What Now for the World Economy?

Submitted by martin on 15 February, 2008 - 4:38 Author: AWL EC 14/02/08
Bear Stearns

Document Of AWL Conference 2008

1. The UK has not had an actual recession since 1990-2. Manufacturing went into recession in 2001, but not the whole economy. People under the age of about 30 generally have no living memory of a recession.

We do not know whether the recession now underway will spread into a full-scale world recession, or how big the effects in Britain of a world recession may be. But there is a serious probability of a serious downturn.

2. It would be foolish to assume that a slump will necessarily provoke a burst of working-class industrial combativity. Trotsky pointed out long ago that "there is no automatic dependence of the proletarian revolutionary movement upon a crisis". A crisis will tend to spark big industrial struggles if the unions have used the previous period of expansion to build up strength, resources, confidence, expectations. In fact the union leaders have been able to prevent the unions doing that in the recent period.

3. A serious slump may well, however, toughen political radicalisation. We have been in a period where, as one leftish US journalist puts it, "leftists deem capitalism invincible and fearfully lob copious documentation at each other detailing the efficient devilry of the executives of the system. The internet serves to amplify this pervasive funk into a catastrophist mindset".

Many left-minded people loath capitalism, but see it as supremely solid, monolithic, and effective. "Kitsch anti-imperialism" is reinforced by this mindset: if big capital is so steamrollering, you't can't afford to be picky about supporting whatever imperfect opposition may dent it.

The sight of capital obviously in disarray, ineffective, and fragile should put some steel into attitudes of ethical revulsion, and strengthen our argument that capital will and must be overthrown through its own gravediggers, its own internal contradictions.

4. The basic crisis-process is rooted in the very nature of capital. A capitalist boom means rival capitalists racing to be first to grab the expanding loot and get into position to stamp on the slower ones. By its nature, it breeds debt-bubbles, speculation, unsustainable floods of investment in particular areas, and downright swindles. (Remember Enron, which went down in the wake of the dot.com crash!)

As Marx put it: “The whole process becomes so complicated [with a developed credit system]... that the semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash... Business is always thoroughly sound and the campaign in full swing, until suddenly the debacle takes place”.

Once credit has been shown to be overstretched, it shrinks; and when it shrinks, speculation that previously might have been sound now in turn becomes “excessive”. No capitalist can afford to offer easy credit when others are tightening. The “debacle” comes at a point when many business failures or outright swindles have developed and had been hidden only because of easy credit.

The credit squeeze snowballs, and beyond the financial markets into trade and production. Fewer capitalists make new productive investments. Workers are laid off. Both capitalists and workers cut spending. And so production lurches down another round of the spiral.

5. "The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process, which is elastic by nature, is here forced to its extreme limits, and is so forced because a large part of the social capital is employed by people who do not own it and who consequently tackle things quite differently than the owner, who anxiously weighs the limitations of his private capital in so far as he handles it himself...

"The self-expansion of capital based on the contradictory nature of capitalist production permits an actual free development only up to a certain point, so that in fact it constitutes an immanent fetter and barrier to production, which are continually broken through by the credit system. Hence, the credit system accelerates the material development of the productive forces and the establishment of the world-market. It is the historical mission of the capitalist system of production to raise these material foundations of the new mode of production to a certain degree of perfection.

"At the same time credit accelerates the violent eruptions of this contradiction — crises — and thereby the elements of disintegration of the old mode of production. The credit system... develops the incentive of capitalist production, enrichment through exploitation of the labour of others, to the purest and most colossal form of gambling and swindling..." (Marx, Capital volume 3).

6. On top of the basics, the last 20 or 30 years have added something new. As a reaction to the crises of the 1930s, up to the 1970s credit and banking were quite closely regulated in the big capitalist economies. That was the era of “managed capitalism”, the era when social-democrats smugly imagined that capitalism was becoming more and more “socialistic” every year.

