As the world economy teeters on the edge of another major crisis and the UK stock market hits a five year low, Bruce Wallace analyses the situation from a Marxists perspective and warns of the limitations of Keynesian solutions proffered by many on the left
A Storm is Brewing
Storm clouds are gathering ominously over the world capitalist economy. The news from just about everywhere is bad.
China recorded its lowest ever growth rate in twenty-five years of 6.9 percent in 2015, although in reality this is a gross overestimation. Many economists believe the real figure is closer to 4 percent. It should be added that this slowdown in China is happening despite one of the biggest ever government stimulus packages in history.
Reports from other emerging markets are equally bleak as the price of oil plunged to $28 a barrel at the end of January 2016, its lowest since 2003. Stock markets in the emerging economies all took a hit along with the big established markets in the USA and Europe. Reuters reported that falls on emerging economies stock markets towards bear territory (where they drop up to 20 percent in value) could surpass the scope of the 1997 Asian Financial Crisis.
The fall in the price of oil and the sell-off contagion hitting the stock markets represent a major correction in the bloated value of stocks and shares, in the face of a major global slowdown in real economic output of the productive sector of capitalism.
The decline was only halted when Mario Draghi, President of the European Central Bank, announced that the ECB may expand its stimulus programme and inject more cash into the European markets. Although a full blown crisis appeared to have been averted, the scope of value wiped off the world’s stock markets is staggering. Although there was a partial recovery the markets had lost 20 percent of their value in the first three weeks of 2016.
There are real reasons for the capitalist class to be nervous as more bleak news appears almost daily. Market Watch (Jan 28 2015) published profit warnings for major US companies that came as a “grim reminder” for corporate America that it is failing to generate growth. This came on the heels of the announcement that Americas’ most profitable company Apple inc. grew at the slowest rate since the introduction of the iPhone in 2007 and forecast that revenue in the current quarter would decline at the steepest rate in 15 years.
“This weakness in overall corporate earnings growth could bode badly for the broader stock market, as it represents the actual impact of geopolitical concerns, the slowdown in China, the weakness in oil prices and productivity”, said Karyn Cavanaugh, senior market strategist at Voya Investment Management.
“Earnings discount all the noise,” said Cavanaugh. “It’s the best unbiased view of what’s going on in the global economy.””
The question now is whether the USA is entering, or is about to enter, a recession? The slowdown in China is very serious but if the USA follows then the implications for global capitalism are very worrying indeed.
A bottle of water is dearer than a bottle of oil
Scotland is certainly not immune from this spreading crisis particularly from the deflationary pressure on oil prices. The human dimension of the oil plunge has sunk many into a well of misery. 65 year old Spencer Ruck closed his ship’s chandlery, welding and industrial equipment business in Invergordon’s High Street after thirty years of trading to downsize to a local industrial estate. Spencer told the Daily Record:
“We’re giving up the shop due to the downturn. I had six staff but now we’ll just have two of us at the industrial estate. I’ve had to lay off four people. This is our 30th year and I’ve never paid off anybody – ever. The business isn’t for sale. I thought about it but things are so bad that nobody would buy it at the moment.”
As phantom oil rigs idle at anchor in the Cromarty Firth a resident of Invergordon noted:
“It’s eerie. You have all of this hardware parked up and you’d think it would mean there’s at least something coming through to the town but it doesn’t.”
An Invergordon hairdresser said:
“People who don’t understand see the all rigs out there in the Firth and think times must be good but it’s just a giant car park for redundant rigs. A bottle of water is dearer than a bottle of oil.”
It is clear from examining the serious economic analysis and data of professional bourgeois commentators that capitalism has not recovered from the generalised crisis of 2008. Internationally the system is stuck in a global crawl with growth rates slowing in the emerging economies, while the burnt out dynamo of the USA has anaemic growth based on an artificial consumer boom . The real picture there is one of slowing investment, reduced trade and massive corporate, government and consumer debt levels. Meanwhile areas of Europe (Greece, Spain and Portugal) are still mired in depression-like conditions. Any further major economic downturn would provoke renewed crisis in the fragile recovery of these depression hit states.
