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  be similar 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 cringing 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.