econocrisis

As the economic crisis continues to deepen and capitalist society looks to turn people’s gaze from the flaws in the system to the flaws of prominent individuals, John Wight looks at the historical crises of capitalism that have occurred over the last century, and argues that the current crisis stems from the latest attempt of capitalism to overcome its own inherent contradictions, as discovered and outlined by Marx.

Recent revelations that Texan billionaire and financier, Allen Stanford, is alleged to have built much of his fortune on the back of fraudulent activity going back years, follows what we already know of the ‘legal’ activities on the part of the former heads of UK and US banks and financial institutions, leading to their near collapse, and the huge fraud committed by US financier, Bernard Madoff, responsible for the theft of tens of billions of dollars.

But whilst watching the aforementioned individuals paraded on the TV news may help to put a human face to the economic depression that has swept the globe, perhaps even acting as a palliative by simplifying our understanding of what has and is taking place, we should not be under any illusions – the egregious actions of people like Sanford and Madoff and Fred Goodwin are merely the symptoms of the current crisis, they are not the cause.

Bernard Madoff

The economic crisis that has and continues to wreak havoc the world over is a consequence of a mode of production predicated on the production of commodities for sale at a price higher than the cost of producing them with the objective of capital accumulation

The production process involved is contingent upon paying the workers who actually produce said commodities less than the total value of their labour power and expropriating the rest as surplus value. However, with the ownership of the means of production in private hands the commodities of one capitalist competes with the commodities of another, each vying for a share of a market which eventually becomes satiated and leads to a crisis of overproduction.

The battle for markets in which to get rid of surplus manufactured goods, and capital, is what led to both the First and Second World Wars, with Hitler’s attempts after the first to carve out an empire for a resurgent German capitalism in Eastern Europe leading directly to the second. Indeed his crime in the eyes of his imperialist rivals was not so much the fascist ideology he espoused, but rather his attempt to do in Eastern Europe as Britain and France had done throughout the world in forging an empire during a period when industrial output outstripped domestic demand and new markets had to be created, along with sources of cheap raw materials in order to drive down the cost of production.

As such the British Empire, in its heyday, and despite the British ruling class’s efforts to dress it up with the pomp and ritual of civilisation and human progress, was nothing less than the rape on a gigantic scale of the nations over which it held dominion.

After the Second World War a prolonged period of economic growth was enjoyed, lasting all the way up to the late 1960s. It lasted so long it seemed to defy Marxist doctrine with regard to a rise in the organic composition of capital manifesting in a fall in the rate of profit, followed by a decrease in wages as capital attempts to maintain the rate of profit, and finally a reduction in demand leading ultimately to a crisis of overproduction. It took Marxist theorist, Ernest Mandel, to explain the reason for this seemingly inexplicable violation of one of Marxism’s main tenets in the postwar period with his Long Wave Theory of capitalist development, first published in 1972.

Mandel wasn’t the first theorist to talk about long waves of capitalist expansion. The Soviet economist, Nikolai Kondratieff, drawing on extensive historical data going back to the late 19th century, had calculated in the 1920s that capitalist economies enjoy cycles of approximately 50 years of boom followed by depression.

But Kondratieff attributed these waves to purely internal (endogenous) factors within capitalism itself, and discounted the role of external (exogenous) factors in shaping capitalist growth and decline; instead attributing exogenous developments purely to those endogenous factors. Mandel rejected Kondriatieff’s theory as overly deterministic, as had Trotsky back in 1923, and in his own analysis of the postwar period he attributed world capitalism’s sustained period of expansion to concrete exogenous factors arising in the postwar period acting on the endogenous factors within the laws of capitalist development to offset the tendency of the rate of profit to fall throughout the normal life-cycle of capitalism.

Ernest Mandel

In brief, the postwar period heralded the convergence of two processes responsible for laying the foundation of this unprecedented phase of economic growth. On the one hand, the recovery of infrastructures destroyed by the war ensured full employment in the short term, facilitating a more or less smooth transition from war to peace time economies throughout most of the industrialised world. At the same time, the overriding need to replace and rebuild infrastructure and industry destroyed in the war allowed for a continuation of a war time emphasis on national unity between the working class and ruling class, thereby facilitating an increase in the rate of exploitation in most industrial nations in line with a suspension of class struggle on a large scale. This was expressed in a reduction of real wages in comparison to prewar levels.

The second process involved is what Mandel described as the advent of the third technological revolution, whereby technological advances developed during the course of the war were applied throughout industry as a whole. These had the effect of increasing productivity and reducing production costs by reducing the cost of machinery and materials in relation to the value of production. New markets were required to absorb this economic expansion. This was achieved not through the forging of new markets overseas, as previously, but through the replenishment of domestic markets by replacing existing products with new products produced on the back of the development of the new technological advances described. So for example plastics and other synthetic materials replaced glass and wood within the construction industry, and in the production of household items, etc; new household appliances were developed and mass produced, and so on.