Mainstream economists are debate whether capitalism has entered an extended period of “secular stagnation" or what they call the New Normal - a decade or more of low growth in the global economy. Periodically, the International Monetary Fund downgrades forecasts for global growth. In the rarefied level of economics the debate is rather academic but for the working class the spreading capitalist sclerosis is causing real misery.
The worsening economic malaise is being felt through a wave of job cuts in the energy, petrochemical and mining industries, in banking and finance, and heavy industries such as steel. Total global unemployment stood at 197.1 million in 2015. That is 27 million higher than the pre-crisis level in 2007. It could be expected to rise by nearly 2.3 million in 2016 and by a further 1.1 million in 2017. In other words, almost a decade after the onset of the global financial crisis, unemployment will still be on the increase.
Far from capitalism being in a New Normal it’s on a slide towards a renewed crisis of major proportions.
The primary response of capitalist governments’ to the crisis has been a set of policies popularly known as austerity. Following the huge amount of public money used to stave off the collapse of the financial sector in 2008 (and possibly capitalism itself), public debt sky-rocketed. The capitalist class used this to create a narrative placing the blame on over-spending on public services as the main cause of debt, and so the government should seek to reduce the deficit (gap between government income received and money spent) and ultimately “pay down” these debts as a matter of priority. This would be achieved by cutting public expenditure, and to a lesser degree raising taxes on the general population.
Whilst conventional left-wing economists have pointed out austerity is an ideological justification for making the working class shoulder the burden of paying for the crisis of 2008, it is much more than this. Debt is viewed by investors and state creditors as a risk to financial stability, so proponents of austerity believe that a good credit rating is necessary to attract investment. Cutting public spending means that the tax base of the government can be reduced, and this is done in favour of capital by reducing corporation taxes and selling off public assets on the cheap. Public spending cuts mean an increase in unemployment directly from the public sector and indirectly from the private sector. This increase of supply in the labour market depresses wages. These measures aim to increase corporate (post-tax) rate of profit. However, austerity has not been a smashing success for capitalism.
Many conventional left-leaning economists (Krugman, Stiglitz, DeLong, Pettifor et al) base their understanding of capitalism and crisis on the ideas of the 20th century British economist Keynes. They believe the 2008 crisis was caused by a lack of effective demand i.e. low wages, and that this remains the primary factor for the sluggish economic growth most countries are currently experiencing. The Keynesian narrative states that wages have remained stagnant over a period of several decades (since the neoliberal period of the 1980s), leading to rising inequality and debt-fuelled consumer consumption. This consumer debt build up was unsustainable, since wages were not sufficient to service it. Eventually the debt bubble collapsed in the form of the US sub-prime housing market. Keynesians believe austerity has exacerbated the problem of economic recovery by reducing consumer income and hence purchasing. They see austerity as irrational and hence a purely ideological response to the crisis.
The Keynesians of the conventional left believe that economic growth can be restored through increasing effective demand. They argue that increased wages would lead to higher sales and hence higher profits for businesses, who would then invest by raising wages and/or employing more workers, leading to an upward spiral of recovery and economic growth. Keynesians thus appear to be the natural opponents of austerity. In the face of “business uncertainty”, they argue that the state take on the role of investor and spend money in the economy to create jobs, for example by creating public works. Radical Keynesians argue for more “socialistic” measures such as bringing the financial system under state control in order to spend corporation's bank balances on their behalf. Either way, Keynesians believe that a solution to economic crisis can be found within the confines of capitalism itself.
Marxists would support any policies that seek to stop further spending cuts and create decent, well-paid jobs. We would support any demands to put more money in the pockets of workers. Unfortunately, the Keynesian solution simply does not work. Along with austerity, both of these measures fail to revive economic growth because they incorrectly diagnose the cause of generalised capitalist crises. A correct understanding of the crisis and why these policies are unworkable can only be gained with recourse to Marxist theory.
