A Crisis Out of All Disproportion

UK unemployment rose by the largest amount on record today to back over 2 million for the first time since 1997. See: UK Unemployment . At the same time the IMF, which is now forecasting world growth to fall in the current year has forecast that the recession in the UK will last until 2011, much longer than even most recent predictions. See: IMF This is despite the statements in the last few days, in the first press interview by a Fed Chairman for years, by Ben Bernanke, that he saw the recession ending in the second half of this year, and despite a number of indicators of economic activity beginning to turn upwards. Bank of England chief, Mervyn King, has even warned that the kind of mass unemployment of the 1930’s and before cannot be assumed to be a thing of the past as the post-war generation grew up to believe. In fact, over recent months, the scale of the financial crisis has, not unexpectedly, led to many comparisons with 1929, and the Great Depression. As I have previously written, I think these comparisons are wide of the mark. See: 1929 and All That .

Marx analysed basically three components of a Capitalist crisis. In fact, its been said that all subsequent theories of crisis are based on Marx’s analysis in one way or another, each leaning more on one or the other of these components. Marx saw a dialectical fusion of them all. All of them essentially relate to such a crisis emanating in the realm of production, though as Marx sets out the actual spark that ignites the crisis may well, and often does arise elsewhere, for example in the realm of finance and credit. That does not change the fact that the real cause of the crisis lies within the realm of production. The three components can be described as – An Overproduction of Capital, Underconsumption, and Disproportion. The first, and second of these might seem to be the same, and the same is true for the first and third, and second and third viewed in particular ways. All three are indeed, dialectically intertwined, but they are three separate things.

It might be thought that the overproduction of Capital is just another way of saying that there is not enough consumption, and so the answer is simply to increase consumption – which is essentially Keynes solution. But, that is not the case. It misses the whole point of Capitalist production, which is not, as orthodox economists posits it, in order to satisfy consumers needs, but to satisfy the insatiable need of Capital to expand, to maximise profits. Viewed from this perspective it becomes obvious that such a crisis cannot be resolved by increasing consumption – which given that workers comprise the majority of consumers means increasing wages – because the increase in wages would reduce profits, which would in turn reduce the Capitalists ability to spend unproductively, and more importantly would reduce his incentive to invest, which would in turn cause the demand for Capital goods to fall, the demand for additional labour to fall, and so on. Nor can such a crisis be resolved as Keynes argued by increasing consumption by the State, because the State’s income comes from Taxes, and as Marx demonstrated in the long run all taxes are a deduction from Surplus Value, and also constitute a reduction in profits, setting in the same kind of spiral as described above.

In reality Keynes solution CAN work under certain conditions. It can work in conditions such as those which exist now, or existed in the post war boom. That is they can work in periods of the Long Wave boom, where large amounts of Surplus Value have been created, but have not yet been invested in production. They can work by essentially fooling the workers and Capitalists into believing they are getting something for nothing. It works like this. The Government either spends money itself, or else gives money away in tax cuts, higher benefits and so on to others in the hope that they will spend the money. This money is not taken out of the economy by the Government in the first place as taxes, but comes from either borrowing the money – for example all of that Surplus Value sitting as Money Capital waiting to be invested – or else comes from the straight forward printing of money – what is now called Quantitative Easing. This avoids the spiral seen above. Instead, of seeing their profits reduced by taxes the Capitalists see their profits rise, from Government subsidies, tax cuts, and from increasing consumption of their products as the Government and consumers spend the money that has been pumped into the economy. The workers taken on by the Government, or by employers seeing an increase in demand for their products, or else who see their take home pay increase from tax cuts, themselves spend money, and this increases demand for goods further, and so on creating now a virtuous circle of increasing consumption, employment and growth. In fact, two other factors can kick in, which give this stimulus a more powerful character. The first is called the “multiplier” effect. It is essentially the process described above. Suppose that on average people spend 90% of what money they receive as income. If the Government gives someone £1,000 they will spend £900. But, this £900 goes to other people providing them with an income they would not have otherwise had. If we assume this £900 went to one other person, they would then spend £810, who would spend 90% of that and so on. In fact, the original £1,000 will be “multiplied” so that it creates £10,000 of new demand in the economy, demand that goes as income to recipients, and so creates new employment. The second effect is known as the “accelerator”. Suppose, engineering firms have to replace 10% of their milling machines every year – say 100,000 machines in total = 10,000 replaced. The firms that produce these machines, therefore, have a steady demand for these 10,000 machines, which requires a given amount of materials and labour. Now, suppose that demand for the products of the engineering firms rises by say 20%, and that this demand can only be met by buying an extra 10% of machines i.e. 10,000 machines. Now demand for milling machines does not rise by 10,000, but by 100%, going from the usual replacement of 10,000 to a total demand of 20,000. The suppliers of these machines have to hugely increase their labour force, their demand for materials and so on. Of course, in a recession when demand is falling, income is falling, or when the State as happened in the early 1980’s under Thatcher begins to cut Government Spending and borrowing, to raise taxes etc. all of this works in reverse with a vengeance.

