Capitalist crisis – theory and practice

Hello. I’m Mick Brooks. My book on capitalist crisis will be out soon.

I’ll be serialising it on this site, starting with the intro today.

Introduction

The world has just experienced the most severe recession in most people’s lifetimes. The economic aftershocks are still being felt and will be felt for many years to come. We are confronted with years of austerity. Though the Great Recession is now over, the crisis is ongoing.

The downturn has been presented as a financial crisis. In fact it is a classic crisis of capitalism. The financial crisis, the fiscal crisis of the state, the sovereign debt crises and the crisis of the Euro are all successive forms of appearance of this crisis of capitalism.

Some have made virtually a complete recovery from the ravages of the Great Recession. The Sunday Times Rich List 2011 survey begins as follows:

“Britain’s super-rich are making light of the age of austerity, achieving an 18% rise in their collective wealth over the past year. Together, the 1,000 multimillionaires in this Rich List are £60.2 billion better off than they were in 2010. They are now worth a total of £395.8 billion – within striking distance of their all-time pre-recession high of £413 billion, set in 2008.”

Particularly galling is the news from the 2011 Rich List that top bankers have made a complete recovery from the crash that their behaviour helped to initiate. Roger Jenkins of Barclays is ‘worth’ £150m. Bob Diamond, also of Barclays, has £102m and Ana Botin of Santander owns £90m in wealth. New entries to the top 1,000 are Stuart Gulliver of HSBC (£54m), Rich Ricci of Barclays (also £54m) and Michael Geoghegan of HSBC (just £35m). All over the world inequality is soaring as the rich rebuild their wealth.

Ordinary British people have fared differently. The Office for National Statistics reports that real disposable income fell by 0.8% in 2010, the biggest drop since 1977. And there’s worse to come. The National Institute for Economic and Social Research (NIESR) predicts that 2011 will also see a drop in Real Personal Disposable Income (RPDI takes account of inflation and tax changes). The NIESR predicts that output will not return to the 2008 level till 2013. The situation confronting working people in the other countries afflicted by the crisis are similar to those in Britain.

On the other side of the Atlantic, the great American housing disaster rumbles on. Articles such as Negative equity spells end of the US love of home ownership, (Guardian 22.04.11) present the extent of the problems. House prices have been in freefall for nearly five years since 2006. According to the house price website zillow.com, American home owners have lost $9trn in the ‘value’ of their houses in those years, and 23.1% of households (11.1m families) are in negative equity. This means their home is worth less than when they bought it. They are struggling to keep up the payments, based on the price of the house when it was bought. And they cannot afford to leave without making a stonking loss on its sale. Six million households (14 million Americans) will be in the final stages of foreclosure by 2014. They face homelessness. Meanwhile US housing starts in February 2011 were at a 27 year low. This is the wreckage left by the housing bubble and its inevitable burst.

The credit crunch has left millions homeless, millions unemployed, millions more on short time working and millions who have been forced to take a cut in their pay and living standards. That was just the first round. Now the capitalist powers have decided that the overriding economic necessity is to cut the government deficits and debts. These deficits and debts were incurred to bail out the capitalist system.

There was a moment in 2008, as we show, where the establishment was in a state of blind panic. Complete economic meltdown seemed a real possibility. Casting aside the neoliberal nostrums that have been paraded as eternal truths for the past thirty years, governments hurled enormous sums of money (our money) at the banks and big firms in order to bail out capitalism.

Now the ruling class has regrouped. They have a strategy. Working people all over the world are being asked to make a second round of sacrifices to alleviate a crisis that was none of their fault and none of their doing. The policy of cutting deficits at all costs will inevitably mean massive cuts in the public sector and cutting services. There will be huge battles in defence of public services and public sector jobs. This book has been written in part to outline the background to these battles 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.

This book looks at the economic policy options available to governments available under capitalism, broadly grouped under the banners of Keynesianism and monetarism. It comes to the conclusion that, under capitalism, nothing works. It explains that the policies of the British coalition government, and those of all the main capitalist governments, will not return us to an era of prosperity. It is intended to arm all those who are determined to defend public services with arguments for an alternative to the coming onslaught.

The failure of orthodox economics

What explanation and solutions are offered by the economics establishment, those who are supposed to know about such things? They were completely caught on the hop by the Great Recession. When Queen Elizabeth II visited the London School of Economics in November 2008, she asked the assembled academics, “How come nobody could foresee it?” Eventually she received a letter in reply from Tim Besley and Peter Hennessy. It spoke of a “psychology of denial” and concluded that “it is difficult to recall a greater example of wishful thinking combined with hubris”.

Not only did the vast majority of the official economists fail to foresee the approaching catastrophe. For many such a prospect was completely impossible according to the basic principles of orthodox theory that they taught and believed in.