Marxist Theory of Capitalist Crisis
Marx recognised that the aim of capital was not the satisfaction of consumer demand, but rather "[a]ccumulation for accumulation’s sake, production for production’s sake" (Marx 1867). This stands in opposition to modern bourgeois economists, who take the existence of capitalism as something perfectly natural that exists to meet the needs of humanity. Marx showed that satisfying consumer demand was merely a by-product of capital's self-expansion. In fact, the self-expansion of capital occurs precisely without regard to consumer demand. This runaway capital expansion is what leads to the uniquely capitalist phenomena of periodic crises of overproduction:
“In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. … Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce.” (Marx 1848)
Overproduction is not in relation to consumer demand, but the ability of the capitalist to make profit: “The word over-production in itself leads to error. So long as the most urgent needs of a large part of society are not satisfied, or only the most immediate needs are satisfied, there can of course be absolutely no talk of an over-production of products— in the sense that the amount of products is excessive in relation to the need for them. On the contrary, it must be said that on the basis of capitalist production, there is constant under-production in this sense. The limits to production are set by the profit of the capitalist and in no way by the needs of the producers.” (Marx 1863)
So what causes capitalists to stop making profit? Clearly they only make profit if they sell their products. If we assumed the end goal of capitalism was the creation of consumer goods, then we would naturally look at the sale of consumer goods, expecting a decline in sales prior to a crisis. However, the facts show that US consumer sales only fell after the 2008 crisis began
So a fall in workers’ consumption or consumption more generally could not have been the cause of the crisis. Instead, we have to look at the other commodity market - capital goods, also known as the means of production (factory machinery etc). In his reproduction schemas of Capital Volume II, Marx showed how the production of capital goods must expand faster than the production of consumer goods in order for worker productivity to rise (physical output per worker per hour). The market for capital goods must therefore be primary for the expansion of capital and the health of the system, since worker productivity has trended upwards in all capitalist countries.
So why do capitalists stop buying capital goods? Or worded another way, on what basis do capitalists invest? The answer is: on the expectation of a return on their investment. The profit a capitalist makes on the basis of a given amount of investment in a given time period (typically a year) is their rate of profit, or return on investment.
The long-term trend of the economy-wide rates of profit for all advanced capitalist countries is downwards. This is particularly evident in the USA where the 2008 crisis began, but also in the UK, China and other major economies. Falling rates of profit lead to falling rates of investment, which in turn leads to slower growth in jobs and wages.
If capitalists are unable to make sufficient profit, they start to cut costs and purchases of capital goods. If the rate of profit is weak across the economy, cut backs in one sector of the economy lead to knock on effects in others. Profits fall and capitalists eventually make loses as they are unable to sell their stock. What starts off in the capital goods sector spreads to the consumer goods sector as unemployment increases and wages are cut. At this point, overproduction becomes apparent due to the generalised inability of capitalists to sell enough stock, and we have crisis. Businesses start going bust, markets crash and so on.
If the underlying reason for a crisis is the insufficient rate of profit, then the only way out (from a capitalist perspective) to raise the rate of profit. This can only be done by reducing the cost of capital investment, which inherently occurs as part of the crisis through bankruptcies and collapses in the price of commodities. In that sense, the aim of a crisis is to devalue capital sufficiently to make its self-expansion possible again, paving the way for another period of growth. Unfortunately for us, a crisis leads to mass unemployment, falling living standards and general social upheaval. Movements in the rate of profit drive the boom and bust cycle, but there is also a long term tendency for the general rate of profit to decline over decades.
What causes the Falling Rate of Profit?
Marx showed that, under capitalism, only workers' expenditure of labour-power creates value. Capitalists appropriate a part of that value which workers are not compensated for. This unpaid expenditure of labour-power is called surplus value.
In simple terms, as the production of commodities becomes more automated and mechanised, less labour-power is used in production. Living labour (variable capital) is replaced with dead labour (constant capital), which cannot produce new value. Over time, this causes the value of the commodities produced to decline, along with the surplus value congealed within. Since surplus value is the essence of profit, the profit realised per sale must also fall, and therefore the rate of profit. To compensate for this, capitalists attempt to sell more commodities. But this involves investing in production and producing more commodities, which in the long run causes the rate of profit to fall further!
