Wednesday, 29 October 2008

Georgian War Crimes

Time Whewell's report, on last night's Newsnight, See: here, showing the extent of the War Crimes committed by Georgia in its invasion of South Ossetia was clearly uncomfortable, not only for the, Walter Mitty like, Georgian President, but also for Britain's Foreign Minister, Miliband, given that Georgia is Britain's ally, and that for the last few months Britain, and the rest of the West, have presented the events as simply being Russian aggression.

Whewell dryly demolished the supposed evidence of the Georgian's, of Russian instigation, that was supposed to be represented by a supposed intercepted phone call between Ossetian border guards, evidence which, despite its clear importance, had apparently not been put forward at the time of the conflict, and which had been "lost" for over a month. This evidence was also contradicted, by eye witnesses who reported no sign of Russian troops, other than those there as part of the agreed monitoring arrangement, by the fact that the Ossetians themselves criticised the Russians for their original failure to respond to the Georgian bombardment, and the fact that when eventually the Russians did manage to respond they were so disorganised that their first detachment walked into a Georgian ambush that attacked journalists and troops alike.

Whewell's report illustrated the way that Georgian tanks had systematically shelled apartment blocks from just yards away, had launched attacks on civilians trying to flee the conflict etc. To find the West's Georgian ally committing such barbarous acts and war crimes must be deeply embarrassing for the British Government. The West has vehemently denied any similarity between Russia's intervention, to prevent Georgian atrocities in Ossetia, and NATO intervention in Serbia to oppose Serbian atrocities in Kosovo, though they have never said why the two situations are different, other than that a supposedly "democratic" imperialism, and "democratic" Georgia are involved one one side against a totalitarian or undemocratic Serbia and Russia. I doubt, however, that those suffering the atrocities could tell the difference between a "democratic" or a "totalitarian" bullet.

It must be deeply embarrassing for those too, including some of those who claim to be on the Left, who told us that Saakashvilli was "No Milosevic", and who doubted that Georgia had engaged in murderous attacks on the Ossetians, and who were all to eager to believe that it was all the responsibility of the Russians. Even where those that fall into this category take a less strident anti-Russian stance they are keen to be "balanced" in their condemnation over the Russia-Georgian-Ossetia conflict telling us that there were a number of wrongs involved. On this basis the US expansionism, putting a military ring around Russia is wrong, the Georgian attack on Ossetia is wrong, and the Russian response was wrong. Fine, yet the same people told us in Kosovo that imperialism's bombing of Serbia was "good" to stop the Serbian atrocities! But, as recent discussions on the AWL's website demonstrated the "kitsch" Marxists that argue this kind of social imperialism make exactly the same distinction that the politicians of the Miliband variety make between "democratic", and "totalitarian" states. At least it would show that if the AWL had not deleted a series of comments by comrades critical of their positions!

Of course, none of this confirmation of the murderous attacks of Georgia on Ossetia, could lead a Marxist to defend the Russian response, that would be as bad as the AWL's position on Kosovo, or their refusal to condemn a possible Israeli attack on Iran, and no doubt any further investigation will uncover similar atrocities carried out by Russian troops in Georgia. Marxists rather argue for a workers solution to such conflicts, and potential conflicts, for Workers Unity across borders and communal divides, for that workers unity to fight for consistent democracy for Minorities to oppose any oppression against them by the State, to recognise that their main enemy is not other workers living across those divides, but their own ruling class and its State. Its a pity that many Marxists have abandoned that fundamental aspect of proletarian internationalism, settling instead for lining themselves up with one side or another in such conflicts depending upon which side they consider the lesser-evil.

Where We've been, Where We Are, and Where We're Going - Part III – Where We Are Going

The Credit Crunch

It normally takes two years for a Credit Crunch to unwind. The current one is already 16 months old. On the one hand there has been an unprecedented amount of money thrown at resolving the current crisis, and the Capitalist State has stepped in to effectively nationalise the world’s largest banks and finance houses. The State has taken on responsibility for ensuring that all risk related to lending is socialised. However, the current crisis is itself unprecedented in scope and scale. In addition to the problems arising from sub-prime mortgages, remains the question of other sub-prime lending, on Credit Cards etc., and of non-sub-prime loans, which could default in the event of an economic slowdown. In addition, as the Lehman’s collapse demonstrated the big problem arises with counter-party risk. The result of the huge explosion of derivatives is that no one knows who the counter-party is! Whilst, in theory, the trillions of dollars of those derivatives are netted off – basically for every derivative buyer there is a derivative seller, for every winner a loser – in reality things are not so simple. Firstly, the extent of leverage means that even the winners may not be winners if the losers cannot pay up, and if a large finance house is a loser like Lehman’s the time taken to unwind all of its positions to identify all of the counter parties to these trades etc. is likely to be too long a time in a fast-moving maelstrom of panic. The problem that could arise given the scale is that the same causes of breakdown of trust and relations between Banks, which led to the Crunch could simply be transferred to the relations between States now acting as banks. We have already seen that to some extent. It was seen over the actions of the Dutch, Belgian and Luxembourg governments over Fortis. It was seen in the scramble for advantage when Ireland stepped in to guarantee all Bank deposits, threatening a stampede out of deposits in other EU countries. Most classically, it has been seen in the conflict between Britain and Iceland over deposits in Icelandic banks, and which was reminiscent of the 1970’s Cod War. It is certainly the case that some of these banks such as UBS of Switzerland have Balance Sheets bigger than the GDP of their host nations.

If this problem does begin to materialise – and it is clear even now that the huge sums put in by States will have to be increased – there are essentially only three solutions. The first is the Libertarian/Free Market solution, which I saw presented on TV the other day by Peter Schiff. It is essentially for the State to withdraw and allow the market to have its way. The argument is that the Banks that brought this on themselves by their actions will go bust – those that make this argument never consider that the biggest losers will not be the bankers who made the decisions, but will be the workers who lose their jobs, but who never had any say in the decisions that caused the crisis – and those Capitalists – in Banking or otherwise – who acted responsibly will do well and pick up the pieces. The Capitalist State will never adopt that position under current conditions. Were this at the beginning of a Long Wave downturn it might have no choice, and would prepare to promote fascism as it did in the 1930’s, to beat down the inevitable social eruption. For now, it has no need of so risky a strategy. Rather, it will either simply pump even more money into resolving the problem – a few years ago Ben Bernanke earned himself the nickname “Helicopter Ben”, because he argued that the fed could defeat deflation by simpling printing dollars and dropping them from helicopters – or else it will seek to encourage the trillions of dollars held in various Sovereign Wealth Funds to come in and re-capitalise the collapsing financial system.

No Good Options For Capital

Both options have serious problems. In the main, Governments do not increase money supply by actually printing money. They achieve it by increasing the potential of the system to create Credit. In a severe Credit Crunch this option can be restricted precisely because the Banks and finance houses cannot be persuaded to create more credit – the analogy of “pushing on a string”. That problem is to some extent removed if those banks are State owned and controlled. But, if the problem becomes one of these State Banks themselves owing money to other State owned banks in other countries then, if the problem becomes severe it does become tempting to actually just crank up the printing press and pay these debts in devalued currency. That was what happened in the 1920’s in the Weimar Republic as a means of Germany repaying its commitments under the Treaty of Versailles. The consequence then, and now in Zimbabwe, of such a strategy is inevitable – hyperinflation.

Even without such a catastrophic likelihood, it is clear that the huge amounts of liquidity pumped into the world economy during this period will result in much higher levels of inflation – there is around a two year lag between changes in Money Supply and the effect on prices. Even before the crisis took its latest turn a month or so ago, inflation was rising and capital was worrying about workers looking to defend wages against rising prices. If even higher inflation for a more prolonged period, manifests itself then an increasingly militant and confident working class will demand wage rises to keep pace. In order to avoid this problem, the better solution for Capital is to mobilise the trillions of dollars sitting in SWF’s around the globe, built up in economies with high savings rates, and which have prospered from a growing world economy as they have exported more than they have imported. But, there are problems with this too. Firstly, some of these SWF’s have already had their fingers burned. They already invested large amounts in US financial institutions and saw their investment collapse. In addition, the US over recent years has stepped in to block some foreign investments where it felt that they threatened US National or Strategic interest. Finally, in a situation where economic growth is slowing some SWF’s appear to be intent on ensuring they give precedence to putting money into their own economy and institutions.

Given the complexity of all these derivatives, and the extent of counter-party risk its impossible to say how bad this situation could become. It seems likely, however, that some floor might have been put under the financial system. My guess is that further capitalisation will be required and will come from a combination of further State funding, together with funding from the SWF’s backed by State guarantees. Given the almost complete collapse of the price of Bank Shares – RBS, which is not only the second largest UK Bank, but also the fifth largest US Bank, has seen its share price fall by 90% - and the continuing ability of these companies to generate huge volumes of cash flow – its likely that in the next few months they will begin to attract investors. Already, people like Warren Buffett – who has a personal wealth of around $40 billion – have begun to buy bank shares, and Buffett’s mantra has always been only to buy shares in companies that represent long-term value.

