The Economy Of Analysis - Part 10

I began the week by saying that it could be the week we see the shit of European Debt hit the fan of the global economy. As suggested, the sell-off on Monday was just a taster, as markets waited to see what the Federal Reserve would come up with later in the week. The answer was not very much, and consequently, on Thursday, the sell-off intensified. It was encouraged by data out of Europe, showing that not only was growth slowing across the region, but survey data showed that the weakness was growing, with the PMI's falling below 50, which is an indication of future negative growth. Data out of China also showed that its economy was slowing, with its manufacturing sector showing a decline for the third month in a row.

By Friday, tens of billions of dollars had been wiped off global stock markets, and the prices of commodities across the Board had fallen significantly. Included in that was the price of Gold, which has fallen around $300 from its high, or around 15%. However, Bloomberg has reported analysis by Societe Generale, which shows that fair value for Gold, based on the quantity of dollars that have been printed, now stands at $10,000 an ounce, or around 6 times its current price! Its clear that, the reason that Gold has fallen this week is due to Hedge Funds, and other Financial Institutions having to sell everything in order to raise cash, as Credit Crunch 2, takes hold with a vengeance. We now have not only Bank of New York Mellon charging clients to have the privilege of depositing their cash with it, but we have also seen Siemens withdraw €500 million from a French Bank, and deposit it directly with the ECB, such is the fear that European Banks, are simply not safe. There are rumours that Siemens is not alone, and a representative of BGC Partners on Newsnight during the week, said that the cost for Banks in Europe to raise short term funds was becoming prohibitive, and that anything beyond short-term was now impossible.

An indication of the fear gripping sections of the ruling class was demonstrated by former, long-time, CEO of GE, in the US, Jack Welch, who commented on US CNBC today that the Command Economy of China, and top down decisive decision making was showing that it was providing a better model for growth than was the US!

As I pointed out the other day, he is not alone in making this comparison with the dithering and indecision that characterised the US political system over the Debt Ceiling, and continues to characterise the Merkelling around in Europe. Such sentiments, as I pointed out then, given the short history of bourgeois democracy in places such as Greece, Spain and Portugal, as well as in Eastern European members of the EU, represent a significant threat.

Yet, despite all of the doom and gloom, the reality is that in most of Europe, there is still growth. In addition, the Earnings releases of most companies in the US and Europe, continue to show growing profits.

And, although Chinese growth is slowing, it is still likely to be around 7-8%. Whilst, the IMF gave a very downbeat report this week, it still saw global growth being around 4%, next year, which is above the long-term average. In other words, rather like 2008, what we have is, once again, a Financial Crisis, rather than an Economic Crisis. The basis of that crisis resides immediately within the realm of Politics, even if ultimately the conditions which gave rise to it, are economic. To understand those conditions its necessary to look at the situation in the main economies. There isn't enough time or space to do that thoroughly here, but the following is a summary position statement.

The world has to be divided into a number of different regions with separate characteristics. These are:

1. The BRIC economies, plus the other Asian Tiger economies, and the emerging economies of Latin America.

2. The US and North America

3. Europe (excluding Russia)

4. The Emerging, and industrialising economies in Latin America, such as Bolivia, and in the Middle East, such as Egypt, Tunisia, Israel and Turkey, and in South-East Asia, such as Vietnam, and South Africa.

5. The rapidly growing primary product economies of Central Asia, such as Kazakhstan, and of Africa, such as Angola.

6. The pre-capitalist, economies of Sub-Saharan Africa.

I will look here only at the fist three, starting with the US.


The US

The difference between the US and Europe, with the countries in groups 1 and 4, is that, as developed economies they have workers whose Value of Labour Power has developed over centuries, and during a period when these economies exerted economic and technological hegemony over the rest of the globe. That has meant that this Value of Labour Power rose, and was able to rise, because its productivity and quality was significantly higher than that of Labour Power in the less developed economies, which meant that unit costs of production were lower, even allowing for the much lower wages in these other economies. The real economic causes of the crisis today lie in the very simple fact, that in a globalised Capitalist economy, the Value of Labour Power is no longer determined on a nation by nation basis, where what Marx termed the historic and cultural component could be significant, but is determined within the global Labour Market.

