The Economy Of Analysis - Part 7

In Part 5, I argued that the US and the UK under Labour, had been the main forces arguing for a continuation of Keynesian stimulus, until such time as the economy had regained sufficient traction of its own, for growth to become self-sustaining. Had Labour won the election the dynamic of the last 18 months would have been different. Conversely, of course, the defeat of Labour, and the fact that the Liberal-Tories began to put forward the narrative of austerity, accompanied by similar right-wing groups in Germany, and other parts of Northern Europe, calling for austerity in Greece, Ireland, Portugal, Spain and Italy, though introducing only minor austerity measures in their own economies, gave a boost to right-wing populists in the US.

The Tories had rapidly switched from saying that they would support all of the Labour Government's spending commitments, to arguing the dire need for Cuts. It had largely worked as an electoral tactic, providing them with a different narrative, to distinguish themselves by, and around which they could mobilise their traditional base. The Republicans, as the Mid-Term Elections came along, saw an opportunity to adopt the same strategy, to distinguish themselves from Obama and the Democrats – again they seemed to forget all about the fact that it had been Bush that had run up massive deficits, and introduced most of the stimulus to deal with the Financial Meltdown! Even that was not enough for the Tea Party, and the Libertarians, like Ron Paul, who had been arguing throughout Bush's Presidency against “Big Government”.

But, its also clear that they were facilitated in making this argument. Unlike the Federal Government, the States are not allowed to run an unbalanced budget. In States with Republican Governors and Legislatures, that was a perfect opportunity to frustrate the kinds of fiscal stimulus that Obama and the Federal Government was trying to introduce. (See, for example, Paul mason's Two blogs America's Two Nations, and Gary, Indiana. And, a large part of the fiscal stimulus was being channelled through the States.

If the Republican States held back on introducing projects, if they used Federal Funds to bolster their fiscal position, then the effect of the stimulus would be reduced. The more the economy sank, the more Obama and the Democrat controlled Congress and Senate would get the blame. Obama failed to learn the lesson of F.D. Roosevelt, and the New Deal. Roosevelt took control, and many new bodies were set up through which Federal Funds could be directly channelled. Obama seems to have learned that lesson too late, and in the latest package is proposing a range of projects financed and controlled by the Federal Government. Already, Republican supporters are decrying this, complaining that the States know how to spend the money better than the Federal Government.

The consequences of that are now being seen in the sharp slow down of the US economy. Moreover, its likely that the kind of longer term, larger scale Capital projects being proposed by the Federal Government, may not have the desired effect either. In Capital III, Ch. Four, Marx sets out the effects of differences in the Rate of Turnover of Capital, on the Rate of Profit.

To summarise, the more times Capital is turned over during a year, the higher the real rate of profit, as opposed to the apparent rate of profit calculated on the Capital employed. That is because this higher rate of turnover, means that the Capital embodied within the commodity, is more quickly realised, the circuit of Capital is completed, and this Capital, is converted back to money Capital, available to buy more means of production and Labour Power. Conversely, the real Rate of Profit on Capital employed in producing things that take a long time to complete, and be realised .e.g. ships, large scale civil engineering, is lower than the apparent rate. The consequences of this for an economy was also set out by Bukharin, in his Economics Of the Transition Period.

Bukharin, demonstrates how these large scale, long term projects can act to reduce Capital Accumulation (or in the case of a Workers State, economic growth) because, whilst those involved in them have to be provided with Capital (means of production, Labour Power) that could have been used in other types of production, and which has to be produced in other parts of the economy, no new Value is being fed back into the economy, from this production, so it does not contribute to meeting the consumption needs (productive and unproductive consumption) of the rest of the economy. Consequently, it acts as a drain of resources. Even when such projects are completed, and enter the realm of commodities in circulation, it may take years, before the Exchange Value tied up in the commodity is fully consumed. I will return to this in later parts of this series to examine the kinds of economic policy that can, and are likely not to work, as a means of promoting growth under current conditions.

So, the nature of the economic slow down – which cannot currently be described as an economic crisis - in the US, although, like all economic crises, has its basis in the contradictions of Capitalism, is not immediately being caused by those contradictions, but rather is being caused by political decisions, and political conflict between the contending parties. But, as I have argued elsewhere, the demands for austerity from the Greeks and others, put forward by the Germans and other Northern Europeans, are also more complex than simply a reflection of the interests of Capital.

It is difficult, in fact, to see how driving Greece closer and closer to an unplanned default is in any way in the interests of Capital, and yet that is what pretty much every intelligent observer believes will be the consequence of such austerity measures in the absence of any wider solution to Greece's problems. Already, the partial planned default on Greece's debt, negotiated by France and Germany with the Banks, has meant them losing more than 20% of their investment, and required them extending their loans for up to 30 years. In the absence of the kind of European State, and of the kind of State institutions that go with that, a single Finance Ministry, Fiscal Union, a single Debt Management Office selling EU Bonds and so on, the response to the crisis has had to be done in a very ad hoc, and typically bureaucratic manner.

It means that the German Government, in particular, has had to assuage the concerns of German voters, in doling out successive payments to Greece, and others. And, on top of that, these methods, have necessarily led to challenges, such as the decision of the German Constitutional Court recently, that limited the ability of the Government to make payments without it being approved by Parliament.