In short, its likely that the worst of the financial crisis is over, but the consequence will be that the US has been fundamentally weakened, if not mortally wounded. The biggest investors in hard US assets – the purchase of actual companies, Banks etc. – will be those like the China, OPEC and Russia, sitting on huge dollar reserves. Those dollar reserves will diminish in home currency value as the dollar falls – an inevitable consequence of the huge increase in Supply of dollars pumped into the market – but those dollars can be used to buy up those dollar denominated assets effectively neutralising that effect. Not only does this present political and strategic problems for the US, but it will also suffer the problem other economies have in the past – a Capital transfer out of the Country as profits are paid out to foreign owners. Already, the huge extent of the US’s indebtedness has left it on the verge of a tipping point whereby its economic growth was barely sufficient to keep pace with its foreign debt financing.

A couple of years ago George Soros said that the dollar would lose its role as world reserve currency within 5 years. That is not likely to occur until the present crisis is resolved, but it now seems inevitable. Already, China is saying that the US and the dollar’s role cannot continue after this crisis. It is likely that China will move its peg from the dollar to a basket of currencies as a first stage in that process. Its possible that OPEC could begin to price oil in Euros or the Gold Dinar.

The Responses

In short, there are no good solutions, particularly for US Capitalism – already on CNN and other news channels questions such as, “Is this the end of Capitalism?” are being raised (to which the answer is clearly no) – only less bad solutions. Marxists would no more call for the Capitalist State to save the system than would the Libertarians, but where the Libertarians simply want to punish one group of Capitalists who they believe acted irresponsibly and in cahoots with what they see as a socialistic State (!), and want workers to simply suck it up for a crisis not of their making, whilst another group of Libertarian minded Capitalists make a killing, the Marxist says workers have no interest in saving the system that oppresses them, especially by strengthening the Capitalist State! The Marxist, though, has no interest in promoting the idea that workers should just suck it up. The Marxist argues that the experience shows why they need to replace Capitalism, why they can place no faith in the Capitalist state bringing that about – a State which continually says it has no money for health care, education etc. but can find trillions to bail out its ruling class – and whythey should use the crisis as an opportunity to take over the means of production for themselves. The Libertarian cannot understand why Capitalism requires the State to intervene, because they have a narrow view of what Capitalism is, one still rooted in the 18th Century, a view which fails to recognise that Capitalism is not based on the principles that applied then of the free market and small state, but is based on Monopoly Capital, and its close integration with a large, interventionist, bureaucratic State. The Neo-Cons, and Neo-Liberals understand that perfectly well.

The neo-Marxist, or perhaps they should be labelled “kitsch” Marxists, also have some grasp of that. But, with a statist ideology, rooted not in Marxism, but Lasalleanism, they end up with effectively the same position as the neo-Liberals. They see State intervention as good, as in some way a concession to Socialism, and therefore, to be promoted. Of course, as marx and Engels argued, State ownership is objectively considered, historically progressive, just as capitalism is historically progressive compared to feudalism, or Monopoly is progressive compared to small-scale ownership. It represents the same kind of logical development from the monopolisation, cartelisation, and trustification of the means of production inherent in Capitalism, and therefore, its more mature form. But everything is relative. Bourgeois democracy is progressive compared with feudal absolutism, but it is reactionary compared to workers democracy. Marxists defend Bourgeois democracy against a return to feudal absolutism, but do so by the methods of and by promoting workers democracy. Marxists do not call for State property to be turned back to private property and defend it against such a move, but do so on the basis of exposing the limited nature of State capitalism, of its reactionary nature compared with direct workers ownership, argue for its conversion to Workers property, the establishment of Co-operatives etc. Marxists should oppose to this programme of statisation of these financial companies their takeover by the workers – both as workers and customers – the extension of existing Co-operative and mutual enterprises into these spheres – the Co-op Bank and CIS, Unity Trust, The Mutual Building Societies, Credit Unions etc. – and for the mobilisation of the Labour movement to ensure that these Co-operative and mutual enterprises are brought under meaningful workers control and democracy.

A couple of months ago, when I warned this financial crisis was about to break, I based my warning on the fact that there had been a rapid fall in the price of oil, which appeared to have been caused not because of any fundamental or psychological change in the oil market, but because of forced selling by financial institutions, who were having to sell profitable positions in order to boost their cash holdings. At the time, Bill Jeffries of permanent Revolution, dismissed this warning saying that the oil price drop was not unusual. (some of the background discussion can be found here, and the actual discussion on the oil price is part of the discussion here

The Economic Fallout

The warning and my reason for giving it has been proved more correct than I believed at the time. In fact, in the last few weeks we have seen not just the price of oil, but the price of other commodities, as well as other assets e.g. the share prices of mining and energy companies etc. fall even more dramatically. The price of oil has fallen more than 50%. Xstrata, a broad based mining company has seen its share price fall from a high of over £46 to less than £8. The common argument for these falls is fear of a serious world recession or even Depression. This is nonsense. The reason for these price falls is, as legendary Commodities Trader, Jim Rogers, said on CNBC the other day, forced selling by financial institutions, hedge funds and other investors and speculators. At around $100 a barrel the demand and supply of oil appeared to be in short-run equilibrium. The spike in the price to $147 was partly a risk premium based on a justified fear of an attack on Iran – I commented a year ago that some oild traders believed an insufficient risk premium was included in the price for such an eventuality – and was a reflection of the fact that some financial institutions were piling into what appeared to be a one-way bet, and that some hedge-funds recognised that in the medium term Peak Oil means that the oil price is going to $200 and above. The fall to below $70 is a reflection of the degree of forced selling. When that stops oil prices are likely to head back towards $100 in the near future, absent of course an Israeli attack on Iran as the forerunner to US involvement that would just happen to benefit McCain’s chances ahead of the election. In real terms oil is still below its 1970’s levels. Despite all the broo ha ha the main economies are not YET in recession. China’s growth has fallen to 9%, but in part that is the result of natural disasters earlier in the year, and of the Olympics. Despite the references to 1929 and the Depression there is no evidence that the World economy is headed even for the kind of recession seen in the 1980’s let alone the 1930’s. In the US there is talk of a $300 billion Keynesian stimulus package, China is stimulating its economy by both Monetary and fiscal policy, Japan too, Britain will scrap the Golden Rule, and Europe will scrap the Stabilisation pact to allow a massive Keynesian stimulus. The recession is likely to be restricted to some of the largest ddebt-ridden economies. The IMF still sees World growth at 4%, ahead of the 2.5% required for a world recession. The main demand for raw materials, foodstuffs etc. is coming from China, India and other Asian economies, which look set to continue growing strongly. As the FT commented in its World economy Supplement of 10th October, any fall in Commodity prices is likely to be limited and short-lived.

There are, however, likely to be some significant price falls. Traders often speak of reversion to the mean. In other words, if prices rise rapidly they are likely to fall significantly until they return to the mean or trend level. The last 20 years of massive injection of liquidity has resulted in huge bubbles in the prices of some assets – share prices, property. The Dow Jones is still hugely expensive compared with its long-run relation to Gold. Traditionally, Price-Earnings ratios fall to around 8 in a serious recession, but remain in the mid-teens for many markets. Despite recent falls, property prices in many parts of the US, UK and other countries like Spain, where there has been speculation – and where the structure of the housing market makes such price rises possible, compared to say Germany where it has been absent – remain at high levels. If there is any comparison with the 1930’s it is that these inflated prices may well suffer a severe deflation – the more so if a recession is most marked in these debt-ridden economies – which for related reasons outlined earlier is likely. In the 1930’s the property prices fell in the US to around 10c on the dollar. Its quite possible that there could be a fall of around 50% in property and share prices from current levels (I wrote this a couple of weeks ago since when share prices have already fallen dramatically). However, the consequence of the liquidity injections already undertaken, and those to come will lead to a large inflation in a year to two years time – probably as high as 20% - as that liquidity feeds through, and economic activity resumes strongly. This will bring about a re-establishment between these asset prices and commodity prices – reversion to the mean – a relation which has been thrown off completely as a result of the bubble in assets, and the effective deflation of the prices of commodities over the last 20 years. Gold is likely, by the same token, to rise to between $2,000 - $3,000 an ounce before hitting a peak in 2010 – that is a real terms peak. Gold hit a real terms peak in 1960 (compared with the prices of all other commodities), but peaked in nominal terms in 1980 as a result of prolonged inflation, and the other factors I outlined earlier.

