Monday, 3 December 2012

The Zombies Are Coming! - Part 2

Corporate Welfare & The Zombies

In the 1980's, the UK and US, certainly did de-industrialise, and large parts of their manufacturing went to China and other emerging economies. But, neither matched that with a restructuring of their Capital into high value production. There are a number of reasons for that.

Most of today's problems in developed economies were
created by Thatcher and Reagan in the 1980's, whose
policy of massive money printing, alongside the financial
 deregulation of the banks and finance houses, blew up
huge asset price bubbles in Bonds, Stocks and Property, which
in turn prevented the necessary restructuring of Capital, turning
large numbers of companies into zombies, dependent on
corporate welfare.
Reagan and Thatcher were both representatives of small capital, of money capital, and of the middle class. It is the small capitalists, the money capitalists (particularly the stock market traders where the ideas of the Miseans are over represented), and the middle class that make up the core of the membership of these parties, and of their electoral support. Although, as with every Capitalist Government, they ultimately have to accede to the needs of Big Capital, it was to these  former layers that these parties geared their policies. That is what determines their world view, and as Marx describes, that view is that profit is the product of the hard work, and special skill of the individual capitalist, in their ability to buy low and sell high. That determines the view of these layers that in order to make profits what is required is cheap labour, the abolition of all restrictions that prevent them from obtaining cheap labour, and so on. It is what leads them to believe that the capital gains they make from gambling within the markets are just as much profits as those arising from the creation of surplus value in production. So, when they see their nominal wealth rise, because their share portfolio or their house price has risen, they believe that this is yet again a reflection of their specific individual ability and skill! In fact, what it reflected in the 1980's more than any other time, was simply massive asset price inflation brought about by huge amounts of money printing by Thatcher and Reagan, which along with the introduction of Financial Deregulation of the banks and finance houses, created a bubble in those markets, the bubbles which created the problems we are still suffering from today.

That had a number of consequences that prevented the necessary restructuring of Capital, and created the problems we now have. As I described several years ago, Thatcher and Reagan only introduced their Monetarist expansionary programme after the working class in both countries had been heavily defeated. In both countries, despite the rhetoric, the State also continued to expand, and Keynesian fiscal stimulus was also used. In the US, Reagan, as well as massively increasing military spending also cut taxes for the rich. The idea behind that came from the Voodoo Economics of Art Laffer. Laffer put forward the idea that if you cut taxes for the rich, they would actually pay more in taxes, because they would work harder, invest more, and spend less time trying to avoid paying taxes. It was, of course, nonsense then, just as it is nonsense today, when it is proposed by Republicans, Tories and their hangers on. The proof it was nonsense did not take long to materialise. The US Budget Deficit exploded to unheard of levels, and the increased consumption that followed, simply sucked in lots of imports from Japan and elsewhere, blowing up the US Trade Deficit. This crisis became known as “The Twin Deficits” crisis, and ended with the huge Stock Market Crash of 1987. The Stock Market Crash was followed 3 years later by the property market crash of 1990, when UK house prices fell 40%.

In the 1980's, Thatcher and Reagan printed
 money and deregulated banks and finance houses.
 It created huge asset bubbles, as well as huge
budget and trade deficits.  It burst in 1987, with
Stock Markets falling by 25% in a single day.
The underlying problem was never resolved. Instead, it led to even more money being printed, and the deregulation of financial markets meant that people were encouraged to borrow like there was no tomorrow. That simply reflated the previously burst bubble, and blew it up even further. The onset of the new Long Wave Boom in 1999, meant that the bursting of that bubble again, was postponed for several years, until 2008. But, once again, more money printing has reflated those bubbles in many cases, for example, in UK property prices and in share prices globally.

In the Tech Bubble of the 90's, share prices of tech
companies often rose by 70% a year. Until, the bubble
burst in 2000. Then the NASDAQ fell by 75%.
Its still only at 50% of its 2000 peak
This in itself has worked against the needed restructuring of capital, because money capital that should have gone to productive investment, has instead simply gone into gambling in these markets. Why would you go to the trouble of setting up a company and producing something, if instead you thought you could simply buy the shares of some existing company, and whether it was good or bad, the price of those shares would rise by 10% a year, or as happened with the Tech Bubble, by 70% a year?! Why would you invest in producing something, if you could buy a house, whose price would double every four years?

UK house prices ballooned in the 1980's, on the back
of Thatcher's huge money printing, and financial
 deregulation.  But like all such bubbles, it burst.  In 1990,
UK house prices fell by 40% in just a few months.
And, in the US and UK that was the lesson that was learned. A lot of manufacturing disappeared to low wage economies, where big profits could be made, but instead of investing in new high value production, money capital went into gambling, and blew up asset price bubbles, that were all the more unreal because the productive assets that underlay them were becoming increasingly decayed, and unprofitable. That essentially is the condition with many of these zombie companies today, they are decayed, inefficient, and unprofitable kept alive in their zombified form only by artificially low interest rates, and the low wages, and poor conditions of their workers.  But, as Marx had identified, it was not the skill of the individual Capitalist, or their ability to buy low and sell high, that was the source of profits.  Profits did not come from underpaying workers.  That was merely how it appeared to the small capitalist.  For the Big Capitalist the real situation became more apparent from the fact that they could often make even bigger profits, when their workers were better paid, and enjoyed better conditions.  As Marx shows the real source of profit is the fact that Labour creates a higher value than is required for the reproduction of Labour Power.  The higher the Value created by Labour the more profit, even if wages and conditions improve.  That is why the only solution was via a restructuring of Capital into higher value production.

Another reason this restructuring did not occur, was that some sections of Big Capital were so big that they could live for a long time off the size of their balance sheet. Companies, like GM and Ford, for years, made losses on every car they sold. They could continue doing that hoping that things would eventually turn around, because they had big enough balance sheets to simply draw down their cash, or borrow when needed. But, these companies also used the option of turning to investment in money capital. GM established GMAC, and GE set up GE Capital, as financial services companies initially providing consumer credit for their customers, but then expanding into all sorts of credit provision including mortgages. For a long time GM, was able to cover the losses in producing cars from its profits from GMAC.

But, perhaps the main reason for that restructuring not occurring was the natural operation of the Long Wave itself. That is that in the 1980's, as during the 1920's and early 1930's, there were simply not enough new types of high value production for capital to move into. In the 1980's the micro chip had begun to enter devices, but the personal computer was a novelty owned by only a small number. The main devices at the time were video games consoles like the Atari. I bought my first personal computer in 1985, but that was because I had just become self-employed as a management and IT Consultant. It cost £500, which was a lot for that time, and yet had just 512 k of RAM! The only mobile phones of the time were like house bricks. It was only in the later 1990's, as more and more devices, especially the introduction of mobile devices, and the Internet, were introduced, that the required critical mass existed to provide the basis of the new Long Wave Boom, after 1999.

So, Capital went into gambling, and also into those areas that could share in the now high volumes of profits being created in China and elsewhere. On the one hand Money Capital expanded massively, providing financial services for these new Asian capitals, and dealing with the huge volumes of financial transactions. On the other, Merchant Capital expanded massively establishing more and more cathedrals to retail, that sold the products of that Asian capital, and shared in the profits it created.

The provision of massive amounts of money printing to keep interest rates at unsustainably low levels to keep these zombie companies going, is a form of corporate welfarism. But, the zombified economy depends on welfarism much more than that. I will demonstrate that in Part 3.

Back To Part 1

Forward To Part 3

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