Ben Bernanke, current Chair of the Federal Reserve (the US central bank) talked of the Great Moderation in recent decades. He meant that, though there have still been economic fluctuations, they no longer threatened the capitalist system like the convulsions in the 1970s and early 1980s. The right wing economist Robert Lucas went further. He averred in his 2003 Presidential Address to the American Economic Association that, “Macroeconomics…has succeeded. Its central problem of depression-prevention has been solved for all practical purposes, and has in fact been solved for many decades.” Economic orthodoxy was that the Great Recession just couldn’t happen.

How do the neoclassical economists differ from the moral philosopher Dr. Pangloss in Voltaire’s Candide? He argued, “Observe that noses were made to use spectacles; and so we have spectacles.” Pangloss, like the neoclassical economists, concluded that all was for the best in the best of all possible worlds. The only difference is that Voltaire intended Pangloss to be a figure of fun. Most economists deal in apologetics, not explanation. Naturally there are dissenters from the economic orthodoxy. We shall come across some in the course of this book.

An example of the dogma that buttressed this misplaced optimism is the efficient markets hypothesis, developed by economist Eugene Fama at the University of Chicago. Put simply, the efficient markets hypothesis (EMH) argues that markets fully reflect all available information. This suggests that markets ‘get it right’.

Now, as we show in Part 1, the Great Recession was preceded by a house price bubble. The bursting of this bubble was the proximate cause of the credit crunch, the opening phase of the Great Recession. A bubble is a situation where prices go up because people are buying, and people are buying more and more because prices are going up. In other words it is an instance of markets getting it wrong on the grand scale. It is now widely agreed that there was indeed a house price bubble in Britain, the USA, Spain and other countries in the years before the credit crunch. It has to be said that this was very much a minority view at the time the bubble was actually being inflated. Then the economists and commentators rushed to reassure us that all was well.

Here is Eugene Fama being interviewed by journalist and author John Cassidy in 2010, after the onset of crisis. He is asked several times about the existence of a bubble which, of course, contradicts the foundations of his EMH theory. He wriggles and twists:

Cassidy: Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst.

“I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals…

“Fama:…I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”

He is then asked to suggest an alternative explanation for the collapse:

Cassidy: So what caused the recession if it wasn’t the financial crisis?

“Fama: (Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity…”

To further examine the limitations of orthodox economic theory, and the EMH in particular, we turn to Justin Fox’s accessible and entertaining review (Is the market rational? Fortune 09.12.02). He begins:

“’In an efficient market,’ wrote Chicago professor Eugene Fama in a landmark paper he delivered at the 1969 annual meeting of the American Finance Association, ‘prices fully reflect available information.’”

It follows that any future movement will be a ‘random walk’, depending on new information emerging. This theory did not pass the test of real world events. Fox goes on:

“That real-world phenomenon was the stock market bubble of the late 1990s. According to strict efficient-markets thinking, there must be a rational explanation for what happened. Fama describes those sky-high Internet stock valuations as a risky but not crazy bet that one or two of those money-losing Net companies would end up as big as Microsoft. But he’s almost all alone on this one. ‘We have just lived through the biggest bubble of all time,’ says Malkiel, who now calls himself a ‘random walker with a crutch.’ Fama’s favorite collaborator, Dartmouth’s French, is on the verge of using the b-word as well when he stops himself. ‘I work very closely with Gene,’ he says. ‘He would be very upset if I used that word in print.’

“Yale economist Robert Shiller has no such compunctions about ticking off Gene Fama. In 1984 he declared that the logical leap from observing that stock price movements were unpredictable to concluding that the prices are in fact right ‘represents one of the most remarkable errors in the history of economic thought’.”

As we shall see in Part 7: Economic Perspectives Shiller, in challenging the orthodoxy, was also able to explain the Internet share bust of 2000 as the inevitable outcome of a bubble in his book Irrational Exuberance. Fox continues his account, showing the complete inability of mainstream economists such as William Sharpe to explain what was going on in the economy:

“That was Shiller’s first brush with fame.” (In 1984)  “He got more popular attention after the 1987 stock market crash, which the efficient-markets professors had trouble explaining. (‘It’s weird,’ Sharpe told a reporter at the time. Later his mother called to berate him: ‘Fifteen years of education, three advanced degrees, and all you can say is, ‘It’s weird?’)”

Perelman, in The invisible handcuffs of capitalism, gives a fascinating insight into how academic debate and dissent is handled within the economics establishment. Perelman makes a general critique of the method of neoclassical economics. The account below is drawn from his book. We deal with the discussion on the minimum wage as an example.

David Card and Alan B. Krueger investigated the effects of different minimum wage levels on employment. (In the USA the minimum wage is set at a state-wide level.) Their findings suggested that raising the minimum wage did not increase unemployment. This tended to disprove a central dogma of neoclassical economics. They suffered a hail of bullying and intimidation as a result. Card found that his academic career suffered:

“I’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole.” (Interview with David Card, The Region, December 2006)

James Buchanan retorted to the duo, “Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.” (Wall Street Journal 25.04.96)

This abuse is extraordinary. Card and Krueger had provided evidence indicating that “the teaching of two centuries” was false. Buchanan did not argue against this evidence. He simply dismissed it. Surely those who argue against a minimum wage as a basic defence for the poorest workers in the face of the evidence (in the process defending the interests of the rich and big business) should more accurately be described as “camp-following whores?”