The Keynesian solution can work in times of Long Wave Boom, precisely because there is that pool of Surplus Value waiting to be invested, and because the nature of the Boom itself means that the conditions exist for economic expansion, and that expansion will itself provide the new value, which pays back to Capitalists the money borrowed, or absorbs the money printed through the production of an equivalent amount of new Exchange Values. None of that is possible during a Long Wave downturn such as the 1930’s or the 1980’s.

Such a crisis can stem from an overproduction of Capital in a certain sector. That is goods are produced over and above what can be consumed at a price, which returns a profit to the Capitalist. There may well be a need for those goods, the Keynesian solution works in such cases by creating a demand for them at prices, which enable the Capitalist to make the profit they otherwise could not have obtained. It prevents this overproduction becoming a generalised overproduction of Capital as a result of the mechanism set out above. One reason that such an overproduction in one sector may occur, is because Capitalism tends to create a disproportionality, with growth in production being higher in one sector than another. This is a consequence of the unplanned nature of Capitalism, and of the drive due to competition to maximise profits. In essence the crisis arises because despite the assumptions of neo-classical economics about perfect knowledge, and free movement of Capital and Labour neither of these conditions can possibly exist. So in areas where the Rate of Profit is high Capitalists will rapidly expand production to maximise these profits, but they will tend to overextend this production in search of these profits and because they do not have perfect knowledge of what future demand for those products will be. They will each introduce new more efficient machines and techniques, because that will enable even greater profit to be made – because orthodox economics sees new value as being created by all factors of production rather than just Labour it even theorises this as the Marginal Revenue Product of Capital i.e. the extra profit arising from the addition of an additional unit of Capital – without seeing the overall picture that when everyone introduces these machines the cost of production will fall, and so prices will fall – so that MRP they expected from that investment turns out to be a shadow or even to be negative – and profits will fall too. But, the unplanned nature of Capitalism means that this knowledge comes to late. The goods are produced, but the Capital bound up in them cannot be returned, or at least the Surplus Value that the Capitalist expected cannot be realised.

I remember back in the late 90’s I was working as a research and development Officer, and part of my job was to think about future trends. I woke up one night thinking about the fact that everywhere you looked there were new cars, new this, new that. And it wasn’t just here. When I’d been abroad I saw the same thing. And with cars in particular you could see throughout Europe fields full of cars that had been produced. It wasn’t quite the same with other stuff like mobile phones, because people kept throwing them away for the next model, the same thing with computers. It was just before the Asian crisis of 1998, and the Rouble crisis of 1999. I remember going into work and scribbling some of these ideas on my white board, and writing the words “Depression” and “Over-Production of Capital”. In fact, I was wrong, despite the fact of those above two crises, and despite the recession of 2001-3. Those crises were essentially forerunners of today’s financial crisis. Asian economies had borrowed lots of money, run up large trade deficits in order during the 1980’s and 90’s to modernise and develop their economies to build new infrastructures, provide investment for production. Russia had done the same to an extent borrowing against its vast oil and resources wealth as foreign Capital and the Oligarchs sought to invest in businesses. Those crises were the typical debt blow-off that occurs at the end of the Kondratiev Long Wave decline. But, they were fundamentally different from the financial crisis that has hit the US and Britain, in particular in the last year or so. As the economist Joan Robinson once put it, an economy that borrows money to invest in production is on the path to success, the economy that borrows money in order to consume is on the road to ruin. The Asian countries were doing the former, the US and Britain for the last 30 years have been doing the latter.