From a Marxist perspective there is another consequence of this. In the last 30 years the resultant structure of economies in the UK, US in particular, has meant that Finance Capital has been almost hegemonic. There has been gloating not just on the left, at the rapid fall of the City spivs, and comments about the fact that the best and brightest might in future look for jobs in industry or science. As Marx and Engels elaborated, classes are not homogenous. As Marx demonstrated, the Capitalist class itself is wracked with division, not just because of market competition, but because Money Capitalists, Merchant Capitalists and Industrial Capitalists compete over the division of the Surplus value created in the latter sphere, and although all Capitalists have a common interest against the working class, they have diverging interests over the division of the spoils of their collective exploitation of the workers. One of the characteristics of the last period has been the degree to which, particularly large companies, have built up sizeable cash positions on their balance Sheets, and that some of these companies, and others such as TESCO, Sainsburys etc., have ventured into the sphere of Money Capital. It is important for Marxists to analyse these divisions within the Capitalist class, divisions which will heighten as a result of the current crisis.

Resumption of the Boom

It is possible that the severity of the financial crisis could cause a severe recession, but not a Depression which implies a prolonged period of economic downturn. If that happens it is likely to be uneven. Some economies will grow strongly, and new trade relations will develop on the basis of that changed pattern of economic activity. Any recession is likely to be short, and followed by very rapid growth.

There are a number of things with this boom which are different from previous Long Wave booms. For one thing, the World economy is now much greater in its scope than in previous booms. The market is bigger, and Exchange Value dominates more extensively. Although, technology always plays an important role in ever new boom there are some differences this time. Computer technology is now so advanced that it plays itself a role in speeding up technological advance. It plays into the very process of innovation e.g. the role played by computers in the Genome Project. All sciences are now becoming susceptible to mathematical modelling. Everything is becoming digitised so that even sciences such as biology can be dealt with by mathematical techniques, and anything that can be digitised and subjected to mathematics can be modelled and analysed rapidly using computer technology. The other consequence of this is that what have in the past been separate scientific disciplines are being integrated in a way that was not previously possible. Computer technology and biotechnology are being merged in a way that not only allows the very fabric of life to be manipulated, but also allows computers to be developed on the same kind of basis as organisms. Nanotechnology is already allowing the manipulation of matter at an atomic level. This is a qualitative change in the productive forces which has not been adequately theorised, and so neither has its consequences for the productive and social relations.

This means that this Long Wave Boom, irrespective of the consequences of the current crisis, will be much more explosive and extensive than previous booms, including the post-war boom. Similarly, the consequences arising out of the end of the boom - sometime between 2020 and 2030 – will be that much greater, particularly given a world in which there is no hegemonic power – as there was for example in the 19th Century in the form of Britain, or in the period after 1974 in the form of the US – so the danger of imperialist conflict is that much greater – in 1974 the second superpower, the USSR, was not Capitalist and so was not driven by the same imperialist drive that Capitalist economies are subject to. This background explains much of the current manoeuvring and strategising by the major powers. It should be of concern to the whole of humanity not just to Marxists, but it is only Marxists that can provide humanity with the solution to the catastrophe the world may face.

Tuesday, 28 October 2008

Where We've Been, Where We Are and where We Are Going - Part II – Where We Are

A Multi-Podal World Economy

I remember back in the 1980’s the Economist ran a series of articles on a number of countries – Malaysia, Singapore, Taiwan amongst other Asian nations. They were what were to become known as the “Asian Tiger” economies. At the time I was working on a number of papers on the question of Imperialism and “sub-Imperialism”. I still have the articles somewhere in my archives. These were all countries, which only a few years before most Marxists would have had no difficulty in understanding within the context of the established theories of imperialism at the time, as oppressed nations, dependent upon some metropolitan centre. Indeed, not long before that they were classic, politically oppressed colonies. But, the Economist articles showed that even by the early 1980’s that model was no longer applicable. All of these economies were not only formally, politically independent, but they were rapidly industrialising, had a rapidly growing domestic bourgeoisie, arising out of that development, rapidly rising levels of education and culture for a growing number of their people, and indeed were not only exporting their manufactured goods around the world, but were also exporting Capital, often to other Asian economies whose wage levels were even lower than their own. In my opinion, today even the term “emerging economies” is no longer appropriate to most of these economies. Countries such as South Korea, Singapore etc. have already emerged. They are still young and dynamic, still capable of rapid growth (and by the same token rapid slowdown), but they are no more emerging in that context than was say the US at the beginning of the twentieth century. In some respects – as was the case with the US and Germany in the past – they have leapfrogged the developed nations. For example, Singapore has probably the best wired economy in the world in terms of access to broadband technologies. Some have such well developed systems that children can be taught at home on line over Video networking. Geoffrey Kay in his book “Development & Underdevelopment – A Marxist Analysis”, explains why. Capital will, despite low wage levels always have an incentive to exploit even cheap labour by using the most efficient, most modern means of production. That is why the Neo-Classical Development Economists were puzzled that that model failed to explain the actual development of such economies, why despite low wages high levels of unemployment was created. That is not to say, of course, that the kind of combined and uneven development seen and analysed by Lenin in Russia can’t be witnessed in these economies – China is a good example – but it is the more advanced that pushes out the less, and subjugates it to itself.

Lenin, in his “The Development of Capitalism in Russia”, not only produced a huge opus of statistical data showing how Capitalism was developing on Russian soil, but in doing so he took apart the ideas of the Narodniks. I think there has been a great deal of Narodism in post-war Marxist theories. The Narodniks believed that there was something unnatural about Capitalist development in Russia, that it was something foreign, transplanted on to their soil. In large part, of course, it was. The huge new factories often were foreign owned, or built with foreign Capital. But, as Lenin showed there was plenty of home grown Capital too, and as the market grew, as it inevitably did, increasing numbers of peasants and artisans found themselves producing for that market rather than themselves. The consequence was an increasing differentiation into bourgeois and proletarians. This was not something to be deplored as the Narodniks did, but welcomed as Marx had done. Moreover, as Lenin showed, in general, the more developed, the larger, the more capitalistic the business, the better the wages and conditions of the workers. The problem, Lenin proclaimed, in contrast to the Narodniks, the reason for the workers and peasants poverty, was not Capitalism as the Narodniks said, but “Not enough Capitalism”! Moreover, the Narodniks looked to the State as being the means by which the development of Capitalism could be held back, and instead measures pursued by which the Russian form of Socialism, based on the Village Commune, could evolve. But, Lenin pointed out, the State is a class state, the instrument of a ruling social class, and in Russia by the late 19th Century that class as Lenin pointed out was already the capitalist class.

Many of the Narodnik ideas can be seen in the positions of Marxists in the post-war period. Firstly, the very real existence of foreign Capital has emphasised the idea that the Capitalism that exists is in some way alien, and hostile to the development of the economy e.g. the notion of “the development of underdevelopment”. Even the term “underdevelopment” emphasises this notion. As I have written elsewhere this notion of “underdevelopment” is applicable in relation to Colonialism, as the overseas activity of merchant Capitalists – usually in conjunction with a ruling Landlord Class – whose method of extracting a profit – buying low and selling high – necessarily implies an impoverishment of the counter parties to such trades, and the political regimes established on the back of such economic and social relations reflect that. But, that is not true of Imperialism as the overseas expansion of industrial and financial Capital. Merchants’ Capital can buy and sell into any kind of economic and social system. The introduction of industrial Capital, of Capitalist production proper necessarily sets in motion the kind of development of market relations and thereby Capitalist relations described by Lenin in “The Development of Capitalism in Russia”. Moreover, this type of production necessarily brings with it the other things seen in any other Capitalist economy; the need for infrastructure, markets, a level playing field, Capitalist property laws, bourgeois freedoms etc. Increasingly, technological production requires educated workers, a middlec lass of technocrats and administrators. In short, it is as much required here to undertake its “civilising mission” – as Marx described it in the “Grundrisse” – of raising workers living standards, improving their education and culture etc. as it was in Britain and other developed economies.

Locked into a mechanical view of Trotsky’s “Permanent Revolution” or afraid to admit that a Capitalism that was supposed to be in its death throes was capable of any objectively progressive role – clearly Imperialism was not and is not subjectively progressive; it didn’t/doesn’t act consciously to improve the lives of workers and peasants in these countries, did not and does not act out of some moralistic quest to spread freedom and democracy around the world as the AWL, for example, seem to believe; it acted and acts out of pure self-interest and greed for profit that has led and will lead it to install dictators just as readily as democracy when that suits its interest; but overall the consequences of the development it brought were progressive – they denied the reality, refused to recognise any independent national development, branding such nations as neo-colonies and so on. And like the Narodniks, who placed misguided faith in the Russian bourgeois State, post-war Marxists have placed faith in various bourgeois-nationalist states rather than in the workers in opposition to those states. A good example now is Venezuela.

Does the fact of the emergence and subsequent development of these economies during the 1980’s and 90’s contradict the notion of the Long Wave downturn during that period? Not at all. Firstly, the concept of the Long Wave as explained in Part I does not involve ABSOLUTE declines during the downturn, just below average trend growth. Secondly, its necessary to look at the underlying reasons for the downturn, the consequences of the response of Capital to them.

