Issue 223 of SOCIALIST REVIEW Published October 1998 Copyright © Socialist Review
A lot of people have been asking me how badly the economic crisis is going to hit Britain, Europe and the US.
That is not surprising. The panic in the ruling class has been very similar to that which suddenly developed when oil prices shot through the roof In October 1973, signalling the end of the long postwar boom, and that at the beginning of the 1990s when it suddenly became clear that the speculative 'greed is good' boom of the mid and late 1980s had hit the buffers.
William Keegan, the Observer's business
editor, summed up the sudden new mood
among the circle he moves in on 6 September:
'Those of us who went on holiday feeling that warnings about economic troubles to come were not being sufficiently heeded have returned to find the whole place in a state bordering on panic. South East Asia, Russia, Canada, Australia, Latin America, Wall Street..... the mood seems to have shifted from complacency to fear of financial and economic Armageddon.'
This in turn is creating an additional form
of panic among the most outspoken
apologists for capitalism that the crisis will
make their ideology seem as bankrupt as the
ideology of Stalinism did after the fall of the
Berlin Wall. The Economist complains:
'A particularly dangerous form of bad judgement is abroad just now. It is the kind which says: "See, this is what free market capitalism does for you".'
The Economist is right to be worried on this score. The very fact that many of those involved in running capitalism now see a deep crisis occuring, even one as deep as that of the 1930s, shows how chaotic and irrational their system is. But, the question is still thrown back, what exactly is going to happen?
To this there are two replies. First, the possibility of a very deep crisis is built into the system in its present phase. Second, the very complexity, accident proneness and chaos of the system means no one can foresee exactly what will happen over the next 12 months.
Crisis is built into the system because markets, by definition, exclude real planning. Firms only employ people to produce goods that can be sold. But they can only be sold if people or firms are prepared to spend on them the money they have received in the past as wages, profits, interest payments or rents. If all the money in an economy is not spent, then firms cannot sell all the goods they are capable of producing. They shut down factories, sack workers and do not take on any new ones.
Workers have little choice about spending the great bulk of money they receive as wages. They cannot provide an even half tolerable living standard for themselves and their families unless they do so.
With the profit, interest and rent that goes to capitalists, things are very different. There is no mechanism in the system to ensure that all of this is spent. of course, the capitalists will always spend some of their income in providing themselves and their hangers on with outrageous levels of luxury. But what happens to the rest of it?
It might be used for investment in ways that produce new goods or services. In that case, it provides a market for things sold by other capitalists, there are jobs for workers and the system might even boom.
However, there can never be any guarantee that such investment takes place. Whether it happens or not depends entirely on whether capitalists think they can make further profit from it. If for some reason such profits are not to be made--or rather, the capitalist think they are not to be made-- investment will not happen, firms won't be able to sell all the goods they produce, factories will shut down and unemployment will shoot up.
Once this begins to happen a vicious circle sets in. When a firm shuts a factory it stops buying raw materials and components from other firms, which in turn sack workers. When workers are sacked, they no longer have wage packets to buy things. In this way the gangrene rapidly spreads through the system.
The speed of the contagion is accelerated by other features of the system. Most firms do not pay immediately for the goods that they buy, but rely on credit which they expect to be able to pay off once they have sold their products. Banks can provide credit bemuse they in turn expect to be able to borrow from other firms and rich individuals. Governments can withdraw purchasing power by taxing on the one hand and add to it by spending on the other. Similarly, they provide credit to the banking system and take it back through government borrowing. On top of all this, some capitalists specialise in making profit out of speculation in raw materials, goods, company shares, currency rates or the provision of credit: as they bid against each other in the hope of short term gain they drive prices first in one direction and then suddenly in the other.
Vast and intricate chains of borrowing and lending complicate the already long chains of buying and selling. It becomes virtually impossible for anyone to see through to the condition of the 'real economy'--the process of production. So long as the economy is booming, few of those at the top want to see through to the real economy. For capitalists what matters is immediate profit--and that is only to be had by grabbing what you can as quickly as you can, regardless of what might happen in a year or two. Speculators get carried away by the momentum of their own speculation, and company directors justify their ever greater salary increases by inflating their profit figures.
The same shortsightedness necessarily affects all those who look to advance their own careers by endearing themselves to such people--New Labour cabinet ministers, upwardly mobile academics, former leftists such as Martin Jacques, David Aaronovich and Andrew Marr who now receive a pretty penny writing inane comment for the posh papers. They tell each other how brilliant they are, without being able to see beyond the ends of their noses.
Yet it should not require great insight to grasp that any chain becomes useless the moment one link breaks. So with capitalism, any breakdown in the long sequences of buying and selling, lending and borrowing, and the whole system is suddenly in trouble. The basic process of profit making in production may be obscured, but if there are problems with it then breakdown is at some point inevitable. Through the 1980s and 1990s basic profitability has been much lower than 30 years ago--as we have long pointed out in this Review and as people like Anwar Shaikh and Robert Brenner have recently shown from rather different theoretical standpoints.
The link that first breaks can often seem so far away and so marginal to the system as a whole as to be insignificant. So in the late 1920s the first sign of crisis was in problems with land speculation in Florida, while this time it was the fall in the Thai stock exchange and the Thai currency. But if a tyre is over inflated, a pinprick can burst it.
The Thai collapse suddenly threw light on faults in the Malaysian and Indonesian economies. Their collapse then made financiers suddenly question the massively inflated pretensions of the South Korean chaebol companies with their enormous overspeculation in computer chip production. The next link in the chain was the international price of oil. It fell as the Asian slump cut global consumption--and dealt a death blow to the Russian government's belief that oil exports could cover the cost of luxury imports for Moscow yuppiedom. Talk of a Russian debt default made international investors worry about their own exposure elsewhere, particularly in Latin America. And now an awful lot of them are praying that 'Communist' China can avoid a devaluation and a 'hard landing' from its boom.
Once market and credit networks start unravelling, it is very hard to tell where it will stop. The complexity, the panic and the continued speculation (now in falling rather than rising share markets) mean no one really knows what the underlying levels of profits really are--especially since recession, by cutting markets, threatens to cut profits still more.
At the same time, despite free market theory and the hype about 'globalisation', governments are intervening in a desperate attempt to hold things together--taking over certain bank debts in Indonesia and Japan, buying shares to keep stock market prices up in Hong Kong, cobbling together a coalition of the heads of Russia's great industrial monopolies in the hope they can agree on coordinated action to help each other.
Such measures will not somehow bring a magic end to the spread of crisis. Much more likely are ever deeper schisms within ruling classes and their governments as they thrash about in desperation. All this makes it impossible for anyone to prophesy with any hope of accuracy what will happen next.
Just as the most skilled meteorologists could not foresee in detail the impact of El Niño, so even the most scientific Marxists cannot foresee in detail how the current economic crisis will work out.
However, the crisis has already proved
how completely hollow are the arguments of
those who portray the market as a rational
way of organising humanity's productive
activities. And it has already proved, in the
case of Indonesia and Russia, how rapidly
economic crises can turn into political crises
which make a very large number of people
question old ideological certainties.