What existed was and what exists is not a crisis of overproduction, nor indeed is there any crisis of underconsumption. What exists is a crisis of disproportion, and because all of these components of capitalist crisis are dialectically interlinked that crisis has necessarily elements of Capital overproduction, and of underconsumption tied to it. The basic theory is that Capital works so as to equalise the Rate of Profit. It does this by Capital gradually moving out of or not entering those areas of production where the Rate of Profit is lower than the average, and moving into those areas where it is higher than the average. In so doing, Supply is reduced in one and raised in the other. Prices and profits thereby increase in one and fall in the other. See: Prices Profits and Capital

But, of course, there are frictions within this process. Josiah Wedgwood did not just invest in pottery production, because he saw the potential for profit. He did so because he was himself a potter. Most Capitalists, or at least entrepreneurs will invest in those things they actually know something about. So having invested his Capital in a potbank Wedgwood would not easily have been encouraged to turn it into say a carpentry shop, of which he knew nothing about, just because it offered a slightly higher Rate of Profit. The higher the level this is considered at the greater potential frictions that can exist. If we take the world economy that becomes obvious. As Marx set out the fact that wages were much higher in Britain than say India was not necessarily a reason why goods produced in India would be cheaper or more profitable. The British textile worker, with the assistance of the latest machines and so on, might have a much higher level of productivity than the Indian textile worker working with traditional hand techniques. So the British production could be cheaper and more profitable. Nevertheless, as his argument in relation to the Tendency for the Rate of Profit demonstrated their would be a likelihood that ultimately the tendency would be for Capital to move to those lower cost areas where it could exploit that cheaper labour. There are of course, other frictions involved in such a move. Capital is not concerned only with the immediate cost of production of goods, but with the cost of actually getting them sold. If the infrastructure of such economies is very bad that cost can be very high, if the main market for goods is in the metropolitan centres, then the cost of shipping those goods to those centres has to be taken into account. This explains why production of such goods is often located around coastal regions where these costs can be minimised.

For Colonialism the issues were different than for Imperialism. Colonialism arose essentially as a fusion of interests between Merchants and Finance Capital and the old Feudal regime. The feudal aristocracy financed the voyages of the merchant explorers, bought the exotic goods they brought back, took for themselves a chunk of the bounty those explorers/pirates secured for themselves, and gave Royal Charters for their Trade Monopolies such as the British and Dutch East India Companies, the Hudson’s Bay Company and so on, allowing them as with Robert Clive to develop their own armies to secure such territories, rather than that cost falling upon the King. And having secured such colonies the feudals were well acquainted with the technique of securing for themselves a portion of the Surplus Product or its money equivalent by the levying of rents on their newly acquired territories and estates, or the levying of taxes. The Merchants, made their profits from buying low and selling high into such economies, whilst the Money Capitalists increasingly fused with sections of the aristocracy who saw the potential to make a buck without getting their hands sullied by the rather tawdry business of trade, used their vast money fortunes to establish or invest in the new financial institutions and banks, that financed the activities. The kind of businesses established were typical of the kind of business in which slave or very oppressed labour can best be employed, just as was the case with the slave states of the Southern United States. As Marx points out the slave will always express their alienation by abusing what is in his power to abuse, the tools or animals he works with, and so on. Such labour is not suitable for Capitalist production proper, for factory labour, for working with sophisticated tools and so on.