The conditions which lead to the rise of the Long Wave are essentially these. Raw materials and foodstuffs prices have fallen to their lows, as new long-term supplies have been maintained/extended whilst demand has been falling either relatively or absolutely. Wages have fallen due to the weakened position of workers viz a viz Capital. Some developments of the Innovation Cycle have been introduced raising Labour productivity, thereby reducing Labour and input costs further. The rate of profit rises. There is often a blow-off of debt which leaves available productive assets which can be bought up cheap and used by more dynamic entrepreneurs. The causes of the Long Wave downturn are essentially an unwinding of these. Raw materials and foodstuffs prices are forced up rapidly at the beginning of the new upswing as Supply cannot keep up with demand. There is a scramble for resources, and an explosion of exploration and development as we have seen since the late 90’s. High prices force attempts to find new more efficient means of using energy and materials, which again we have seen during that period. As most traders will tell you, a Commodity Bull Market runs for around 20 years. This corresponds to the fact that it takes time to carry out exploration, and around seven years to bring on stream new production. Food production can usually be increased more rapidly. Driving around Europe recently I have noted how many fields are now given over to Maixe compared to previous tours. But, bringing on stream entirely new sources of food production can take longer. Potential areas have to be identified, land cleared, drainage installed, infrastructure built to take products away and for fertilisers and equipment to be brought in. In Africa, there are now some huge programmes being developed along these lines as one benefit of high food prices that makes such investment profitable. Angola is engaging in a Programme worth around $6 billion to develop agriculture on its highly fertile lands, and again reasserting the point made earlier, it is seeking to do so not by extending inefficient small-scale peasant production, but by encouraging foreign multinationals to invest in the development of large high-tec industrial farming.

Eventually, all of this new production exceeds demand, its lower marginal costs arising from the larger scale production, the new techniques and higher proportion of Constant Capital employed ensures that prices fall. Falling prices for these primary producers is one component of the slowing of the expansion, both in respect of their own very large investments, and in potential markets for industrial goods producers. Meanwhile, the expansion has raised the demand for Labour, strengthened workers position and militancy, and thereby eaten into the Surplus Value of Capital, slowing accumulation. The period of expansion of Constant Capital (exacerbated by the rise in the input prices of raw materials component of C) together with relatively rising wages means a falling Rate of profit, a phenomenon noted by Glyn and Sutcliffe during the period of the last Long Wave boom in the 1960’s. Alongside the diminishing potential arising from the slowdown of the primary producer economies, Capital also faces problems realising Surplus Value, and a problem of over-production. But, as Marx pointed out, this overproduction is not an overproduction of Use Values, but of Capital. There may be a great need of Use Values, of articles of consumption, the problem for Capital is not producing too much, but producing more than can be sold profitably. The trick for capital appears to be to reduce the cost of production in order that goods sold at the price the market will bear, create a profit. In fact, this is one of the reasons that such crises escalate. Competition ensures that each tries to expand and undercut the others.

But, here in part at least is the explanation for the development of the Asian Tigers. Not only does the globalising nature of Capitalism – its low prices that break down all Chinese walls as Marx put it – mean that all economies are forced to begin producing Capitalistically – and hence those with large untapped Labour forces tend to have a competitive advantage through lower labour costs, go straight to the latest machines, techniques etc. as did US, Germany, Russia Japan – progressively spread Capitalist production and thereby create ever new capitalist and proletarian classes, but at a certain point industrial Capital from developed countries naturally sees the answer to its need to produce at lower cost as being to locate its production in such low wage economies. As Marx pointed out, this is not straightforward. In the developed economy there is decades of development, infrastructure, trained workforces, and so on that reduces the unit labour cost. It is only profitable for capital to relocate if some at least of these things exist. By the early 1980’s that was true of these Asian economies.

As Keynes and other economists noted, wages are “sticky” downwards. In other words, workers having established a certain standard of living are loathe to have it reduced. Even in dire economic conditions it is difficult for Capital to force wages down below a certain point. This is similar to the idea of a “historical” or “cultural” component of the value of Labour Power referred to by marx. In the 1930’s living standards did not fall to that of the 19th century, nor in the 1974-99 downturn did wages fall even to that of the 1950’s. The social and political costs for Capital are simply too great, especially as the working class has shown on several occasions what the consequences for it must be if it pushes too hard – for it to attempt such a catastrophic reduction. Rather it seeks to manage the decline in workers living standards, to effect it by Salami tactics, and through a prolonged relative decline.

That is the strategy Capital has adopted over the last 30 years. That is the context within which “De-industrialisation” took place – for a discussion from the time of De-industrialisation see the book produced by the NIESR, “De-industrialisation”. There is no reason other than the ability to exploit cheaper labour for Capital to locate manufacturing in certain countries – apart in some cases from the costs and problems associated with pollution. There is a certain logic arising from the Harvard School Model of the product Cycle as to why products in their mature phase can be more profitably produced in a low wage, low skill economy, but as India and other Asian economies are demonstrating the supply of highly educated, highly skilled workers does not remain a constraint for long. Indeed, even the “De-industrialising” economies can only pursue this course up to a point. The US retains considerable manufacturing capability though concentrated at the high end e.g. aerospace (although it retains large auto production it is pretty much all loss-making except for the Japanese and other foreign owned plants). It has been able to de-industrialise to the extent it has due to a number of factors. First, because of its large service sector, secondly because of its high-tec base and other high-value export industry, thirdly because of its huge agricultural sector, and finally due to the role of the dollar as reserve currency, which has enabled the US to both pay for its imports in devalued currency, and to borrow huge sums from foreigners. At the other extreme Japan was less able to de-industrialise. It has no sizeable agriculture or raw material production. It has to produce in order to import absent the role of the Yen as a reserve currency like the dollar.

The development of the Asian Tigers and other “emerging markets” then from the 1980’s does not at all contradict the idea of this being a period of Long Wave downturn, but in fact is a consequence of it, as Capital seeks strategies to deal with it, to maintain the Rate of profit in the face of “sticky” wages, by relocating to economies where wage rates are a fraction of even the depressed levels in developed economies. In so doing it is able through prolonged unemployment and the removal of these large scale enterprises to shift labour towards lower-paid, casualised employment etc., and thereby effect over a period of years the necessary adjustments.

Some time ago I wrote about the wage cuts etc, imposed on US auto workers. For example at GM and Delphi where workers saw wages cut by up to a staggering 60%, and saw entitlements to Health Insurance slashed.

The world can no longer be seen in the terms that Lenin viewed it when he wrote “Imperialism”, or even that viewed by Trotsky in the 1930’s. The world is no longer made up of a handful of very powerful economies. Indeed, increasingly, national economies have formed natural geographical associations – the EU, North America and Asia. It is increasingly these economic blocs (which trade more and more within themselves forming increasingly coherent common markets) that confront each other on the world stage to push their particular interests. The latest Nobel Laureate for Economics Paul Krugman won for his work on analysing trade patterns. He asked the question why was it that trade cannot be theorised in the terms of Ricardian Comparative advantage, why is it that some countries produce essentially the same products, but trade these similar products between them? His answer was simple – economies of scale. It does not make sense to produce at a single car plant small batches of 5 different models. It makes sense to produce a large number of one model. It then makes sense to produce the other 4 models at 4 other plants, and these can just as easily be in say Canada as in the US, resulting in trade between the two.

Only Africa and parts of Latin America stand outside this framework, and increasingly they too are being drawn into the globalised industrial economy, just as Asia was in its turn.

An Economy on Steroids

Viewing the world economy and the relations within it simply on the basis of a superficial look at the economic statistics for each nation can only lead to error. Simply basing yourself on those statistics for the US, for instance, over the last 20 years would have led you to believe that this monster economy also remained vibrant, increasingly productive etc. But, such a view would have been false as the present crisis is demonstrating. The crisis is financial, but the roots of that finacial crisis have been spreading over the last 20 years from their heart within a fundamentally weak US economy, and they have done so as a result of the measures taken over that period to mollify that economic weakness. The US economy during that period has been like a Tour De France cyclist, always suspect to those with a critical eye, and wholly revealed when the results of the drug test comes in.

