Against Catastrophism

I was prompted to write this post after reading an article, and the subsequent comments over at Permanent Revolution

Bill Jeffries of PR is one of the few economists prominent within the left groups that has consistently opposed the views of the catastrophists. There are two things that strike me about the arguments put forward by the catastrophists. Firstly, they always speak in general terms, rather than providing any specific details to back up their argument about the severity of crisis.

The facts they do present, in reality, have nothing to do with a crisis of Capitalism as a system, certainly not a systemic crisis that is likely to see it collapse. In the present conditions, they cannot even provide evidence that any serious systemic crisis exists at all. In 2007, I wrote a blog Prepare To Dust Off The Sliding Scale, which pointed out that the World economy was booming.

“The world economy is booming. One of the largest investment firms in the world Bridgewater Associates has recently completely its regular analyses, which shows that for the first time since 1969, there is not one single economy in the world in recession. The IMF has just increased its forecast for world economic growth yet again.

China where the Government has been trying to slow economic growth for fear of overheating has just put in economic growth yet again of over 10%, but that is put in the shade by the world’s fastest growing economies. Azerbaijan is forecast to grow by 26% this year, as is Angola as a result of the current high price of oil, Mauritania which does not have oil, but has gold and other raw materials is forecast to grow by 18%.”

And, despite some catastrophists arguing that the Capitalist world was about to end yet again, even after the Credit Crunch manifested itself in the collapse of Northern Rock, world economic growth, including in Britain continued throughout 2008, until the Financial Crisis derailed it.

Yet, despite the worst Financial Crisis ever, the economic crisis that followed it was surprisingly minor. Yes, the rate of decline in output in many countries was very sharp, but the duration of the decline was short, mostly due to massive Keynesian intervention by Capitalist States, and less than half the forty months duration of the Great Depression, which itself came on top of a decade of low growth and recession.

A few months ago in a blog discussing the Cuts strategy of the CPGB - CPGB Cuts strategy Falls Between Scylla & Charybdis – I pointed out that capitalism as a global system is still in rude health.

“In summary, China continues to grow at more than 10% p.a., India is growing at more than 8% p.a., other Asian economies such as Korea, Taiwan, and now Vietnam and others are also growing rapidly. Russia is growing strongly, as is its BRIC partner Brazil. Emerging economies as a group are producing more than 40% more than they were just 5 years ago in 2005. In Latin America, Colombia is one of those new tier of developing economies, but on the back of massive and increasing global demand for raw materials – itself a function of a booming global economy – many Latin American and African economies are growing rapidly, by satisfying that demand, and by their own industrialisation. The other strong area of growth is the Middle East, and again another of those economies seen as being in the next tier after the BRIC's is Turkey alongside Egypt.

And although there is clearly a crisis in the peripheral Eurozone economies, as a whole, it continues to grow, with Germany, which accounts, in any case, for 30% of Eurozone GDP, growing at more than 3%, and remaining the world's second largest exporter after China.

In the second quarter of 2010 Germany grew at an annualised rate of 9.5%, and 3.9% in the third quarter. It was not alone. Austria grew at 3.6%, whilst Poland grew at 5.3%. Sweden put in a performance more like an Asian Tiger with a rate of 6.8%! The UK itself has been experiencing stronger growth than was expected on the back of the fiscal stimulus and monetary expansion conducted by the previous Government. And, as I commented in my post "Tomorrow Could Be A Big Day", economic activity in the US has begun to increase quite strongly on the back of a huge fiscal and monetary stimulus. Incidentally, if Mike McNair is right that the Cuts are needed, due to the fact that Capital has no alternative, other than to throw the cost on to workers, then no one seems to have told Capital in the US, or its political representatives, who continue to resolve the crisis by huge amounts of Keynesian intervention, the extension of Welfare Payments for the unemployed and so on. Moreover, given the importance that Mike McNair gives to US Imperialism, in shaping the global response of Capital, it is odd that he neither points to these solutions being adopted there, nor to the fact that the US has spent months trying to get its European partners to adopt similar policies of fiscal and monetary expansion!!!!”