The crises of the 1970s produced the opposite reaction to those of the 1930s. Economies were deregulated and privatised — initially, mostly, as a ploy to meet more intense global competition and to turn the blade of that competition against the working class. Those measures “worked”, as slicker credit set-ups generally do for capital, to make the system more flexible and agile. But they also store up vast instabilities.

The ratio of global financial assets to annual world output rose from 109% in 1980 to 316% in 2005 (and 405% in the USA). The processes are more complicated and opaque — and have become still more complicated and opaque in recent years. A new sort of bit of paper, called “credit derivatives”, has expanded from zero ten years ago to $26 trillion today.

The secret of the last 20 or 25 years is not, as it appears to be, that capital has gone into the financial sphere rather than into production. It is that financial manipulations have allowed what Marx called "fictitious capital" to double and treble.

Marx wrote in Capital volume 3: "The same piece of money can be used... for various loans... It represents in the various loans various capitals in succession... The number of capitals which it actually represents depends on the number of times that it functions as the value-form of various commodity-capitals... Everything in this credit system is doubled and trebled and transformed into a mere phantom of the imagination".

As the journalist John Plender puts it: "A peculiar feature of this 21st century financial crisis is its opacity. Nobody knows where risk has ended up, which is why confidence and liquidity drained away in the first place".

A recent survey finds: “The Recent Period... more [financial] crisis-prone than any other period except for the Interwar Years. In particular, it seems more crisis-prone than the Gold Standard Era, the last time that capital markets were globalised as they are now”. (Franklin Allen and Douglas Gale, An Introduction to Financial Crises). The Asian-centred financial crisis of 1997, and the dot.com bubble-bursting which started in March 2000, were both substantial crises, although they did not become full global slumps.

7. Two factors might restrain this crisis. First, increased rates of exploitation have pushed industrial profit rates fairly high, and so most industrial firms have relatively low levels of debt. They have some protective fat. In the UK, the average profit rate was 16% in 2007 quarter 3, the highest since the current run of statistics started in 1965. Usually, profit rates sag in the later stages of a boom, before any actual crisis.

Second, there is still a lot of spare cash in the world system available for stricken banks to tap. For example, the oil prices mean that oil-exporting states have masses of dollars they want to lend at a good rate of return.

The world’s central banks are still buying dollar assets though, as the economist Brad Setser puts it, "not because they want more dollars. Rather, they fear the consequences of stopping”.

Towards the USA, the rest of the world, with its huge dollar holdings, is like the bank in Maynard Keynes’s saying: “If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has”.

8. Thus the paradoxical situation that many capitalist commentators are unhappy about the prospect of the drastic interest-rate cuts made by the US Federal Reserve in early 2008 "working" as intended, i.e. limiting the US recession to something fairly mild. If they "work" that way, they will be allowing chronic and unsustainable imbalances - the vast "excess" consumer expenditure of the USA, financed by flows of investment dollars from trade-surplus countries in the East and Middle East - to stagger on, and thus paving the way for a worse crisis later. Some commentators would prefer a nasty crisis now to a patch-up now which prepares the conditions for a much nastier one later on.

9. Should the flow of investment dollars into the USA dry up, the consequences would be on quite another scale from anything seen so far. The USA has a huge trade deficit. Without that being balanced by the inflow of investment money from Asia, the USA would see a dramatic drain of dollars, and a collapse of the relative value of the dollar. But the dollar is still the keystone of world trade. A collapse of the dollar would mean an implosion of world trade.

10. From a world in which many basic industries and services were run directly by the state - actually according to the overall interests of the national capitalist class, but at least notionally with some public accountability - we have moved to one where those industries and services are controlled by an oligopoly of competing giant multinationals. Each Government's role is redefined as making its national economic arena advantageous for the operation of those multinationals.

The Government's job, as New Labur's ex-CBI minister Digby Jones put it, is to fashion its country as a "product" attractive to the global wealthy seeking sites for their operations.

This "country-as-commodity" philosophy does not rule out a bit of "social" policy. To make "the product" attractive to global billionaires, the government may boost education, infrastructure, and some other public amenities, as well as keeping wages low and unions submissive.