The rise of a multi-podal world economy has fundamentally changed the nature of trade and economic relations within it. The dependence of the US on Chinese, Russian and Middle Eastern creditors for its survival is just one part of that. These relations are often seen as still giving a whip-hand to the US. The quote, “if you owe a thousand pounds to the Bank then you have a problem, if you owe a million pounds to the Bank then the Bank has a problem”, is frequently used to describe the problems the US’s creditors have in withdrawing their support. The argument only stretches so far. The economic consequences of actions are always multi-faceted at this level in a way that does not apply to the Bank and its customer – and let’s not forget that Banks DO foreclose on people even when they owe very large amounts of money. For as long as China wanted to sell huge quantities of goods to the US the dollar-peg was useful. It would not want to force a dramatic fall in the dollar. However, the US now only accounts for a minority of China’s exports. The majority goes to the rest of Asia, as intra-Asia trade (particularly with Japan) expands. Europe is the next largest market for China’s exports with the US third. Additionally, the Chinese dometic market accounts for around a third of all Chinese production and is growing rapidly. Over the last few years rising oil and raw materials prices have hit hard at economies pegged to the dollar. The falling dollar meant that these commodities prices rose much more quickly, and as the Authorities sought to maintain the peg, they were forced to import inflation through the increase in liquidity needed to sell RMB and buy dollars. Chinese and other Asian economies began to suffer high rates of inflation. It was against this backdrop that the Authorities decided to relax the peg, allowing the value of the RMB to float higher, and the dollar to fall. In fact, the idea that the dollar could not be allowed to fall rapidly has been disproved several times. It lost 50% of its value against the Deutschmark for instance, and since 2002 has lost 50% against the Euro. Now Chinese spokesmen have openly stated that the time has come for the role of the dollar as reserve currency, and the US’s unique position stemming from it to end.

Its true that if the dollar falls then its Creditors get paid back in devalued currency, but much depends on what they do with those dollars. For instance, if its creditors cut off support not only would the dollar fall dramatically, but the consequence would also be a huge falls in US Stock Markets, and the market capitalisation of its companies, alongside a similar fall in other asset prices, for example, property, in anticipation of a big reduction in economic activity. Under those circumstances, all of those dodgy dollars could be used to snap up these cheap assets in effect exchanging worthless paper for physical assets. By that means the effect of the devalued currency is mitigated if not neutralised. The current events demonstrate just how many such deflated assets may be available to purchase with these dollars. Indeed, it is probably the prospect of all these dollars finding their way back home for the purpose of such purchases – together with the effects of forced liquidation of foreign assets by US financial companies in need of cash – which has prompted the current short term rise in the dollar.

World Trade Relations

A clear indication of the Long Wave can be seen by looking at the graph of world trade over this last cycle. Such a graph was provided in the World Economy Supplement of the FT on 10th October on Page 7. Between 1980 and 1990 global trade rose from around $4,000 billion to around $6,000 billion, remaining flat until around 1994. Between 1994 and 2000 it rose from around $6,000 billion to $12,000 billion. But, the sharpest rise has most notably been since 2002 where it rose from around $12,000 billion to around $28,000 billion by 2007. (Source: WTO Thomson Datastream) The FT article here shows another aspect of this multipodal economic order. The seven years of unresolved discussions over the Doha Round demonstrate these increasing economic interests coming to play and the inability of the US to simply impose its will. The intervening period has been one in which these contending economic powers have sought advantage by establishing multifarious bilateral trade agreements. China, thirsty for raw materials, has been highly active in this regard developing deals in latin America and Africa for its foodstuffs and raw materials in return for infrastructure, training and manufactures, and has not been slow to use such deals to further its strategic and political goals in the bargain. The fact that the world economy is divided into these three main competing blocs does not mean that they are free of internal frictions, as the recent attempts to obtain a common strategy, across Europe, to deal with the financial crisis, showed. And, as the FT says, “China and Japan are engaged in what appears to be a competition to make themselves the dominant hub in a hub-and-spoke pattern of agreements.”

Against all of that has also to be placed the emergence of economies in latin America. Many of these like emerging economies in Africa are prospering on the back of soaring raw material prices. Yet, that once was true of Asian economies. Other, for example Brazil, have rapidly industrialised and diversified their economies. Even in Africa a number of Lion economies are emerging with the potential for rapid growth and industrialisation provided they are able to divert earnings now into the necessary industrial development, capital accumulation etc. Angola, as mentioned earlier, not only benefits from huge mineral wealth, but is looking to make a huge investment in developing agriculture on an industrial scale, using the latest technology etc. other economies such as Kenya are developing rapidly, whilst as I said in a blog some time ago even places like Mauritania have very high growth rates. See:here. China has a huge bilateral deal with Congo (not to be confused with the Democratic Republic of Congo which is currently in Civil War) for the supply of raw materials in return for the building of roads, railways, hospitals, schools, Universities and the training of technicians.

If the world does not blow itself up in a new imperialist war at the end of this cycle, then in 50 years these countries are likely to be the equivalent of today’s Asian Tigers.

Not unusually then the picture of the world economy at the present time is one that is racked with contradictions. We have a financial crisis rooted in the Long Wave downturn, that manifests itself a third of the way into the Long Wave upturn. That financial crisis is if anything worse than that which erupted in 1929. Yet, as I have written in another blog the two cannot be compared. The 1929 Crash came in a period when the Long Wave downturn was already more than 10 years old, when Europe had been in recession throughout the 1920’s. The current financial crisis at a period of strong and continuing world economic growth. That financial crisis began in the early Summer of 2007, yet more than one year later its effects are only just beginning to be felt in the real economy. The US is probably now in recession, but we will not know fopr some months. France is in recession, and Britain will probably be in recession by the end of the year. Growth in germany has slowed rapidly. Yet, as the FT stated on 10th October, “Contraction Likely, But Decline May be Overstated”. (World Economy Supplement p10) Chinese economic growth has slowed from around 12% to 9%, but as a spokesman said some of that was due to natural disasters, earthquakes and floods earlier in the year, and is also partly due to industry being closed down prior to and during the Olympics. But 9% growth for the world’s fourth largest economy cannot be sneezed at, and now the State has cut interest rates and introduced other monetary measures to stimulate growth.

Despite all the talk about China as a Capitalist Market economy it has to be remembered it remains in general a centrally planned and directed economy as the Olympics demonstrated. One economist declares,

“Third, the Chinese production structure is all the more unbalanced since the investments of local companies have been mostly financed by the state-owned Chinese banking system, in which credit is allocated according to the aims of an industrial policy and not according to profitability expectations (even in companies belonging to the private sector which represent 45% of the total) [3]. This explains that depending on the source (Morgan Stanley, Moody's, etc.), the share of nonperforming loans is estimated at over 50% of total loans [Pei, Shirai, 2004]. According to Rawski [2001], the share of interest paid on interest owed stood at 84% in 1994, below 60% between 1996 and 1998 and under 50% in 1999. As a result, when they develop an industrial project, companies in China worry less about projected profitability or the competitive environment than about the State policy in favor of regions, fiscal incentives, or access to public credit [Huan &alii, 1999].”

See:here

It retains huge scope for using its reserves for internal development as the announcement today of a huge multi billion dollar railway programme illustrates, and may need to do so to buy off internal social problems if the recent demonstrations of sacked workers from a toy factory and elsewhere are a prelude.
For a Marxist, the notion of decoupling – the idea that some economies are unaffected by problems elsewhere, usually in the US – is a nonsense. If anything, for a Marxist, globalisation and the cloer integration of all economies is a desirable inevitability. Yet, that does not mean that the severe problems being experienced by the US necessarily means severe problems for the whole world economy. It is the very fact of the development of a multi-podal world economy, and globalisation that means such a development is not inevitable. Certainly, a severe US slowdown in US consumer spending will have a consequence for world growth. But, US consumer spending is not going to cease. Far too much attention in media coverage of the current crisis has been on the effects in the US, as though the US WERE the World economy. Its not, and in Part III I shall seek to set out where I think we are going, and the consequences.

Monday, 27 October 2008

Where We’ve Been, Where We Are, and Where We’re Going - Part I – Where We’ve Been

Cyclicality

I’ve set out in many previous blogs how the World Economy got to where we are. I want to develop some of the main points.

Have you ever walked up a mountain? One of the things you notice is that you see a point that you think is your goal, but in fact when you get there you find that in fact the path continues. It might flatten or even decline for a while before once again rising into the distance. The curve of Man’s economic development is like that. If you could see the whole thing, you would see it rises to a peak, but on the way it is made up of a whole series of separate slopes sometimes up, sometimes down, sometimes flat for a considerable period. Each of these in turn has similar characteristics.

One of the things Marx elaborates, though he was by no means the first to observe it, is that in Man’s history there are distinct breaks and changes, which lead to a more rapid period of development than that which had gone before. Not only can we think about the changes between the Stone Age, the Bronze Age, and the Iron Age, all of which have their particular consequence for production, but anthropology breaks Man’s prehistory down into what Engels described as Hunter Gatherers, Barbarism, and Civilisation. New productive developments produce new ways of producing, which, combined, revolutionise production, bringing forth a new burst of human productive potential and range of economic activity.

For most of human history and pre-history this process is slow, it is often random and consequent on natural factors, largely outside human control. Moreover, the fragmented nature of human societies means that developments in one place do not quickly, if at all, get transferred to other societies. There is some evidence that there were connections between the ancient civilisations in South America and in Egypt, hence the similarities of the pyramids, probably through trade, but these are exceptions. At the same time that civilisation was thriving in Mesopotamia and the Nile delta, in Northern Europe people were still at the stage of hunter-gatherers. We now know that although some of the Native peoples of North America crossed the Baring Straits from Siberia, whilst others crossed like Eric the red to Greenland, the earlier settlers came from France. At a time when the Arctic Ice Sheet came much further South, they crossed the Atlantic in relatively small boats that they used for fishing, and as hunter-gatherers they clung to the ice sheet and ice flows, living by fishing and hunting on the ice until they completed the crossing. The hunting and gathering techniques they took with them from France remained unaltered for thousands of years as those of the North American tribes, until the much later European settlement and colonisation.