The more Capitalism spread, the more a global working-class was created – which now for the first time in history is the largest class on the planet – the more, these workers were put in a position to be able to compete for available work on a level playing field with their counterparts in the US, and Europe. The other factor that facilitated the competitiveness of western workers, the existence of vast amounts of infrastructure, to ensure that goods, and components could be quickly and cheaply transported, has also now largely disappeared, as the newly industrialised economies were able, not only to build their own infrastructure, but in line with the theory of combined and uneven development, were able to skip over stages, and to build the most modern and efficient types of infrastructure. For example, many have skipped extensive, fixed telephone land lines, and moved straight to extensive mobile phone networks, satellite TV and Broadband networks and so on.

Even where mobile and wi-fi networks were not the first choice, for example in Singapore, they have been able to skip the use of copper cable, and go straight to extensive fibre optic cable networks. Singapore already has general broadband access for its population – used also for TV streaming – that is around ten times faster than what the UK is proposing to provide in ten years time!

The significance of this is clear. The global competitive advantage that these developed economies had in the production of a wide range of manufactured goods, and which enabled them to dominate global markets has gone for good. Capital from the US, UK, Germany and other developed economies did not become invested in China, Korea, Singapore and these other economies for the reasons Lenin believed, of there being some absolute surplus of Capital, which demanded it burst free of its national borders.

It was invested in these other countries for the same reason it had invested in other developed economies – it saw the opportunity to make higher rates of profit, by doing so. US Capital, in the form of car companies like Ford, was led to set up factories in places like Brazil, because once the necessary infrastructure existed, once the necessary Capitalist State structure, and relative stability was in place for it to produce cars more cheaply than it could in the US, it essentially had no other choice. Had Ford not done so, then GM, or Chrysler would have done, and thereby gained a competitive advantage. Had US car giants not done so, then European, or Japanese car companies would have done so. It was not the kind of Monopoly that Lenin saw as standing behind Imperialism, which led to this overseas investment, but intense competition between global giants.

Having done so, the kind of Fordist production regime that had been established in the US and Europe, in which workers were paid relatively high wages, and given wage increases in line with productivity increases, ensured that workers in Brazil, and the other newly industrialising economies, where this investment took place, saw their living standards rise, and with it their ability to demand a range of new consumer goods, which in turn created the potential for an expanding domestic market, and for the growth of domestic industries to meet it.

This was the basic process that led to the kind of de-industrialisation, and globalisation that began in the 1980's, and which I described in Imperialism And The New International Division Of Labour. In reality, this process is no different than the process that Capitalism has gone through many times before within the context of a national economy. For example, in the 19th Century, in the developed economies, Capitalism saw a large reduction in the significance of Agriculture, as Labour and Capital became concentrated on industrial production. Similarly, the old heavy industries of coal, steel and shipbuilding that once dominated the British economy, declined, as other economies such as the US and Germany developed, and were able to capture some of this market, whilst the development of new production methods meant that less Capital and Labour was required for any given amount of output.

The Depression of the 1930's was largely a measure to which these old industries were in decline, and Capital and labour was in the process of being re-allocated to new types of production, such as electronics, motor manufacture, and pharmaceuticals.

On these previous occasions, production of these old industries continued within the national economy – sometimes even on a larger scale, but now requiring less Labour and Capital – at the same time as the reallocation to new areas of production occurred. What characterises the process under current conditions, however, is that this production has shifted in large part, out of the previous economies of the developed world, and become relocated in the newly industrialising economies. This has meant that the need to ensure the reallocation of Capital and Labour to those new areas that are to replace them becomes even more pressing.

Of course, this has to be taken in general terms, rather than understood in some kind of absolute, sweeping terms. In the case of the US, for example, not only does it continue to be an important manufacturing centre, despite the process of de-industrialisation, and off-shoring that has been taking place for the last 30 years, but it remains an important producer of agricultural goods too, even though they account for just 1% of US GDP.

