a) Global Imbalances.
A Long Wave Boom commenced in 1999. Like previous such periods, it was prepared by the development of new geographic areas of economic development. In this case the Asian Tiger economies, which began to be transformed during the 1980's. There is nothing magical in such a process. It is merely the consequence of the phenomenon of combined and uneven development, and of the fact that Capital will seek out avenues by which to maximise the rate of return on its investment. The two things go together. Prior to the Industrial Revolution, the North of England was not in any way a centre of economic activity. It was that event, and the specific advantages that parts of the North enjoyed that led to the mass of investment that migrated there, and which created its particular economy.
In the 1930's, it was the development of new types of industry that led to the migration of large amounts of investment into the Midlands and South-East, even whilst large-scale unemployment existed in the North and North-East.There is no reason why, when investment in some particular type of production reaches a level where demand is satisfied, where there is over-supply and consequently below average profits, that this should lead to a crisis. In fact, all the time, within each sector, there are firms producing below, at and above the average level of efficiency and making corresponding rates of profit. At any one time there is no average rate of profit, enjoyed by every Capital. It is an abstraction, a useful concept by which to understand why, as a tendency, Capital, earning below this average, will move to those areas where above average rates are being made. Depending upon the particular concrete situation, the frictions that exist and so on, Capital – particularly small Capital – will remain employed in production that produces below average profits. The engineer who sets up a small engineering company, which may or may not enable him to make a bit more than he could earn in wages, is still not likely to set up a company using his invested Capital in some line of production about which he has no knowledge. The concept that Capital is not interested in the particular Use Values produced is only true as an abstraction, and of Capital on a large scale. The ultimate reality of the abstraction, however, is manifest at the point that the engineer becomes so uncompetitive as against his larger rivals that he can no longer make any profits, and at which point he is cast back down into the proletariat. In fact, it is not the lower than average rate of profit, which creates the crisis here, but the crisis, which makes the reality of the lower rate of profit manifest.
The engineer might lose his Capital altogether. The physical manifestation, the factory, machines and materials, as well as the workers picked up, on the cheap, by one or more larger competitor, thereby once more taking forward the dynamic of the formation of the average rate, which is now, by this process of driving out the least efficient, itself lifted up. Or, he might save some of it before it is too late, selling out, and investing the Money Capital in some new venture, or else used purely as Money Capital earning interest, while it is used productively by some other more dynamic, more efficient Capitalist. Again, the consequence is that Capital moves to some more productive use, and the average rate of profit is raised as a consequence.
As Marx points out this kind of partial overproduction must occur all the time, and is the means by which disproportions are resolved, and Capital is moved to where it is most effectively employed.
A crisis of overproduction can result only if it is generalised, if it is not just in one sector that such overproduction occurs, but in every sector, or at least in the majority of sectors. Only then does it become impossible for Capital to move from one employment to another.It is not surprising then that these periods of the Long Wave are marked both by the emergence of new types of industries, and by the emergence of new more dynamic economies. As I have demonstrated elsewhere, the normal forces at play in the Long Wave Boom, create the seeds of its own destruction. At the beginning of the Boom, reserves of Labour are available to be mobilised, such that expansion can occur without the increased demand for Labour Power putting excessive upward pressure on wages. So, the increased economic activity brings about not only a continuation of the rise in the rate of profit, but a rapidly rising volume of profit, that stimulates Capital Accumulation. Lack of investment in exploration and development of raw material and food production during the period of the downturn, means that the same is not true for primary product prices, which rise rapidly, boosting the profits of primary product producers, and stimulating exploration and development. Two factors here give a big stimulus to the momentum of economic growth. Firstly, consumption rises due to the extension of the Labour Market, as the reserve army is reduced, and new workers are brought in. Secondly, the increased profits of the primary producers itself raises the average rate of profit, and provides a big stimulus to demand for producer goods with a consequent Accelerator effect.
The rapid increase in Primary product prices on the one hand increases the costs of manufacturers and distributors, however, the new technologies developed during the downturn act, to ensure that these materials can be used more effectively, and the general rise in productivity achieved reduces unit costs, particularly as expanded production brings with it improved capacity utilisation, and economies of scale.
However, by the time the Boom has started to become mature at around 10-12 years after its commencement, changes are already apparent. I predicted these kinds of developments more than 2 years ago ago when I wrote that by this stage of the cycle, I would expect to see new Labour Movements developing in Asia, and for them to be engaging in offensive struggles. Workers and Inflation The reserve army has been used up – very apparent in China – a prolonged period of rising demand for labour with few lay-offs, provides confidence to workers, even if only that they can move to a better paid job. Bosses concede more readily rather than suffer disruption. This facilitates workplace strength and organisation at the expense of the union bureaucracy. In short, the demand for Labour Power will have raised wages, and this will become locked into a new Value of Labour Power. The initial benefits from improved Labour productivity arising from the introduction of new technologies and work processes will be reduced. The rate of profit will begin to fall as the Value Composition of Capital begins to move against it. Moreover, by this time, the investment in exploration and development of new mines, food production etc. will begin to bring on stream new sources of supply, just as the increase in demand begins to slow. Primary product prices will stabilise before falling, and the profits of these companies will fall dragging the average rate of profit down with it, as well as acting to slow down the rate of growth of demand for producer goods, and indeed for consumer goods within primary producing economies. The only upside of this is the effect on reducing the cost of these inputs for manufacturing, and distribution companies.
All of those features could be seen as the last Long Wave Boom began to unwind in the late 1960's and early 1970's. It is not surprising then that as Capital saw the rate of profit falling in its traditional homes, it began to migrate to Asia, where the potential to overcome some of those difficulties existed. In the 1980's, it was these Asian economies that sucked in large amounts of debt. But, there was a difference. Their debt was to finance domestic Capital formation that proceeded alongside the large amounts of direct foreign investment that was taking place.
As Joan Robinson pointed out a long time ago, there is a big difference between economies that borrow to invest, and those that borrow to consume. The indication that the Long Wave downturn was ending was the Asian currency crisis of the late 90's, and the subsequent debt-blow-off that accompanied it, a typical feature of the late stages of the downturn. Having cleared that debt, and their currencies having been re-aligned, the Asian Tiger economies were well placed to begin the solid expansion we have seen during the last 10 years. Japan went through its own equivalent phase during the 1990's. But, the US and UK, and other Western economies were in no position to go through a similar process of adjustment. The contradictions in their economies had been papered over by the use of debt, which sustained consumption, and sustained a service and finance based economy. Any attempt to clear the debt – for example by raising interest rates to deter consumption and encourage saving – provoked a serious reaction. In the US, where Consumer spending accounts for 70% of aggregate demand, and where consumption was being sustained on the basis of borrowing against property, and via withdrawal of Capital Gains from rapidly rising share prices, any significant fall in asset prices would provoke a serious recession, without the ability to replace domestic demand with exports that the Asian economies had enjoyed.The State's only response when the normal business cycle turned down in 2001, was to open the Monetary spigots once again. In China, the State itself had used its control over various levers, particularly the Banks, to direct investment into those areas it chose, in accordance with the 5 year plan. The State in other Asian Tiger economies played a similar role encouraging investment up the value chain. At the same time, the neo-liberal agenda in the US and UK, although it required the State to play a big role in creating a favourable climate, precluded such micro-management.
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