It is very difficult then to identify any periodicity in these technological and productive developments. It is only when Capitalism arises, when man becomes a far more conscious determinant of this development, particularly through the application of science that randomness becomes less significant within the process. Moreover, it is the consequence of producing for the market which plays a significant role in creating a more identifiable periodicity as a result of an increasing synchronisation of economic activity. Take, for example, the situation of societies based largely on peasant production. Suppose some new form of plough is developed. The peasant may desire such a tool if it makes his labour easier or more productive. But, he is under no competitive compulsion to acquire it. He is likely to wait until his existing plough needs to be replaced before buying, or spending his time constructing, such a plough. It can take many years or decades before such a plough becomes the standard. A capitalist cannot do that. If a new machine is introduced which halves the labour-time required for production, even capitalists who have recently retooled are compelled to introduce it, or else find that their products are not competitive, cannot be sold, or else their profits are greatly reduced. Investment cycles then tend to be synchronised for all companies, and these tend also to become linked to innovation cycles, which in turn are linked to other cycles within the capitalist economy.

Moreover, the nature of Capitalism is to be far more expansive than previous systems so that it spreads relentlessly over the globe, and as it does so, it draws all other economies into this complex of cycles, forcing them to become also syncronised with its ebbs and flows.

See Also:World Economy

Kondratiev

This was the recognition of the Russian economist and statistician, Kondratiev. He identified that alongside the already known business cycles, three were also longer cycles, which lasted between 40-60 years peak to peak. It was within these longer cycles that some understanding of things such as innovation, exploration and the larger types of fixed investment could be understood, and these things, which are highly significant for Capitalist production also act upon pther forms of economic activity. To go back to the example of the mountain each Long Wave is like a section of the path. Even in a stretch that is more strongly upward sloping, their will be parts of the path that are flat or even sharply falling. In a Long Boom like that after WWII there were periods of recession or less strong growth. Similarly, in the period of the Long Wave that rises less than the average, there will be years of boom. Taken together, just as with the mountain path, the trajectory remains upward.

Kondratiev also theorised that the different conjunctions, the inflexion points where one part of the cycle ends and a new one begins, also create the conditions, which lead to various social and political phenomena such as wars and revolutions. Periods of strong economic growth typically lasting 20-25 years create a relative shortage of labour power. Wages rise, workers become more confident, more militant, better organised. Capitalists are more inclined and more able to concede to demands. When the boom ends e.g. 1914-20 or late 60’s/1974, the bosses have more reason to resist, industrial struggle becomes more intense, increasingly, militancy is not sufficient. Workers need a political response, and without it they are necessarily defeated, become weaker and demoralised. Similarly, in periods of boom Capitalist states compete economically, but when the boom ends and profits are not so readily available they are forced to compete for markets, raw materials, and outlets for the more profitable employment of their Capital by other means, including War.

When Kondratiev first produced his theory in the early 1920’s, it was subjected to many criticisms. Its one thing to look at history and identify such patterns, its another for these patterns to actually represent the manifestation of objective factors. For it to be a theory it has to be predictive of future events. Moreover, the fact that the duration of the cycle as between 40-60 years meant that it was open to the criticism that Kondratiev had, with such a small sample, simply adjusted the duration to fit the facts. This latter objection can be answered with the reply that the Business Cycle, which everyone accepts exists, was taken as being between seven and twelve years, a greater proportional divergence than the 40-60 years of the Long Wave.

See Also:Kondratiev

As I have set out elsewhere, many other economists such as Joseph Schumpeter adopted Kondratiev’s ideas and developed their own take on it. Today, Stock Market analysts use derivatives of it such as the Elliot Wave. Trotsky disputed Kondratiev’s ideas, because he considered them determinist. Like Lenin, Trotsky believed that politics dominates economics. In fact, Kondratiev was proved right. By the 1920’s, the turn of the Long Wave put workers throughout Europe on the back foot. They were fighting defensive struggles and usually losing. That had its effect on workers consciousness and on the workers’ organisations. Militancy was no longer enough, and the political solutions the workers had at their disposal were inadequate.

Post War Boom and Bust

I first became interested in Kondrtiev’s ideas in the late 1970’s. If his theory were correct then the end of the Long Wave decline that began in 1914-20 should have come some time between 1934 (20 years from 1914), and 1950 (30 years from 1920). In fact, most theorists would put the commencement of the new boom as beginning in 1949. If Kondratiev;s theory were correct it would mean the end of that boom some time between 1969 and 1979. No one doubts the existence of a post war boom. For Marxists, stuck in a view of Capitalism in its death throes – carried over from that assertion of Leninism and Trotskyism in the 1920’s and 30’s – the continuation of that boom into the 1960’s posed some problems, which could only be addressed by searching for some peculiar cause for it, be it the conditions created by post-war reconstruction, the ability of imperialist powers to grow on the basis of a super-exploitation of neo-colonies, the role of the “Permanent Arms Economy”, the ability of monopoly capitalism to manage crises, or even of a super-imperialism under US hegemony to fulfil that function on a global scale. But, such explanations were only necessary if the post-war boom was seen as something exceptional. It wasn’t as Kondratiev had shown. The Capitalist economy had seen previous periods of similar expansion of similar duration. What the Marxists saw as the peak of Capitalist rise in the 1920’s and 30’s, was merely just a peak amongst many on its overall upward trend. The decline from that peak did not signify its collapse, but merely presaged the next new rise. If Marxists spent time trying to provide such explanations for a long time, it is ironic that by the time the actual decline does begin they are by the same token required to dismiss it. After all, if all those theories were right then this couldn’t be a prolonged crisis could it?

When I first became interested in Kondratiev’s theory in the late 70’s, the crisis had become apparent, yet there was no reason to suspect that it was not just a recession more severe than previous ones, and which Capitalism would deal with as it had done with previous post-war downturns. But, as Mandel sets out in “The Second Slump”, this was not like the previous post-war recessions. The Keynesian intervention was largely ineffective, indeed possibly counter-productive, leading to stagflation. The relief was short-lived with a new downturn in 1981. The policies of Reagan and Thatcher were not the cause of the prolonged nature of high unemployment and slow growth, it was the prolonged nature of the downturn – the 20-30 year down phase of the Long Wave – which meant that Keynesianism had to be abandoned in favour first of the economics of Mises and Hayek, and then of Friedman.

If Kondratiev had been confirmed by the end of the Long Wave Boom in the late 60’s, and certainly by 1974, then he still needed to be confirmed in the duration of the downturn. A look back over that period shows that after the Second Slump of 1974, which continued into the late 70’s, a further downturn begins in 1981 and persists for several years. These are the years of the Peoples March for Jobs, of 3 million (probably actually 5 million) unemployed in Britain, with similar figures elsewhere. By the mid 80’s, the workers militancy that continued in largely defensive struggles through the 1970’s (mirroring the struggles of the 1920’s), was defeated – the Miners Strike in Britain, and similar strikes elsewhere, the sacking of the US Air Traffic Controllers etc. – and policy switched from Miseanism to Monetarism. Increased Money Supply and Supply Side economics boosts profits, but also creates an asset price bubble. IN 1987 the consequences – the ballooning of the US Twin Deficits acting as a spark – causes the October Stock market Crash, which is larger in percentage terms than 1929. Two years later the other asset price bubble – property – is also bust, with a new recession beginning in 1991. In this new recession the world’s second largest economy, Japan, suffers a serious deflation that lasts in spite of zero interest rates for 15 years. In Britain, house prices do not recover their 1990 levels until 1996 (later if inflation is taken into consideration). In the US real wages continued to fall, whilst workers sought to cover the fall by working an average two weeks more a year than they were in the 1970’s, and by going more and more into debt. In most of the developed economies, but most notably in the US and UK, what in the 1980’s had been theorised as “De-industrialisation”, sees former long-term manufacturing employment replaced by lower-paid, insecure, often temporary jobs.