The second thing, is that in order to justify this idea of crisis they are forced to abandon Marx's model of Capitalism, and instead adopt the model of orthodox, neo-classical economics.

The neo-Classical model posits the idea of Capitalism being a system based upon a static equilibrium, hence the two main models it uses of General Equilibrium Analysis, and Partial Equilibrium Analysis. Within these models, crises are abnormal events – despite their regular occurrence – and usually to be explained by exogenous causes, including Government interference in the working of the market.

But, Marx's model of Capitalism has never been based on such a concept. It is not just that Marx recognised that periodic crisis was endemic to the system, it is that Marx's model is based on a perpetual, dynamic disequilibrium. For Marx, if some kind of equilibrium between Supply and Demand occurs, it is THAT which is abnormal. Indeed, for Marx if such a situation were generalised for Capitalism it would be a symptom of ill-health, not normality, because it would mean that the very basis of growth, which stems from that dynamic disequilibrium had been undermined.

For Marx, Competition is central to this dynamic disequilibrium. Competition is not just about one firm competing against another for market share, and therefore, profits. It is about all fractions of Capital competing for their particular share of the total Surplus Value. So, for Marx, unlike the neo-classical model, which essentially assumes all firms are identical, it is the very fact of difference – whose classic historical manifestation is Combined and Uneven Development - which creates this dynamism.

In any industry, the firms are defined by their differences, some producing above, below or at the average efficiency, and therefore, Rate of Profit, for that industry. Within the industry, this drives innovation, because those producing least efficiently are driven to find more efficient ways of producing, which can then act to leapfrog even their most efficient competitors. Or else, those firms are driven out, and the general level of efficiency within the industry is pushed up.

But, it is not just within each industry that this disequilibrium exists, nor that no average rate of profit exists for all firms. The average rate of profit, is itself a movable feast, which changes by the minute as the productivity of all these competing Capitals changes. There is no Average Rate of Profit, which applies to all firms or all industries, it is merely an abstraction from a process of Competition. Consequently, in industries where the Rate of Profit is low, Capital will accumulate more slowly. New Capital will flow instead to where the Rate of Profit is high. During certain periods, Capital will actively disinvest from areas of low profits and move to areas of high profits.

This is not just true, within a single economy, but is true at an international level. In other words, Capital will move from one geographical location where profits are low, to where they are high. That happened in the 1930's in Britain, when Capital moved out of traditional heavy industries based in the North, and moved into new industries such as Cars, electronics, and chemicals based in the Midlands and South-East. It has been true of the post-war period, and particularly from the 1980's, when it has moved out of those traditional industries in the Capitalist heartlands, relocating production in Asia, Latin America and so on, and at the same time moving into new high value, high profit industries such as technology, finance and so on based again in new areas such as Silicon Valley, or the City of London.

Incidentally, it is this movement of Capital in search of higher profits that really accounts for the export of Capital that has been seen, particularly during the 20th Century, rather than Lenin's idea set out in “Imperialism”, where he posits the idea of some necessity for it to do so to avoid crisis, due to a falling rate of profit. In fact, in the post-war period, when the rate of profit was rising rapidly, there was a considerable increase in the amount of Capital exported, particularly by the US, where the Rate of Profit was rising more rapidly than anywhere else.

From Marx's perspective this frantic activity and movement of Capital is not a sign of systemic crisis, but a manifestation of the dynamism of that system, its ability to continually restructure, so as to raise the level of efficiency, and of profits for the system as a whole. If there is any indication of crisis, it is that in the Capitalist heartlands that restructuring did not take place as thoroughly, and as radically as it might have done.