But, the extent of that process can be seen by the fact that where industry now accounts for just 22% of GDP, Services account for 78% of GDP (Source:CIA World Factbook) Of course, not all manufacturing activity is the same. The US, as the world's most technological economy, is able to out compete low wage economies in many areas, of high tech production. Moreover, in certain areas of production, for example, film, TV etc. it is able to produce a product that is sought after throughout the globe. Other types of luxury production are also able to find a market, within the ranks of the global rich, whose purchasing decisions are not restricted by price, and indeed for whom, the exclusivity provided by very high price tags, is an attraction!

Herein lies the basic problem for the US economy. Like much of Europe, it needs to ensure an efficient re-allocation of Capital and Labour to these others forms of production in a sufficient quantity, such that the sales of these products in overseas markets are sufficient to cover the imports of the manufactured consumer goods, it now buys from China and elsewhere, and which it once produced for itself. The difference today from those past such transitions is clear. In the past, those goods continued in large part to be produced within the national economy, and all that had to be organised was an internal exchange.

Now, the jobs themselves have gone overseas, and the goods have to be imported, so that in place of an internal exchange, it is necessary to be able to fund an international exchange. In all such previous transitions there has been a prolonged period of adjustment, during which both Labour and Capital was unemployed – that was the case with the Great Depression of the late 19th century, and the Great Depression of the 1920's and 30's. It was partly due to the nature of the kind of Fordist regime, and the consumer society on which it relied, which existed by the 1980's, which meant that the kind of long term, deep reduction in economic activity of those previous transitions, was no longer a suitable strategy for Capital in the period after 1974. Such, a strategy would have meant destruction of vast swathes of Capital based upon meeting the needs of such a consumer society. The conditions that existed in all developed economies meant that an alternative solution, based upon encouraging workers to go into debt, by borrowing against their houses, and other assets, was available. It was this alternative, which led to the massive build up of debt in the US, and in Europe, which now lies behind the current financial crisis.

It is to this extent that the causes of that Financial Crisis are rooted in the economic conditions. But, it is the political decisions to make a fetish of this debt, and to seek its rapid repayment, which is the immediate cause of the current crisis. In fact, a look at the history of British debt, shows how ridiculous it is to make a fetish out of it. The period at the beginning of the Industrial Revolution, for example, saw UK debt to GDP rise to 250%, as against around 70% today.

The same was true in the period up to 1950. Although, the latter figure is bloated by the borrowing to finance WWII, like the period after 1750, a large part is also due to the need to engage in large scale investment. Both after 1800, and after 1950, the consequence of that investment was to bring about rapid growth, and consequently to reduce the percentage of debt. The Tories, frequently pose the problem in terms of how a business would have to deal with its debt, but any sensible business that recognised that the only way of repaying its debts was by expanding its revenues, would have no qualms about taking out the necessary additional loans to facilitate that expansion of its business. The problem really facing the US, as with much of Europe is not debt, but whether that debt – and any additional debt needed – can be used to bring about the necessary investment into those kinds of areas of production of goods and services, which can be globally competitive. The history of the US, and its current degree of technological dominance, means it is a brave person who would bet against their ability to do so.

The main problems standing in its way, is the ideological dogmatism of some of its politicians, and the failings of the US education system, in being able to produce a sufficient number of highly educated, and skilled workers, to enable the growth of these new industries.

Europe

Much of what has been said above about the US can also be said of Europe. It has always been the case that developing economies require “Colonies”, which provide them with the supply of raw materials needed for their industrial production. Britain, had its Empire, and even was able to draw in cheap food from Europe after the abolition of the Corn Laws. The US had its own internal Colonies, in the form of the defeated South, which provided for the needs of the industrialising North. Tsarist Russia, as Lenin points out had Siberia to perform a similar function. The more these Colonies – external or internal – themselves develop and industrialise, the more this function has to be pushed out to a wider periphery. For the US, Canada, Mexico, and parts of South America – especially now through NAFTA – not only provide it with the raw materials it needs (in addition to its own large supplies of raw materials and foodstuffs) but also provide it with markets for its goods.