The Appearance of Affluence and the Great Ponzi Scheme

Yet, from the late 80’s and certainly through the 90’s an appearance of affluence arises precisely in these latter two countries. Official figures appear to show high rates of growth, and productivity. This appears more marked when compared to mainland Europe where different economic conditions have not led to the same adoption of the “Anglo-Saxon” model. In Europe a greater degree of state intervention and protection of national industries – particularly in France and Germany – means that the effects on workers is not as pronounced, but the cost appears to be slower growth, and persistently higher rates of unemployment. But, the appearance belies the reality. In the US, the figures for productivity growth are largely a fiction, demonstrated by the fact that even in the most productive State – California – productivity per man hour remains lower than in France. With an increasing amount of employment in service industry it becomes increasingly difficult to measure productivity in output terms meaningfully, and as the “Austrian” economist Kurt Richebacher has demonstrated the US growth figures were equally a fiction bloated out of all proportion by the use of hedonic pricing. Nor could the unemployment statistics be believed. In both the US and UK changes were introduced which reduced the reported figures. That is not to forget the nature of these jobs compared with those lost. More importantly, the growth that does occur is built largely of a fiction – of a huge Ponzi scheme, in which wealth appears to continually expand out of thin air, just as long as everyone has confidence it will continue to do so. Capital, having migrated and grown in China, India and other new dynamic economies, produces commodities, which are exported – at very low prices adding to the appearance of affluence – to the very countries that once produced them. In order for the workers who once produced these goods to them they have to have jobs. In place of their former jobs they now increasingly have jobs selling and distributing these very commodities, or else in other service jobs providing for the increasingly varied consumer needs of their fellow workers. A very few find jobs in high value industries such as technology or finance, but these are the exception – though they create an illusion of affluence in a “Loadsamoney” society. As most of these jobs provide services only to the home market, they produce no exported counter-value for the imported manufactures. A trade-gap increasingly develops, and so these jobs can only be financed by borrowing money – from the very Chinese and others from whom the manufactures are being bought. Moreover, with falling real wages workers can only continue to consume and give the appearance of affluence if they make up the shortfall with their own borrowing. It is precisely in the countries of the “Anglo-Saxon” model that this fiction of affluence arises on the back of this almost fanatical obsession of consumption financed by debt. Its no wonder that the term – ridiculous for anyone that thinks about it – “retail therapy” arises, summing up its absurdity, a culture is created in which anyone that does not go into debt to finance the purchase of vast quantities of consumer junk is considered unusual. Feeding this madness is the other consequence of the huge amounts of liquidity fed into the system to maintain the fiction – the return of asset price bubbles in the Stock market and Property Market. These allow the victims of the scheme to further delude themselves by giving the impression of affluence through higher paper prices of their houses and portfolios, leading them to indebt themselves further by borrowing even more against these assets.

Its by no means the first time such manias have occurred. The banker John La persuaded the French Government that it could solve its economic problems through printing paper money. At first his scheme worked. Increased money supply promoted economic activity, sucking up unused resources. But, then the printing of more and more money had the inevitable result, the money became increasingly worthless and once confidence in the money disappeared – the only thing that allows a Ponzi scheme to work, and a Bubble to inflate – the whole scheme collapsed. Similarly in Britain, the 19th Century saw the “South Sea Bubble”, as well as a “Railway Mania”. In Holland there was even a “Tulipomania”, in which tulips were exchanged for fantastically inflated prices until the Emperor was found to not be wearing any clothes. All of these phenomena have the same result. Eventuially, there are no bigger fools left to buy at a higher price. Confidence collapses quickly, and prices even more so.

The New Long Boom

As I have written several times before, Kondratiev was proved right again. The very things his theory predicts occurred. The end of the down-leg is characterised by a number of things. Firstly, there is a final blow-off of debt. That occurred with the Asia currency crisis of the late 90’s and the Russian Rouble crisis of 1999. It is probably only the position of the US economy, and role of the dollar as reserve currency that prevented the dollar and US economy being drawn into that maelstrom at the time. Secondly, the prices of primary products – raw materials, foodstuffs – hit their low point. That too occurred in 1999. That marked the end of the Long Wave downturn, just as Kondratiev’s theory predicted, 25 years after its beginning. The world economy began a strong new Long Wave Boom from that point. After the debt blow-off, the Asian economies and Russia saw their economies grow rapidly, and their cash reserves grow enormously. World Trade began to grow rapidly. Having hit a low of $250 an ounce Gold rose to over $1,000 an ounce, whilst industrial metals like Copper rose even more in price alongside prices of foodstuffs. Meanwhile, new base technologies developed in the preceding innovation cycle, began to be introduced both as means of production, and embedded in new consumer products – in particular the Internet, and mobile technologies. Finally, as the new dynamic economies such as India and China consolidate their positions, changing the relative weight as against the old dominant economies, the baton is passed in preparation for the next cycle to the next generation – the Lion economies of Africa such as South Africa, Kenya, Angola, Congo etc., which now have growth rates even surpassing some of the Asian Tigers, many utilising their resource base, and even, as with Angola, taking advantage of high food prices for large scale investment in what are highly fertile soils with huge agricultural potential.

That is the background to the economic development that led the world to its current situation.

Wednesday, 15 October 2008

1929 And All That

I'm still in Spain, but had to post something given the recent events. Much more to come when I get back


Some time ago, I had gone with my family to Ullswater in the Lake District. We decided to walk up Helvellyn. After about an hour’s walking, bouncing down the mountain towards us came a guy who lives just around the corner from me, and who I see frequently similarly running towards me, while I am out in the fields walking the dog. Our paths crossed in the same manner with no words spoken, but simply an acknowledging glance between us.

The point? Two events that appear to ssimilar are in fact completely different. Our occasional crossed paths back home are not unexpected. We live close together and many people walk in the fields, especially if they are walking the dog or out for a run. With similar routines, it is no surprise that if you meet someone once, you meet them again. The crossing on Helvellyn was completely different. On that particular day and time, either of us could have been anywhere else in the world.
There are two points of relevance here. First, the superficiality of taking events or phenomena that appear the same as actually being the same, and second, the problem that economists and social scientists have with randomness. I do not wish to talk about the latter here, but will come back to it in another blog. All I will say about it is to repeat a comment made recently by hedge fund manager Hugh Hendry on CNBC. Asked for a prediction, he said: “I can tell you what will happen in five years, possibly even two, but I can’t tell you what will happen tomorrow, next week or next month.” This might seem odd, but it is not.

In the longer term, the consequences of randomness are removed. It is possible to analyse laws of motion and predict how things should develop, but tomorrow, some random event can cause consequences that no-one could predict.
However, my main concern here is with the former point. The recent chaos on the financial markets has been compared with the 1929 Wall Street crash. It is a false comparison. If the 1929 crash has any comparison, it is with 1987, not 2008. Contrary to popular belief, the 1929 crash did not cause the Great Depression of the 1930s. In fact, the world economy was already in trouble by the time the crash occurred; in fact it played a part in the crash. The long-wave boom that began at the end of the 1880s had ended in 1914, and was the spark for the Imperialist War. A brief post-war boom soon collapsed and recession set in during 1921. Europe remained in economic crisis during the 1920s. The US, as a dynamic new economy, and benefitting from the introduction of mass production and commercial credit escaped, or more correctly, as Kondratiev pointed out, it was out of synch. The US grew, exported and on that basis was led to cut interest rates and expand money supply, creating an asset price bubble, including a Stock Market bubble. But, that growth could continue for only so long, especially in a world where the major economies were in recession, and it turned into an overproduction of Capital, where commodities could no longer be sold at a profit. That is he realisation, the catalyst, which pops the bubble. The result, the financial crisis, the seizing up of credit and Capital markets, reacts back on the real economy, just as the severity of the present Crunch is beginning to do now, but there the similarity ends.

Its true that the US and UK, in particular, have experienced asset price bubbles in the last ten years just as did the US in the 1920’s, but again the similarity disguises a significant difference. In the 1920’s the US was a young, dynamic economy, similar to China today. Its asset price bubble was a consequence of that – just as China is experiencing a similar bubble today – whereas the asset price bubbles of the US and UK have been the consequences of economic weakness. In the 1920’s, mass production, Fordism and Taylorism enabled the US to export its cheap production all over the world. Its exports brought it a huge influx of gold. Under the Gold Standard, this meant that its domestic interest rates had to fall, and its money supply increase. This was the mechanism by which trade imbalances were to be resolved. The result should have been an increase in the price of US commodities – inflation. That didn’t happen because although Money Supply increased rapidly the output of commodities rose even faster. In Marxist terms the total value of Exchange Value rose, but the quantity of use values rose faster so that the Exchange Value of each Use Value fell. Then it was the huge productive potential of the US that brought that about, today that of China. Consumers could sate their demand for these Use Values, supply could expand faster than demand. The excess liquidity found its way then not into raising these prices, but into other sectors of the economy, into assets.

In the US and UK over the last 20 years, however, liquidity rose, not due to economic strength and dynamism, not in response to an influx of wealth from exports – quite the contrary, both countries racked up huge trade deficits – but its very opposite. Money Supply rose as called for by Friedmanite economics to counteract economic weakness, and the threat of recession as they suffered during the Long Wave downturn. As Samuel Brittan hints in the Financial Times recently Friedman and Keynes are not opposites but twins. Friedman argued the Depression was caused by too restrictive a monetary policy by the Fed. Neo-liberalism has been just as interventionist as its predecessor but has masked it through the use of monetary policy rather than the more overt Keynesian measures. Now even that mask is thrown away, and even Brittan talks about large doses of Keynesian state intervention.