The cost was the huge standing armies, and state bureaucracies that had to stand over such colonial slaves. Another cost, therefore, of Capital moving into such areas was the vast cost of suppression and control. In the immediate post-war period as Industrial Capital reigned supreme over its partners in crime the Commercial and Financial bourgeoisie, and the remnants of the landlord class, it was these concerns which focussed its attention on where to invest, and the risk of some national liberation struggle that might nationalise its Capital played into its calculations of risk reward. Unlike those less mature forms of Capital Industrial Capital had a direct interest in the success of such national liberation struggles, of establishing stable economic and political regimes under the control of a bourgeois democracy that created the conditions under which all Capital could function and make profits. That’s one reason that the main representative of that section of the bourgeoisie – the US – was so keen on braking up the old colonial world – Roosevelt even discussed the idea of an alliance with Stalin against Churchill to that end – in order to create those conditions in which Industrial Capital could move freely to exploit those vast reserves of Labour.

It was the Cold War, and the playing of of masses within such areas in order to win political clients that to some extent held up that process. Yet, on another level it was the existence of the USSR and Stalinism, which facilitated the spread of bourgeois democracy in a way that often confounded the notion of Permanent Revolution. Permanent Revolution is based on the idea that the bourgeoisie will always baulk and make an alliance with either the Colonial Power or else with the old Landlord class, because in the modern world the working class exists as a powerful class with its own interests. The bourgeoisie will always have its eye on the workers for fear that the revolution will go beyond the bounds it has set for it, and will necessarily take fright and jump back into the arms of the existing rulers. But, in more than 50 years of experience of Stalinism, which existed as a powerful force amongst the masses in such countries, the bourgeoisie became aware of the counter-revolutionary nature of that Stalinism, of the fact that consistent with the stages theory the Stalinists would always themselves hold the masses back from continuing the revolution, especially where the Stalinists thought they might get some share of governmental power, and where such a process, often establishing some bourgeois nationalist regime would play into the global strategic game of their masters in Moscow. The national bourgeoisie could always deal with the Stalinists in its own good time, and make its appeals to the deeper pockets of the US to buy its client status.

And it is, that process of the spread of bourgeois democracy, accelerated with the fall of the USSR, which has created the conditions for globalisation, but, which in turn has created the conditions for the current crisis of disproportion.

The example of the car industry is perhaps the clearest example. Nothing could be clearer than the fact that the US car industry with its huge wage costs compared to the wage costs in India, China and other parts of Asia, and even Eastern Europe, along with the additional costs of financing health care and pensions for its workers – including now a larger number of retired workers than those actually engaged in production – cannot possibly compete. The same is true on a lesser scale for British and western European car plants. The argument about productivity no longer applies. Confounding the theories of neo-classical and orthodox economics, which predicts that where Labour is cheap a higher proportion of Labour to Capital will be employed, these new dynamic economies have gone straight to the latest machines, technology and techniques, AS WELL AS, exploiting the cheapness of the Labour. A phenomenon explained by Geoffrey Kay in his book “Development and Underdevelopment – A Marxist Analysis”. Yet for at least the last ten years the worlds biggest car maker General Motors has been producing cars by the millions. As one bourgeois observer commented a few years ago, the Marxist analysis is reversed. Instead, of the GM Capitalists exploiting the workers, the workers exploit the GM Capitalists as it continues each year to produce cars at a loss, paying the workers by year after year reducing its Capital. And, essentially, that was what it did along with Ford and Chrysler. The fact, of monopoly Capitalism meant that these companies had built up huge amounts of Capital over decades, and they continued to produce cars at a loss, and financed those losses by drawing down or borrowing against that Capital. When the flooding of massive amounts of liquidity into the markets led to the financial bubble these companies like many other monopolists saw their chance and set up financial arms too. In the case of GM its financial arm GMAC, was able in recent years to make such profits that it was able to subsidise its unprofitable car production. Until, of course that bubble burst, the consequences of which then made the real situation of these companies apparent, and led them effectively into bankruptcy.