Europe has been able to continue to rely on its old Colonial Empires for the Supply of these materials, and the EU has now begun to develop the Middle East and North Africa as its own periphery. China, has been able to tap its own resources, but has also developed sources in Central Asia, Africa, and Latin America.

The additional problem faced by Europe is that although it has created a single market, and single integrated economy, it has not created a single state, and all that goes with it. This means that the kinds of transfers that the US can carry out between states, pose significant problems for Europe. Within even national economies like Britain, these kinds of regional variations are inevitable – e.g. the difference in the economy of the North-East, and the South-East. Without a single centralised state, without the development of some kind of belonging to that state, as opposed to the individual nation states, without the kind of political structures and mechanisms to deal with these variations, the contradictions within the EU economy will always be in danger of pulling it apart.

On top of the economic problem caused by the build up of debt during the Long Wave decline, it is these political limitations, and their manifestation in the wrangling of the national politicians and states, which are the immediate cause of the crisis in Europe. As I have set out several times the economic solution to this problem is quite simple. The debt of the periphery could be simply bought up and cancelled by a central state. It could be then either monetised by the Central Bank printing sufficient money to cover it, or else it could be covered via the issuing of EU Bonds, sold on the global Capital Markets, with long dated maturities. Neither of these solutions are cost-free. The former implies a rise in inflation, and a fall in the value of the Euro – the consequence being a fall in living standards, though one that would be marginal and gradual, certainly compared with that being imposed on Greek workers currently – the latter would imply higher interest rates being charged, than those faced by Germany, and other Northern European economies, though again, only marginal if spread over long dated maturity bonds.

An announcement of either of these solutions would end the EU debt crisis over night, and would restore the confidence needed, for consumers to begin consuming, and for businesses to begin investing. The growth that results from that would more than compensate for the losses due to either of the aforementioned methods of solving the crisis.

However, as with the US, this solution would only be a solution to the immediate crisis. It would not of itself solve the underlying economic problem arising from lack of global competitiveness. But, again that should not be seen in too broad a brush stroke. It is not the whole of these economies, including Greece, which is uncompetitive. For example, Germany has high levels of wages, generous welfare payments and so on, and yet it is highly competitive. Until recently it was the world's leading exporter.

But, Germany has focussed on quality production, on producing goods and services that do not compete against products made by cheap labour. The new Chinese and Korean millionaires do not look first at the price tag, when they decide to buy a new Mercedes. Something similar can be seen in relation to Ireland. The Irish economy, although, it suffered badly as a result of the austerity measures introduced, has quickly begun to recover. That is because, although, it was damaged by its reckless property boom, financed by its Banks, which were then brought down by it, and which then had to be bailed out by the State, it has over several decades also been developing a modern, technologically advanced economy. It was that, which brought many of its more highly skilled ex patriots back to Ireland during that period. These industries, once again do not, for now, have to compete with cheap labour in China, or India etc. The same has been seen on a small scale in the UK in the last week with the decision of Tata, to build a new Engine Plant, in Wolverhampton, for its Jaguar subsidiary, creating 750 skilled jobs.

The real question again for Europe is not to pay down its debt in a hurry, but how to utilise debt to invest in restructuring its economies, in order to gain global competitiveness. Its unlikely that will be done without decisive political leadership, and without the establishment of a single European State.

China

The problem for the BRIC economies is the extent to which their own fate is linked to that of the US and Europe. If, the latter are drawn in a maelstrom arising from a Financial Crisis, then the reduction in global trade, will inevitably have a carry though effect on the BRIC economies. That does not necessarily mean, even if the US and Europe go into a deep recession or Depression, that this will be the case for China, and these other dynamic economies. Around two-thirds of China's output, goes to meet its own needs, and those of its Asian trading partners. This development of an Asian economic area has been growing. In addition, both China and Japan form twin hubs, of an Asian wheel, of bilateral arrangements with suppliers of materials, and foodstuffs, in return for which, China and Japan trade manufactured goods, and the provision of investment, and infrastructure.