The government may choose to sell its country as a "premium product", and charge a slightly higher "price" (tax on the rich and business) in return for greater public amenities.

But the bottom line is always the saleability of the "product" in the world market, not the interests of the mass of the population. What is wrong about it is not the multinationality, but the profiteering and the debasement of government.

11. To try to go back to the old days when capitalist government policy was focused on building up a relatively comprehensive and self-sufficient industrial base for each country is neither workable, nor even desirable. Where those "old days" yielded welfare states more civilised than today's neo-liberalism, it was because of working-class pressure from below. Without that pressure from below, they would yield fascism, dictatorship, or corrupt bureaucratism like Japan's LDP regime.

And working-class pressure today can "inflect" the way capitalist governments execute their new philosophy, just as in other days it "inflected" the way they executed their old philosophy.

But the way out is to overthrow capitalist government, new or old, and replace it by workers' government dedicated to social provision and democracy.

12. The escalation of high finance has made the chopping-up and asset-stripping of productive enterprise much easier. "Private equity" groups raise cash in the financial markets, take over companies, and ruthlessly chop them up with a view to quick gains and tax benefits.

As the Observer put it (11/02/07): "Private equity works on the basis of making at least a 20 per cent return on investment in a three-to-seven-year timeframe. Savage cuts to workforces and asset disposals - particularly property - are the preferred route..."

Today British firms controlled by private equity generate total sales of £424bn, export £48bn and, according to the British Venture Capital Association, account for 2.8 million jobs, equal to 19 per cent of private-sector employees.

13. Northern Rock has been a vignette of post-1980 capitalism. Everything is privatised. The market is Heaven. But there is a priest sedulously fleecing the flock to maintain the welfare of the Gods who inhabit this Heaven. Namely, the Government.

Vast areas of the economy are officially regulated and subsidised. Production is not a matter of small individual units competing in an atomised market, but of networks involving vast social cooperation. But the Government regulation serves mostly to guarantee the profits of the private operators and contractors.

It is neither free market, nor public ownership serving public interests, but the State as guarantor for capital. Marx once wrote that the State was an "executive... committee for managing the affairs of the whole bourgeoisie". It is now also an insurance society for the bourgeoisie.

Take another example: the railways. Railworkers' jobs and conditions have been cut, services are poor, fares are often exorbitant. But the Government subsidy to the big corporations and consortia (many of them multinational) which run passenger railways now runs at nearly £5 billion (2005/6), or 51% of their total revenue. For British Rail in the late 1980s the subsidy was 25% of revenue.

Another example is the Private Finance Initiative, under which new schools and hospitals are built with finance from private-sector companies, which then pocket a yearly "repayment" for 30 years or more.

This is nothing like the "free market" of the economic textbooks, since the "market demand" and the repayments are guaranteed by the Government. Yet, as of 2006, the PFI contractors were set to pocket £150 billion for outlays of £43 billion.

14. And the "financialisation" in particular creates vast inequalities. Martin Wolf, a conservative Financial Times journalist, writes that: "Two points shine out about the financial system over the past three decades: its ability to generate crises, and the mismatch between public risk and private reward". "The world has witnessed well over 100 significant banking crises over the past three decades. The authorities have had to rescue important parts of the US financial system... four times during the same period: from the developing country debt and 'savings and loan' crises of the 1980s to the commercial property crisis of the early 1990s and now the subprime and securitised-credit crisis of 2007-08... No industry has a comparable talent for privatising gains and socialising losses".

“Across the globe there has been a sizeable shift in income from labour to capital. Newly ‘incentivised’ managers, free from inhibitions, feel entitled to earn vast multiples of their employees’ wages. Financial speculators earn billions of dollars, not over a lifetime but in a single year...

“Democratic politics, which gives power to the majority, is sure to react against the new concentrations of wealth and income”. Which is, though Wolf doesn’t say so, why democracy has been systematically shrivelled by the new wave of neo-liberal social democrats, Blair, Brown, Ségolène Royal, Schröder, Rudd, and the rest. Whether they can continue to stifle the democratic reaction is another matter. And in part it depends on us.