The inseparable flip-side to the falling rate of profit is the accumulation of constant capital, dead labour. The mechanism of crisis aims to purge this dead labour from the system to enable profitable investment to resume.
Why Quantitative Easing Hasn't Worked
Quantitative Easing (QE) is an unconventional form of Keynesian policy. QE is where the Central Bank essentially creates money and uses it to buy bonds from banks and other financial institutions in order for them to recapitalise their balance sheets. The idea is to give banks more capital so they can start lending again to businesses and consumers, increasing effective demand (as per the Keynesian theory). There are several problems with this. Firstly, this simply replaces the capital lost by the banks with more fictitious capital, which leaves the banks in exactly the same situation as before – completely exposed to another crisis. Secondly, by preventing the banks from collapsing (such as through the British Government's nationalisation of RBS, Northern Rock etc), the bourgeois have prevented the purge of fictitious and real capital required for a robust rebound in the rate of profit which would lay down the necessary conditions for a recovery. Thirdly, because the rate of profit has not sufficiently recovered, companies are unwilling to borrow to invest.
Why Austerity Doesn't Work
As discussed previously, the aim of austerity is to raise corporate profitability by selling public assets, reducing corporation taxes and creating unemployment to reduce wages. Whilst austerity in the UK did lead to a modest recovery on the basis of a partial recovery in the rate of profit, it is a fragile recovery. The UK was supposed to doing well among the advance capitalist countries with a vibrant growth rate of 3.0 percent but the British economy is now slowing markedly. GDP slowed to 1.9 percent in the 4th quarter of 2015.
Moreover Britain’s recovery has been completely lopsided, Services have rebounded from the crisis well but manufacturing is in the doldrums recording its slowest growth in 14 months.
This is because, as a proportion of overall investment costs, wages remain a small component of capital outlay compared to constant capital. The elephant in the room remains fictitious capital and constant capital value, which needs to be purged to restore profitability. The bourgeois are understandably anxious to do what they can to prevent what would be a catastrophic collapse in value. However, this is simply kicking the can down the road. A crisis is inevitable.
Why Anti-Austerity Doesn't Work
Like the advocates of Quantitative Easing, proponents of anti-austerity at root believe that increasing effective demand can revive economic growth. This is a false notion. Whereas Marx showed that profit was derived from unpaid labour, proponents of anti-austerity believe that profit can be sourced through paid labour. The class struggle between worker and capitalist is forgotten and replaced with class collaboration – what's good for workers is good for business! Marxists, of course, reject this but let us consider the impact of anti-austerity on the economy.
Anti-austerity comes in several forms. The traditional strategy is classic Keynesian tax and spend. This works by raising taxes on corporations and redistributing the acquired wealth to social programmes, public works and public sector job creation. In Marxist terms, this cuts the capitalists' surplus value and redistributes it to the working class. Whilst this would be a welcome reform, ultimately it would exacerbate the underlying issue of the low rate of profit by reducing the post-tax rate of profit further. Companies would either go bankrupt, cut staff or move abroad in an attempt to remain profitable.
The alternative strategy, as supported by the Labour leader Jeremy Corbyn, is to print and spend money, described as “People's Quantitative Easing”. Much like traditional QE, this would involve the Central Bank (in this case the Bank of England) creating money to buy bonds from a new state-owned National Investment Bank. This bank would then spend money to fund public infrastructure projects, ultimately putting cash in workers' pockets. The apparent advantage of this method compared to tax and spend is that capitalist profits would not be taxed, keeping them sweet. The problem with People's QE is that the state bank would still act as capital. Any investment projects that increase the ratio of constant capital to variable capital will depress the average rate of profit across the economy. Additionally, printing money would simply create more fictitious capital, which would serve as another barrier to restoring profitability.