The need for a radical approach

Given this ‘herd reaction’ from the economics profession it would be unrealistic to expect any answers from them as to the causes of the Great Recession, let alone an effective programme to get us out of this mess. Denial seems to be their default reactions to events that are not in their books. Nobody can make a stronger case for a Marxist analysis than the official economists, through their abject failure to face up to facts and their outright dishonesty in defending vested interests.

Contrast the wilful ignorance of the official economists with the wisdom and foresight of Marx. These words were published in 1848 and are as true today as they were then:

“For many a decade past the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeoisie and of its rule. It is enough to mention the commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly…In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of overproduction. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce” (Communist Manifesto, pp.7-8)

We offer a Marxist explanation of the Great Recession. We believe it provides a powerful account of recent events. Of course there are debates within Marxism and contending explanations of capitalist crisis, which we explore. A Marxist analysis also provides an understanding of the tasks ahead in fighting the cuts and clues for a way out of a future that we fear could be an age of austerity.

The structure of the book

This book may be treated as a unity or as a series of essays. It may be read in the order presented or in any order the reader finds useful. Its central purpose is to test the Marxist theory of crisis against the reality of the Great Recession which first broke out in 2007 in the form of the ‘credit crunch’. The book deals with events till the summer of 2011.

Part 1: What happened in the Great Recession is an account of the course of the crisis up to the summer of 2011. It is not intended as a blow by blow account of the current crisis, but as a link between the theoretical concepts of Marx’s theory of crisis and what actually happened during the course of the Great Recession. In particular a discussion on movements in the rate of profit and what they mean for the economy dips in and out of the narrative. What happened in the Great Recession provides a peg on which more detailed consideration of aspects of the crisis and underlying issues can be discussed.

Part 2: Previous capitalist crises deals with the Great Depression of 1929-33 and the post-War downturns since 1973-4. It deals with the secular trends in the rate of profit and its role in the boom-slump cycle. Its aim is to show the common features and the peculiarities of each crisis in order to prepare us for a deeper understanding of the Great Recession.

Part 3: The accumulation of capital provides a general explanation of Marx’s theory of the dynamics of capitalism as a whole, leading up to his theory of crisis. Since the whole book is written from a Marxist point of view, Part 3 provides the foundation of our analysis.

Part 4: Capitalism and finance deals with the monetary side of the economy. It is intended to equip the reader to understand the mystifying new financial instruments and the pyramid of fictitious capital that grew up in the course of the boom. After all, these securities were to blow up in capitalism’s face. The financialisation debate is about an important secular trend in modern capitalism called financialisation. Obviously this recent tendency presents new features which have to be analysed. Our section on The financialisation debate is not the last word on the subject. It tries to deal with what we call the ‘financialisation thesis’, that we believe generates wrong and misleading conclusions on the nature of the capitalist system and of the crisis.

Part 5: Marxism and the Great Recession deals with how Marxists have analysed the nature of the recent crisis and how far it fits in with Marx’s account. This part fleshes out Marx’s observations on the tendency for the rate of profit to fall and tries to show how movements in the rate and mass of profit operate on the development of the economy and how they wreak havoc in a crisis. Testing the Marxist theory of crisis looks at empirical work on the rate of profit and at other explanations offered for the economic collapse. A look at other schools that regard themselves as Marxist, such as the underconsumptionists, is provided by What sort of capitalist crisis?

Part 6: What can the state do about the crisis? takes up the policy options available to deal with the consequences of the Great Recession under capitalism, and their inadequacy.  National income and the crisis begins by explaining the components of national income and how they interact. Government economic policy options deals with the problems thrown up by the fiscal crisis of the state, the sovereign debt crisis and the plight of the Euro. Keynesianism and Monetarism runs through the policy options for controlling capitalism and their limitations, the main schools of Keynesianism and monetarism and how these creeds have fared. It concludes with the problems of exchange rates and a single currency.

Part 7: Economic perspectives takes us from the past to the present and the future. Economic perspectives discusses possible opportunities and pitfalls that lie ahead. How much has this mess cost us so far? What are the prospects for the future in the light of the past? Will there be deflation or inflation? Can the BRICs (emerging economies) strike out on a different path? Can we just grow out of debt? Can the Euro survive? It is impossible to deal with these events comprehensively while events are still in process, but we have seen enough of the operation of a major capitalist crisis at first hand to begin to draw conclusions.

Fighting back briefly discusses the role of government spending at present, and tries to draw some practical lessons from the rest of the book for the labour movement. Though Britain is used as an example, this section is intended to be of general significance. A drive to austerity is the dominant response by establishment politicians in the capitalist world as a whole to the effects of the Great Recession.

Finally in the Appendix: Measuring the rate of profit, Michael Roberts discusses his work and diagrams on the organic composition of capital and the rate of profit in the USA in Marxist terms, showing how he derived his data.

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