital goods.

There is a longstanding and well established underconsumptionist school of capitalist crisis within the Marxist tradition. Husson, as we saw earlier, fell back on this explanation. Though working class poverty is definitely a reality, the view that the crisis is caused by the poverty of the working class is at odds with the facts. Consumption (which is mainly working class consumption) has shown a secular rise as a proportion of gross domestic product (GDP) over recent decades. In the USA it has hit 70% of national income (NI). [GDP and NI are used as equivalent terms here.] At first sight this is strange, since the general perception is that the American working class has seen only a halting and feeble rise in its real wages over the past two decades. (See for instance Philip Stevens’ article in the Financial Times (05.11.10) cited in Chapter 1.2.)

But the rise in consumption as a proportion of GDP is mainly on account of the relative decline in the proportion of national income going to investment, because of slower rate of accumulation in recent years. Consumption has been propped up by the growth in consumer debt. As we point out in Chapter 6.1 on National income and the crisis, consumption as a proportion of GDP tends to adapt passively to the more volatile elements of NI.

The key factor of recent decades has been a fall in investment as a proportion of GDP. The present crisis has actually seen consumption rise still further as a proportion of GDP. Of course consumption has fallen in absolute terms. But the main components of NI that have crashed in the Great Recession have been investment and, to a lesser extent, exports. This is the identical process that we saw in 1929-33. Consumption then fell dramatically and horribly, but rose as a percentage of the collapsing GDP.

The same processes can be seen at work once again in the Great Recession. Here are extracts from Michael Roberts’ blog (29.10.10)):

“In 2009, the US economy contracted by 2.6%.  Household consumption contributed 0.8% pts of that 2.6% decline, or about one-third, but private sector investment dragged down growth by 3.2% pts, more than four times the impact of private consumption.  It was only US net exports and government consumption and investment that reduced the decline in US real GDP to 2.6%.”

Roberts concludes, “So it is investment (and that means private investment under capitalism) that drives economic growth not consumption.”

This can be seen in reverse in the recovery. John Ross in the Guardian (14.10.10) explained that the reason for the snail’s pace in economic recovery since the Great Recession finished in 2009 is one of underinvestment, not underconsumption. Ross goes on:

“At the recession’s core is a US investment collapse.  Since it began, household and government consumption has risen by $504bn, while private fixed investment has fallen by $483bn: the US economy remains in recession solely due to this investment decline.”

Roberts concludes in an earlier blog (08.10.10):

“Don’t believe as the underconsumptionists do, that booms and slumps are due to the up and downs in workers’ spending.  Recessions are never triggered by a collapse in consumer spending, even though such expenditure accounts for the bulk of GDP and it often looks like that.  Rather, it is investment which plummets, dragging down overall activity and jobs (and eventually feeding into consumer spending).

“Robert Higgs, of the Independent Institute in California… makes the valid point that US consumer spending as a share of GDP actually increased during the Great Recession, going up from 69.2% in Q4’07 to 71% in Q2’09.  In contrast, private domestic US investment peaked in Q1’06 when $2.3trn (in 2005 dollars) were spent by firms, worth 17.5% of GDP; it troughed in Q2’09, having collapsed 36% to $1.45trn, 11.3% of US GDP.”

  • The      underconsumption of the masses is a permanent feature of capitalism. It      cannot be used to explain the onset of crisis.
  • The key feature of the downturn in      the Great Recession, as it was in the Great Depression, is a collapse of      investment, not of consumption.

 

 

 

 

 

 

 

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