This technological innovation continued on the back of the permanent arms race that followed WWII between the capitalist and communist blocs. In the West this manifested in a sustained increase in productivity and a steady rise in wages, driving demand in what again appeared a violation of orthodox Marxist theory, which holds to a direct correlation between increased productivity on the one hand and a decrease in wages on the other. But devising his theory in the late nineteenth century, Marx had not foreseen the intervention of governments to prevent the steady immiseration of the workers, such as took place in the laissez faire period in which he lived, with the emergence and adoption of a managed model of capitalism devised by the British economist, John Maynard Keynes, which came to prominence in response to the Great Depression of the 1930s.

This was a model of capitalism which held that the role of government should essentially be that of a ballast maintaining equilibrium between output and demand, specifically through the management of demand through taxation and/or government investment in public works projects and the nationalisation of key industries and utilities, etc, with the aim of creating employment. Allied to this was the use of taxation to fund a high social wage that would absorb periodic slow downs in the economy by bolstering demand. Such periodic downturns could be due to anything from a restructuring and redeployment of the productive forces from one sector of the economy to another, or a global crisis as a consequence of a foreign war creating instability in global prices of raw materials and/or currency exchange rates.

But even under managed capitalism markets have to exist for new commodities, and by the late 1960s demand was no longer able to keep up with supply. Capital expansion on the back of the third technological revolution had petered out and the rate of profit began to fall. This was exacerbated by a rise in energy prices as a direct result of the 1973 Yom Kippur War in the Middle East, when the Arab oil producing countries decreased oil production in protest at the West’s support of Israel, and Capital attempted to maintain the rate of profit by cutting wages and lowering production costs through a process of rationalisation.

The working class throughout Europe and the US had gone along with the Keynesian model as long as wages kept pace with prices and they saw their incomes rise in real terms year on year. Under such conditions the unions, by and large, were happy to work with the bosses to ensure that blasphemous notions of communism and workers control of the economy were kept at bay. As a consequence the labour movement was viewed as a component part of the economy, its role valued as a junior partner by both governments and the bosses in the production process in what came to be known as the ‘Keynesian consensus’.

This changed as the laws of capitalist development took effect in the downward phase of the economic cycle and a sharpening of class lines occurred in response. The working class, organised, united, and conscious of itself, waged a titanic struggle as the bosses and the government sought to cut its wages and conditions. In Britain this culminated in the ‘winter of discontent’ of 1979, when the nation was brought to a standstill as the struggle of the British working class to maintain its wages and conditions reached its apogee.

Previously, in 1976, in response to a sterling crisis which accelerated the fall in the rate of profit, leading to a lack of supply as the bosses found it harder to cut wages and shed workers under the terms of the Keynesian consensus, hyper-inflation had prompted the then Labour government to approach the IMF for an emergency bailout loan in order to prevent the collapse of the British economy. In the process it acquiesced to IMF conditions attached to the loan demanding a cut in government spending and a wage freeze, in other words a direct attack on the working class.

However, the fall in the value of sterling had begun in the early 1970s, and was the result of a number of conjunctional factors.

Since the Second World War sterling had continued to play a dual role both as a domestic currency and as an international reserve currency. In the postwar period a proportion of the total stock of sterling was held overseas. It was an arrangement which on the positive side provided ready funds with which to purchase British exports, and provided an addition to the nation’s currency reserves. On the negative side the holding of such a substantial stock of sterling overseas rendered the British economy vulnerable to periodic crises if and when foreign central banks decided to cash in their holdings of sterling for either gold or other currencies. In such an event the exchange rate would plummet, thus precipitating a rise in inflation in line with a rise in the price of imported goods. This in turn would apply pressure on demand, forcing the government to either increase public spending or face a rise in unemployment. These factors ultimately would lead to an intensifying of a run on sterling, as international central banks and savers and investors lose confidence in sterling, thus completing a vicious recessionary cycle.

A rise in inflation due to the fall in the rate of profit which began to take hold at the end of the long wave of the postwar years, when demand began to outstrip supply as Capital refused to invest in new industry due to the lack of profitability and output fell, was accelerated by the ‘oil shock’ at the end of 1973, when the price of oil underwent a sharp increase, due, as previously mentioned, to the war in the Middle East of the same year.

It was under these conditions of global economic crisis that the US and British ruling classes replaced the Keynesian model of capitalism with the free market extreme variant devised by US economist, Milton Friedman, working out of his now infamous Chicago School. This model held that government intervention was anathema to the workings of the market, which if left to its own devices in conditions of 'perfect competition' would act as a corrective to any imbalances that may arise between supply and demand.