Everyone is Anti-Austerity
This anti-austerity narrative is popular amongst the Left. Pick up a newspaper or any left-wing journal inside or outside the Labour Party and they are all proclaim allegiance to anti-austerity. Opposition to capitalism has given way to opposition to austerity. Their answer to the enduring economic crisis which has produced austerity is anti-austerity, not socialism.
Unfortunately, anti-austerity is not simply left-wing. Perhaps lesser known is the support for anti-austerity amongst the far-right across Europe:
“The rise of the radical right in Western European countries, particularly in France and the Netherlands, has been a large focus of media attention and scholarly analysis. However, less attention has been paid to the rise of the radical right in Eastern Europe and its links to the anti-austerity and anti-EU movements.” (Huffington Post, 02/13/2014)
“Led by Jaroslaw Kaczynski, twin brother of late president Lech, PiS [the Polish Law and Justice Party] has promised to increase state control of the economy, tax banks and stop privatisation. It also wants to lower the retirement age and says 'no' to adopting the euro any time soon.” (Reuters Mon Oct 26, 2015)
Increasingly, more mainstream bourgeois commentators are coming out in support of anti-austerity policies:
“In an era of extraordinarily low interest rates and slow growth, it is becoming increasingly clear that progressives do best when they reject austerity and embrace public investment. The British Labour party and the Canadian NDP sought to demonstrate their soundness by embracing budget balancing as an objective. Their results were terrible.
The Canadian Liberals, on the other hand, were rewarded for a very different choice. As incoming prime minister, Justin Trudeau told the FT: “People keep telling me we have made a risky choice in this time when there is this political mantra of balanced budgets as a way to demonstrate responsible leadership. I am on the side of economists who say: Why put off investing when we have an opportunity now?” (Larry Summers blog, Financial Times 20/10/15).
The current campaign against austerity on the left has inherent dangers for the working class. It is true that the present austerity offensive by Osborne in the UK presents very real threats for living conditions and employment. However the position of the official labour movement is that austerity is an ideologically driven project that is unnecessary and that there is a viable alternative.
The alternative that is proposed is effectively as we have outlined above, a raft of measures in line with Keynesian proposals that are all contained within the current capitalist system. For the working class this is a disguised trap. Austerity poses a clear and present danger for the working class but as we have shown the Keynesian alternative isn’t viable either. Neither continued austerity or a tax and spend strategy can save capitalism form its impending slump.
The main danger isn’t that austerity will continue as it is clearly failing to solve the current economic slowdown but that the working class will go into the impending crisis without a clear idea of the only real alternative.
This mainly concerns the most advanced layers of the working class and particularly those Marxists who have influence amongst the movement. It is absolutely essential that Marxists draw a clear distinction between opposing austerity and what we are fighting for.
The programme presented by Jeremy Corbyn for example is not a socialist one and neither is that of many of the trade union leaders. Their proposed alternative is a version of radical Keynesianism and an adaptation to capitalism that will be incapable of solving the organic crisis of the system. In engaging in the struggle against austerity we are really involved in the struggle for socialism and against capitalism. It is imperative that we distinguish ourselves in pointing out the shortcomings and pitfalls of the proposed left alternative.
Some may argue that this would isolate us from those engaged in the struggle but unless we have a crystal clear understanding of the economic processes leading towards slump and are able to explain this to the best activists we would be indistinguishable from the rest of the anti-austerity left. Indeed we would be misleading those we have influence over were we to campaign against austerity but have an uncritical attitude to the pro-capitalist policy of the Keynesian left.
At this stage proposing the abolition of capitalism and its replacement with a different form of production may appear as a utopian dream of the distant past but, in reality, the only alternative that is capable of doing away with the crisis wracked system of capitalism is a society where production is based on human need and not profit.
Socialism is the solution. How it is to be fought for and how it is to triumph lies outside the scope of this article, but we can say with absolute certainty that the logic of capitalism will face the vast majority of the producers with this stark choice in the not too distant future.
This is an edited version of an article that appeared in new journal Marxist World, by Bruce Wallace and Steve Dobbs.