Yet, poll after poll shows that the German people remain committed to the EU, and to the Euro. When asked if they are prepared to make further contributions to ensure the stability of the Euro, and of the EU, rather than are they prepared to bail out “lazy” Greeks ( see: Greece And The Media, they say yes. Both the SPD, and the Greens, who have been winning elections from the CDU, are in favour of Eurobonds, and of establishing some form of fiscal and political union. In contrast, the Free Democrats, who have been advocating an increasing Eurosceptic line, have been losing seats hand over fist. Of course, workers, already paying high levels of taxes, to pay for their own Capitalist State, will not relish paying out more money to cover the costs of what is still presented as being a different state (though in reality the EU already does exist as a single proto-state). The requirement from that is that politicians come out openly, and make the case for a single United States of Europe, for the creation of the appropriate democratic structures for such a state, and so on. As I have argued previously, Big Capital, has an incentive in pushing those politicians to adopt that approach, as indeed do workers.

But, the politicians, particularly the Conservative politicians, whose core vote, and party base is rooted in the most nationalistic, and reactionary elements of society, are loathe to do that, because it would mean an all-out political campaign against those reactionary, nationalistic and xenophobic ideas, and that in turn would also mean a political fight, and the consequent opening up of divisions within the Capitalist Class itself, between the more progressive, internationalist elements of Big Capital, and those reactionary nationalist elements of Small Capital. That is why, the process has developed via, bureaucratic means rather than an open, democratic political struggle. But, a crisis means that Big Capital may not have that luxury. It may find itself, having to come out more openly, and hitch its wagon to the fortunes of the various European Social-Democratic Parties, more willing to argue for closer European integration.

But, that is not going to happen within a period of weeks and months, whilst all the time the markets are reacting by the hour. Today, S&P, have downgraded Italy's credit rating, because they say it is not going to achieve the growth needed to meet its need to reduce the ratio of debt to GDP.

That is an inevitable consequence of austerity measures in economies that are essentially uncompetitive, and in need of restructuring. Given the fact that the UK economy is being driven rapidly back down into recession by the Liberal-Tory austerity measures, whilst inflation is being pushed ever higher by the money printing of the Bank of England, it is inevitable that at some point soon, the markets will turn their attention to UK Bonds, the yield on which has fallen to such low levels only due to the fact that in such conditions of extreme risk aversion, investors are happy to put their money, where they know the Government can always print money to pay them back.

In the meantime, considerable ground could be won towards greater European integration by the creation of Eurobonds. In his latest blog Paul Mason, argues following Wolfgang Munchau in the FT,

“ Once the ECB is heavily exposed, and the north-European governments inside the EFSF also, you could argue there is momentum towards fiscal union. Because, as Munchau also perceptively points out, unlimited ECB bond-buying is effectively a eurobond.”

It certainly does create such momentum, but unlimited ECB Bond buying is not effectively a Eurobond. So long as Bonds are issued separately by the peripheral – and not so peripheral – economies, they will be priced – and attacked – by the markets on that basis.

European citizens will see ECB buying of those Bonds, as ultimately being them acting as back-stop for them, having ultimately to stump up the cost via, the need ultimately to provide the resources for the ECB, which ultimately with such large scale operations will require a single state standing behind it. But, that would not be the case with a single Eurobond. It would be priced close to the rating of Germany as the Eurozone's largest, most powerful economy. The resources needed to fund the recapitalisation of the EU Banks and sovereigns would then not be seen as – at least in the immediate future – coming from EU citizens, but would be seen as coming from the global capital markets. Its unlikely that such a Bond would come under attack. Indeed, based on fundamentals, like those outlined by Trichet frequently, such a Bond should have a higher price than UK Gilts, or US Treasuries.

Once again, as with the US, although the nature of the economic crisis is fundamentally rooted in the contradictions of Capitalism, and more immediately in the uncompetitive nature of many EU economies, along with the many disproportions and imbalances that exist within the EU economy, the immediate cause of the Debt Crisis, and of the economic slowdown rests instead with the nature of the political decisions being taken, and the explanations for that reside more immediately within the realm of political rather than economic dynamics. It is rather like is often said about drought and famine. Drought is a natural disaster, famine is man made. We are not dealing here with the kind of economic contradictions that existed at the beginning of the twentieth century, which caused Lenin to question whether European Capitalists could put aside their differences to create a United States of Europe.

We do not have the world divided into the Colonial Empires, that caused him to see in fighting over that division, by then powerful European powers as standing in its way. The preparedness of France to organise intervention into Libya, and thereby supplant the relationship it had with Italy, is merely a faint echo of that. Rather, it is now, more narrow political divisions, based upon the interests of permanent state bureaucracies, political elites, and the remaining vested interests of the small capitalists, and their influence within Conservative parties that stand in the way. But, the significance of that should not be underestimated either.

In Part 8, I will look at why it is wrong to see political decisions and policies as being merely a reflection of the interests of Capital, from the other aspect. That is that policy makers can simply act out of economic orthodoxy, and thereby make mistakes.

Back To Part 6

Forward To Part 8