The difference between the US and Europe in the 1930’s is also instructive. As the depression struck the US it was in a different situation to Europe, which had been in recession throughout the 1920’s. The militancy of European workers, built up during the period of the Long Wave boom from the late 1880’s to 1914, had led to decisive clashes as that boom ended; revolution in Russia, Germany, Austria, Hungary; huge strike waves across Europe; the General Strike in Britain. But, the weakened economic and social position of workers put them on the back-foot as the 1920’s proceeded. It was militant, but not sufficiently class conscious as its collapse into nationalism in 1914 had demonstrated. That lack of class consciousness was partly a consequence of the inadequate Lassallean, statist nature of the Workers Parties that passed themselves off as Marxist of the reformist or revolutionary variety. In turn that weakness of the class became reflected in those parties, the degeneration into Stalinism and the steady rightward drift of Social Democracy. The basis was laid for the suppression of the European Proletariat. Where it did fight back as in Germany and Spain, it was crushed by fascism, or cowed by the threat as in France. The fact that European Capital had been in crisis for more than ten years, its decrepit nature compared with the US meant that its options were limited. The onset of the crisis in the Us saw a similar outburst of militancy, and a sharp rise in support for the CP and other left organisations. A stronger, more dynamic US was able to respond by adopting the the ideas of Keynes whilst Britain rejected them, and went instead for throwing the full weight of the crisis on to the defeated workers. Only Germany, which had emerged alongside the US as the second new dynamic economy, and on the back of an atomised proletariat, and a certain degree of statisation and economic direction introduced Keynesian measures. Even then, by 1937, in both the US and Germany, recession returned and unemployment began to rise again. Only War and war production meant that these two intervened, and without that they too would probably have abandoned such policies in favour of those adopted by Britain and other capitalist states.

Compare that with the post-war period. As Mandel recounts in “The Second Slump”, there were a number of recessions during the post-war boom of 1949 – 74. Each was cut short compared to previous periods as a result of Keynesian intervention. How explain this? Keynesian intervention requires state spending. The state can only spend if it taxes. Borrowing does not change this, it merely defers that taxation to some future date when the borrowing has to be repaid. But, Marx tells us that taxes are a deduction from Surplus Value. If the state intervenes by spending it does so by – at least in the short term – making the bosses pay to resolve their crisis. It may do so for a number of reasons. Firstly, it may feel that it has to do so to buy off a revolutionary upsurge. A left Social democratic regime can be its best option before having to resort to fascism. Secondly, as with the US in the New Deal, or as in the post-war boom period – and now – such intervention can be a lesser evil than risking undermining faith in the bourgeois regime and bourgeois ideology through a prolonged or severe crisis. If it is a matter of a recession within the context of a period of prolonged growth then once the crisis is over reforms can be clawed back, profits restored, state intervention rolled back. This after all is the basis of Keynesianism. It assumes that over the longer term the intervention is cost free because the increased economic activity utilising unused resources provides the basis of the higher tax revenues that pay back the previous deductions from surplus value.

That was not the case for most of Europe in the 1930’s. It was not true in the 1970’s – 90’s. When the crisis began in 1974 most Governments attempted Keynesian intervention. But, the boom had already been faltering in the late 60’s prompting earlier interventions. Those repeated interventions together with the rising share of Public expenditure in GDP arising from the introduction of welfarism – even in the US – meant that an ever increasing amount of intervention was needed. Moreover, deductions from Surplus value remained as deductions reducing Capital accumulation and the rate of profit. As Governments borrowed their borrowing crowded out private Capital causing interest rates to rise, the cost of capital to rise, and the rate of profit to fall further. Keynesianism could no longer provide a solution to a short term problem, because the problem was no longer short term. The US had also been involved in a huge volume of unproductive expenditure in the form of the Vietnam War. It paid or it by printing dollars, effectively paying its creditors in “funny money”, thereby passing the cost on to them. That led deGaulle to demand payment in Gold, which led in turn to Nixon closing the Gold window in 1971, making the dollar no longer convertible into Gold. It created the conditions in which Gold, as real money, soared in value compared to increasingly worthless paper currencies. In the space of less than ten years Gold rose staggeringly from just $30 an ounce to $800 an ounce.

It was not long then before Keynesianism was abandoned. Governments, instead of increasing spending, cut it. The other reason the Capitalist state does not like Keynesianism during such periods is that it has other consequences. Workers become less militant if they believe that job prospects are worsening. They are more concerned to retain their employment than to fight for higher wages. By preventing a rise in unemployment Keynesian policies work against this natural process that allows the bosses to depress wages. In the Us, the New Deal stimulated further militancy, for instance. Moreover, the best organised workers are often those employed in the Public Sector, the very area increased by state spending. In such conditions in the early 1980’s Capital cut spending and launched a class war against a working class, which whilst militant was, if anything, far less class conscious than it was in 1920 or 1930, and which was effectively leaderless. The ruling class had no need of recourse to concessions or to fascism. By the mid 80’s Capital had won, and could begin stabilising the system. Its main concern was and is to maintain the rate of profit. Its best means for doing that was not Keynesianism but Monetarism. By increasing money supply it prevented falls in nominal prices which are disastrous for monopoly capital. Indeed, inflation meant falling real wages, as well as deferred wages – pensions – and the social wage. Unemployment and inflation could remain relatively high whilst the Rate of profit rose. I have written at length elsewhere on how this increase in liquidity was needed to effect the transition of production to the East, and how this led to the asset price bubble.

Its no wonder then that now the Thatcherite class warriors such as Brittan can come out in favour of Keynesian intervention. For the last nine years the world has been at the beginning oof a powerful 20-30 year Long Wave boom equivalent to that of 1890 -1914, or 1949-74, except this time probably far more powerful and extensive drawing into the industrialised world the Lion economies of Africa. That context means that huge reserves of surplus value are available to be tapped to solve the current financial crisis – a crisis, which for all its ferocity and scope is only now twelve months in beginning to have an effect on the real economy, and that still muted (The IMF still forecasts world growth of 4% way above the 2.5% below which it considers the world to be in recession). No this is not 1929 nor the prelude to a 1930’s Depression. It is a severe financial crisis caused by the excessive liquidity produced by the US, UK and Japan over the last twenty years. The Capitalist state will intervene to do what is necessary to end it using both Monetarist and Keynesian policies.

The working class should learn from that. For years people calling themselves Marxists demanded the nationalisation of the banks and finance houses. Marx himself in his Critique of the Gotha programme condemned such Lassallean statist demands. Socialism is about the working class acting itself to resolve its problems not calling on its main enemy the capitalist state to act on its behalf. Nor does covering up such cringeing at the feet of the bourgeois state with a demand for workers control improve things as Marx elaborated. The socialism of those that raise such demands is only skin deep he said. In fact, its now the most right-wing “neo-liberal” governments that are carrying through this demand. That should tell us how progressive leet alone Marxist such demands are. Of course, Marxists do not prefer private ownership to state ownership, but that gives us no reason to argue for that lesser-evil rather than to argue as Marx did for workers ownership of the means of production, for workers to buy up and take over the running of enterprises as workers co-operatives. As Marx pointed out such demands to the bourgeois state simply sow illusions in it amongst the working class, whereas the job of Marxists is to promote the self-activity of the workers raise it up economically, socially, and ideologically until it can achieve the necessary class consciousness to become the ruling class. The working class has to liberate itself through its own actions by establishing its own property in the form of co-operatives, and its own democratic forms built up on the back of those property forms. It most certainly cannot sub-contract that job to some State, let alone the state of its class enemy.

The demand for workers control of nationalised or State property is a nonsense as Marx set out in the Critique. Would you hand over control of your car, your house or other property to someone else?? Of course not. Then why should a capitalist class particularly possessive of its property do so? The condition would have to be that workers could exercise power over them, just as you might cede control of your car if someone held a gun to your head. That may be possible with individual capitalists, for a short period of time, but the Capitalist State represents the capitalists as a class. For workers to exercise their collective power over the Capitalists state they have to be able to exercise that power over the Capitalist class, that is they have themselves to have become the ruling class, or to be in a position of dual power. It requires that workers control the state or an alternative state, but in that case such a demand to a capitalist state is meaningless. Rather it is the converse that is true. The problem workers will have as Marx pointed out in his Address to the First International is that as workers develop their co-operatives it is the capitalists through their State which will seek to exercise control over the workers property. It is that basic fact which means that workers will have to fight for political power alongside their development of those co-operatives.

The workers attitude should be that outlined by Engels. Let the capitalists go bust. No bailouts for the capitalists. Workers should then demand control of their pension funds and use their resources to take over the banks and finance houses themselves as with any other potentially viable enterprises, and run them as worker co-operatives, building an increasing national and international network of workers property forms as an alternative to Capitalism.