In Britain, Margaret Thatcher was chosen to lead the ruling class assault on the working class, charged with cutting and slashing spending and jobs, along the way smashing any and all resistance to the shock therapy being administered.

The role of government was changed from one of intervention in the economy to prevent periodic crisis by managing demand to ensuring the free reign of the market, in accord with free market orthodoxy which guaranteed the perfect equilibrium between supply and demand if allowed to proceed unmolested. Inflation rather than lack of demand was the new evil, with the control of inflation vital to ensure economic growth and a healthy surplus in the balance of payments. Inflation was to keep pace with the needs of the economy by raising or lowering of interest rates to control the money supply. At the same time social spending was cut to a bare minimum to comply with non-interference in the market’s corrective mechanisms, commonly referred to as the hidden hand of the market.

Now, instead of unemployment, inflation was the enemy of economic growth, viewed as an impediment to capital investment by big business and investors seeking to maximise profits. Indeed, unemployment was now seen as a factor in applying downward pressure on wages and therefore demand, thereby helping to keep inflation under control.

This free market economic orthodoxy also advocated swingeing tax cuts for the rich and big business in order to generate investment and economic activity, achieved through cuts on public spending and a rise in indirect taxation, both negatively impacting on the incomes of the working class.

A corollary to this assault on workers was the privatisation of formerly nationalised industries and utilities, exposing the nation’s industrial base to global markets and competition and inevitably leading to their demise.

The workforce, rather than a partner in production, was now viewed as a mere tool, returned to the fate of a mere ‘appendage to the machine’. Shattering the power of the unions, the government argued, would once again make Britain attractive to foreign investors, who would flock to take advantage of a casualised, flexible workforce that knew its place in the new, low wage service economy.

Of course, this new economic orthodoxy was also infused with an ideological belief in the laissez-faire economic liberalism of the past, confusing the notion of freedom with the accumulation of private wealth and an attack on the redistributive role of the state in ensuring social and economic justice in order to enhance social cohesion.

In the UK the new doctrine came to be known as Thatcherism, in the US Reaganomics. Both were responsible for a sharp rise in poverty and inequality, the wholesale destruction of working class communities, a concomitant rises in crime, drug and alcohol abuse, and an overall breakdown in social cohesion.

This structural adjustment of the nation’s economy changed the emphasis from manufacturing, now shifted abroad to take advantage of lower wages and production costs, to the recycling of surplus value through speculation and trading on the stock market. The City of London rose to prominence as a decrease in real wages was offset by an increase in the availability of consumer credit. Private debt spiralled as a virtual economy of inflated property prices and stock market speculation was built upon a foundation of fictitious capital – i.e. capital without any material basis in commodity production. In fact, such a clamber for a share of this new and seemingly endless market in private debt took place that even supermarket and retail chains got in on the act, selling financial services on the High Street alongside traditional banks.

Crucially, as this bubble of debt grew and grew it gave the illusion of a permanent boom which blinded economists and governments alike - allowing Gordon Brown, for example, to fatuously boast that the old cycle of boom and bust was at an end. It wasn’t; the bust was merely being delayed by the ability of financiers and bankers to repackage debt into evermore obscure and extreme investment securities before markets became satiated and the bubble burst.

The absurdity of the short termism that lay at the heart of this process is reflected in the sub-prime mortgage crisis which finally brought about the current crisis. In their greed for profit, banks were now borrowing from other banks to lend, instead of lending only what they held in deposits, as previously. But in order to lend they required a ready supply of new customers to lend to. As such, they began selling mortgages to people who couldn’t afford to pay them back in order to generate revenue, allowing them to maintain their share price and to continue to disburse high enough dividends to investors to prevent them moving their investment elsewhere.

It was a ticking time bomb about to explode, which it did with dramatic effect in the summer of 2007, setting off a chain reaction shattering confidence in the markets and bringing lending and liquidity in the so-called real economy to a grinding halt.

As Karl Marx wrote in the Communist Manifesto: ‘Modern bourgeois society with its relations of production, of exchange, and of property…is like the sorcerer who is no longer able to control the power of the nether world whom he has called up by his spells.’

As the current crisis deepens the ruling class will continue to attempt to blind and distract us from the systemic factors responsible for the demise of the global economy by focusing on the actions of a few prominent individuals such as Allen Stanford and Bernard Madoff.

But the question that the ruling class, and all those with a vested interest in the current mode of production, need to answer is this: How can the greed that’s been ascribed as the cause of the economic crisis be squared with the fact that capitalism itself is an economic system predicated on greed?

Their ability to ignore this question or our ability to force them to address it will largely determine the course of events in the coming period.