Its here I would disagree with Bill Jeffries. I agree with him that from the perspective of Big Capital there is no need for these Cuts. Indeed, to the extent that they risk driving some developed economies such as the UK into recession – during which time profits will fall, and Capital will be destroyed – the Cuts are counter-productive. I agree with Bill, and with a comment made some months ago by Costas Lapivistas that, therefore, the Cuts are ideologically driven.

But, is the real intention here to abolish or drastically reduce the size of the Welfare State? The first Welfare State was established in Germany in the latter part of the 19th Century by Bismark. The intention was clear. A fundamental function of the Capitalist State is to ensure the reproduction of Labour Power. As Marx and Engels pointed out, in the 19th Century, part of that role was to regulate the unbridled competition between Capitalists that could have destroyed the very basis of Capitalist profits – the existence of a large, suitable working-class. It did it by various social measures such as limiting the working day, restrictions on child labour, the Factory Acts etc. And, as Engels wrote later, these measures suited the Big Capitalists who could accommodate these measures, and facilitated their driving out of the small Capitalists who could not.

It was the beginning of what was to be called Fordism, whereby Capitalist accumulation took place on the basis of relative economic and social stability brought about by macro-economic policies, a degree of social security, higher wages and better conditions for workers that tied them to their employer, and also facilitated the realisation of Surplus Value in the growth of mass production consumer goods industries.

The development of Welfare States in all developed Capitalist economies, including the US, was part of this new regulatory system of Capitalist Accumulation. State Capitalist Healthcare alongside State Capitalist Education developed as the most efficient means by which Capital could produce the Labour Power it required in a modern economy.

Even the US developed State capitalist healthcare for those that were not covered by union negotiated health insurance provided by large employers, and as those large employers find that this cost is crushing them internationally against labour-power in Europe and elsewhere, even they are pressing via their Democratic Party representatives, for some kind of socialised healthcare.

So, its true the Cuts in the UK are ideological. They are a reflection that the Tories, as a Party are more a reflection of the interests of small Capital in the UK, just as are the Republicans in the US. The Tories have to respond to those thousands of small business people that make up their Constituency Associations, and whose votes, alongside those of sections of the middle class, and backward sections of workers they rely on to be elected.

But, they still have to look after the interests of Capital as a whole, and in particular of Big Capital. Big Capital in Britain has no particular reason to want to see the Welfare State dismantled. It has spent considerable sums over the twentieth century setting it up to meet its needs, after all. But, in a world of intensifying Capitalist competition, in a situation where to meet that competition, it needs to reduce the Value of Labour Power in the developed economies down towards that elsewhere – and reducing the Value of Labour Power is not at all the same as reducing real wages, but means producing wage goods including health and education more efficiently - it does have an incentive to try to both raise the quality of education and health in order to have available a higher quality of Labour Power, and to achieve that in the most efficient manner. Capital in this context has no reason to want to see the quality of health or education reduced, any more than it would want to see the quality of any of its other inputs diminished in quality.

It is smart enough to know that in the modern economy, monopolistic competition takes place on the basis of quality, more than price. A look at the success of Germany, which until the last few months remained the world's leading exporter, proves that point. It achieved that by producing, high quality, high value products, which could sustain the relatively high wages, and conditions of German workers.

In short, the Cuts are driven by the need of capital to restructure, and within that to extend the principles of Neo-Fordism, as outlined by Aglietta and Lipietz and others, adopted in other areas of Service production into the crucial areas of Health and Education, which comprise a very large component of wage goods production, and therefore of reducing the Value of Labour Power.

Socialists should oppose the Cuts, but in the longer-term, any greater efficiency in the production of Health and Education or other such wage goods for workers is to be welcomed, just as Marx and Engels welcomed the reduction in food prices that would result from the abolition of the Corn Laws, and other such monopolies. But, like Marx and Engels, we should point out that workers can only benefit from such greater efficiency if they take ownership of the means of production themselves. Otherwise, the main beneficiary of such improvements will be Capital.