So, what was going on? As I have set out in previous posts Capital in the developed countries sought to resolve some of the problems it faced in the Long Wave downturn, by looking for more profitable areas of the world in which to invest its Capital. The fall of the USSR, the spread of bourgeois democracy, and US hegemony meant that the conditions were created for such Capital to move into areas of the world where it could invest, profitably and with security. At the same time domestic Capital in these countries was able to grow too as Capital necessarily creates its own market as Lenin argued in his “The Development of Capitalism in Russia”. In China, backed by the power of the Stalinist State, which could foster large enterprises under State Control before privatising them, or by directing finance through the State banks to particular industries and enterprises large domestic businesses could be developed in areas of production previously dominated by the developed economies. India was able to do the same thing, as well as focussing its attention on using its large number of highly educated workers to develop industries around IT, and other technology. This vast amount of new production, which massively reduced the average socially necessary labour required (measured in global labour units i.e. taking into account the different wage levels) caused a real decline in prices of commodities – hidden by the huge amounts of liquidity pumped into the world economy over the last 30 years, thereby reducing the value of money tokens more than the value of commodities declined – at the same time as creating huge new stores of Surplus Value. There was no and is no under consumption. On the contrary, economic development in China and India etc. has created vast new markets, huge numbers of new consumers in India China etc, both from an increasing working class, and a rapidly growing middle class.

Far, from there being under-consumption many of these consumers have been able to meet their immediate needs, and save high proportions of their rising incomes. Firms in these countries have been able to create huge reserves of Surplus Value on their Balance Sheets to, whilst the States have themselves accumulated vast stores of tax revenue etc. that has found its way into Sovereign Wealth Funds. Large amounts of that Surplus Value have then been recirculated to finance the other side of the coin. That overconsumption financed by borrowing from the Surplus areas of the world economy, and the printing of money. And that process, which continued essentially in order to prevent a precipitate decline in employment in the US, which would have had massive social and political consequences – essentially it would have meant that the kind of 1930’s style crisis that commentators talk about now would have occurred during the 1980’s and early 90’s taking the whole world economy down with it, including those economies like China etc. which now are the main drivers of growth – and would at that time completely have changed the balance of power with the USSR etc. and could thereby have brought Capitalism down, meant that although, large numbers of jobs could be created in service industries, in Government etc. those huge monopoly industries like GM, Ford, Chrysler and so on, on which so many other elements of the national economy depended for their existence, had to go on pumping out cars, the Capital contained in which could never be fully recovered. Capital, which should have been employed elsewhere producing commodities in which the Capital could have been recovered and expanded. That is the real nature of the crisis that has now broken out, hastened and sparked by the financial crisis that was itself a necessary part of that whole process of sustaining Capital during the Long Wave downturn.

I was watching the BBC’s “Click” programme at the weekend, and it made me think about all of the vast number of gadgets and gizmos that are entering our world every day. I can’t think of a time before in human history when there has been such a huge rush of new discoveries, new inventions and so on, all of which are almost instantaneously finding a place in production and consumption. It took years before the invention of the laser found a practical application by comparison, but today we see the application of the decoding of the human genome only a few years ago immediately finding application in medicine, in tracing human migration patterns in proving beyond doubt the theory of evolution and the tree of life, computing power continues to increase in geometric progression, and so on. Yet, in reality Capital has not flowed into these new areas of production as quickly as it should, and part of the reason is that vast amount of Capital and Labour that remains tied up in those old areas of production, which should move into those new areas. Again a disproportion. As the effects of Peak Oil manifest themselves – Saudi Arabia has today said that marginal producers require a price of $75 a barrel and the marginal cost of production of a barrel of oil is around $85 so the current price cannot last for long – mean that huge amounts of Capital and labour need to be employed in developing new energy technologies, whether it be a large increase in solar, wind etc. or in conventional nuclear or fusion generation. It is not that there is a crisis of overproduction or of underconsumption, but a crisis of disproportionality, manifested in the global imbalances, manifested by the continued production on a huge scale of commodities at a loss, and by the huge areas of potential production that have yet to attract the necessary Capital and Labour. Once this crisis is over, and I think that Bernanke is probably nearer the truth on that than the IMF, then this provides the basis for an expansion of production on a scale unprecedented in human history. Its not the danger of a Depression now or in the next few years that people should worry about, its what happens when in 10-15 years time, the biggest boom in history comes to an end with the onset of the next Long Wave downturn!