Issue 251 of SOCIALIST REVIEW Published April 2001 Copyright © Socialist Review
Now that the Goldilocks economy is going cold, Chris Harman explains where recessions come from
What a difference a year makes! It is 12 months since I last devoted this column to economics. At that time it was still important to take on claims that the US economy could go on booming indefinitely. Now the trend is downwards on all the world's stock exchanges, and the general expectation is of a US recession. The only arguments are over whether it has actually begun and how serious it will be.
Something else has changed as well. A year ago Japan was widely written out of accounts of the world system as something of an aberration, just as Russia had been before it. Somehow the world economy as a whole could be presented as healthy, even though there were dire troubles in what had been the second and third largest national economies only a decade ago.
Now Japan at least is beginning to worry those who think of themselves as masters of the universe. Kiichi Miyazawa, current finance minister and former prime minister, warned early in March that 'Japan's fiscal condition was approaching collapse' (Financial Times, 9 March).
A few days before, a Financial Times editorial had warned:
The worries do not, however, end there. Some influential economists are beginning to wonder whether the US is going down the Japanese road. Until recently economic orthodoxy argued that a recession could not happen until it was triggered by inflationary pressures. I pointed out in January of last year that this showed 'lack of memory as well as foresight', since many things besides inflation could turn boom into slump, and that 'the most famous crash in history, that of 1929, followed a period in which prices showed no overall rise at all'. Now some of these economists are making the same point.
Stephen Roach, chief economist at Morgan Stanley Dean Witter in New York, has noted that 'for most of the first half of the 20th century, inflation was not a problem', but that 'supply side led recessions of the low inflation era tended to be longer and deeper' (quoted by Gerard Baker in the Financial Times 2 March).
Now no less a person than Larry Summers is making the same point. Summers was, until January, Treasury Secretary of the US, and one of the people who encouraged Gordon Brown to believe the days of boom and bust were gone for good.
He has recently pointed out that price inflation did not play a role in triggering the Japanese crises a decade ago. As Larry Elliot of the Guardian summarises his argument, 'Even when the Nikkei was racing towards 40,000 and land prices in Tokyo had gone through the roof, inflation was only rising at about 3 percent a year, similar to the US over the last year... The US, like Japan, could be returning to an older type of economic cycle' such as occurred 'in the 19th century, when there was a clearly defined cycle driven by the interplay of technical advance, profitability and speculation.
'Increase in profits would stimulate higher investment and higher productivity, driving down unit costs, keeping inflation under control. This was the benign phase of the cycle, seen in Japan in the mid-1980s and the US in the mid-1990s. Then the problems began.
'Attracted by the lure of high profiles and confident that the good times would last for ever, investors would finance enterprises with no chance of making a decent return. At some point reality set in. The speculative bubble was pricked and much of the unprofitable investment was scrapped as the economy went into recession. Fearful for the future, consumers saved more and spent less, pushing prices lower...adding to the squeeze on corporate earnings' (Larry Elliot, Guardian, 14 March).
This, Summers says, is how Japan got into its present mess, and where he fears the US could go.
Economists like Roach and Summers have not, of course, been suddenly converted to revolutionary Marxism. They both believe there is a way out for US capitalism, although their ways differ profoundly from each other.
Roach argues that the recessions of the pre-inflationary era were 'self correcting', brought to an end not by government policies, but by the working out of excesses of over-accumulation and speculation. The implication is that the mistake in Japan was to try to do something about the crisis instead of leaving it to work itself out. Summers's approach, by contrast, is to assume that governments (or central banks) can deal with problems if they act quickly enough.
Neither view is satisfactory. The last great recession of the 'pre-inflationary era', that of the interwar years, was not 'self correcting'. It only finally came to an end when there was the most extreme form of government intervention--massive armaments drives leading to all-out world war. And there has been little evidence of 'self correction' in Japan.
As for the argument about quicker government intervention, it would hold more water if anyone had called for quicker intervention in the Japanese case. But those who harp on about it now are the very people who extolled the 'Japanese model' of capitalism as able to avoid slumps a decade ago.
Anyone who doubts that should look at the books written by William Keegan and Will Hutton at the time.
Since then, as the Financial Times says:
What they all fail to see is that as industrial capitalism gets older it increasingly displays features noted by Marx when it was still in its infancy--the tendency of the units of capital to get larger, and of accumulation to produce a downward pressure on long term profitability.
This does not mean that the system is simply going to collapse, and it is even possible that the onset of all-out recession will be delayed. But the behaviour of the system does get increasingly chaotic, in a way that is subject neither to self correction nor to central bank correction.
Now the trend is downwards on all the world's stock exchanges