As Jack Welch said, in the interview above, the Command Economy nature of the Chinese economy, means that decisions can be made quickly to shift production, to expand consumption etc. in order to overcome an immediate crisis, and to rebalance the economy. China needs to develop its domestic market. In the 1980's, Singapore developed its economy, by bringing in high levels of foreign investment. As its economy grew, domestic producers began to arise. The Singapore Government, had a conscious policy of moving production up the value chain. It gradually introduced restrictions on lower value production, and encouraged high value production, which also meant creating demand for more highly skilled, higher paid workers. As I pointed out in my blog Chinese Workers And The State, we see something similar now in China. The supplies of Labour, for now, are being used up, and Demand and Supply means rising wages. But, as part of the drive to expand the domestic market, and to move up the value chain, the Chinese Communist Party, is now supporting workers wage demands, which in recent months have been for as much as 50%.

The Guardian commented,

“The People's Daily, the mouthpiece of the ruling party, warned that the country's manufacturing model faced a turning point as demographic and social changes slowed the influx of low-cost labour from the countryside.

Coming a day after the premier, Wen Jiabao, made similar comments, the editorial suggests the authorities may be encouraging businesses to restructure the economy by putting less emphasis on cheap exports and more on higher-value goods and domestic consumption.”

As David Pilling put it in the FT, the authorities are reflecting in their statements a basic reality. He says,

“The years of an endless supply of cheap labour, on which the first three decades of China's economic lift-off was built, are coming to an end. That is partly demographic. Because of China's one child policy, the supply of workers under 40 has dwindled by as much as a fifth. Fewer workers means more bargaining power.”

In response firms have moved further inland to the rural areas from where the migrants come. Others have relocated to other economies such as Vietnam. Pilling also suggests that the other reason for the support being given is that the Communist Party itself has a stake in better working conditions.

“Providing cheap Chinese labour to multinationals from Japan, the US and Europe was a means, not an end. Deng Xiaoping said it was glorious to get rich, not to make foreign-invested capital rich. As elsewhere, the share of labour in corporate profits has been falling. That runs counter to the emphasis placed by China's leadership on a 'harmonious society'...

There are other signs that the scales may be tipping labour's way. In 2008, Beijing enacted the labour contract law, stipulating that workers be given written contracts.”

Yet for a variety of reasons foreign capital is unlikely to pull out Pilling argues.

“For all these reasons, Beijing may continue to offer cautious support to an emboldened workforce, though it will keep a watchful eye on wage inflation. But, on no account will it tolerate any hint of organised labour evolving into a political force.”

But, the problems for China's leaders may be more political than economic, as the Arab Spring demonstrates.

As with the Revolutions of 1848, it is industrialisation, the creation of a significant bourgeoisie, and middle class, together with the support it can draw from the working-class, which creates the conditions for bourgeois democratic revolutions. The fear of that by the Chinese Stalinists can be seen by the fact that is has recently banned the Chinese X Factor, because it doesn't want to encourage a culture in which ordinary people get to actually vote freely!!!

China, and the other BRIC economies and newly industrialised economies represent the other side of the debt and de-industrialisation coin. They have taken over the industrial production, and as a consequence have built up huge cash hoards that are the counter-part to the debts of the US and others. The immediate concern for them is how to mobilise those resources so as to best ensure that defaults, and a Financial Crisis sweeping through Western Banks and Finance Houses does not wipe out its investments. China has made clear that it will not simply provide additional funding to overcome the problems of the US and the EU.

However, that does not mean that China and other BRIC economies may not provide additional funding for specific types of investments – for example, buying up strategic industries – in return for concessions by the US and others, in relation to access to markets, a greater say in global forums and so on. In other words, the economic power of the US, and the old imperialist powers is leading to the undermining of their global political and strategic power too.

This series will conclude next week, when I will look more closely at some of the arguments put forward by Hillel Ticktin and others, and why it represents an economy of analysis, and a surfeit of reliance on dogma.

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