Monday, 27 October 2008

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


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


This was the recognition of the Russian economist and statistician, Kondratiev. He identified that alongside the already known business cycles, there 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 other 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?

Moreover, all of these other explanations involved an abandonment of Marxist theory.  The idea that the capitalist economy requires a lack of physical capital, or needs to engage in reconstruction, or requires a permanent diversion of surplus value into arms spending, in order to grow more rapidly, represented a going over of Marxists economists to Keynesianism.  It has nothing to do with Marx's explanation of capital accumulation, as set out in Theories of Surplus Value.  The explanations provided by Stalinist and Third Worldist economists, were even worse.  They explained not just continued, but stronger economic growth in the developed capitalist economies as resulting not, as Marx had set out, from continued growth in the mass of surplus value, accumulation of capital, and consequent rises in productivity, but by super-exploitation and unequal exchange.  In other words, a collapse into Mercantilist ideas that even predate Adam Smith, let alone Marx!

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.

Forward To Part II - Where We Are

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