Banks, Steel and the EU - Steel

In the early 1980's, I wrote a series of theoretical documents that appeared in the Internal Bulletins of the WSL – Imperialism, Industrialisation, Trade and Sub-Imperialism, Imperialism and the New International Division of Labour, Imperialism and War. One of the central ideas I put forward was that a new international division of labour was taking place. Many mature industries, which had already been highly mechanised, produced vast amounts of output, with low profit margins, and only required unskilled labour, were being relocated into a number of newly industrialising, low-wage economies. At the same time, the developed economies, like the UK and US, and western Europe, were seeing a shift towards service industries, just as a century before they had seen a shift from agriculture to manufacturing.

The service industry itself divided into two parts. One part was the development of a low-wage service sector geared towards the domestic market. It soaked up some of the workers made redundant by the process of de-industrialisation. Like the process that soaked up workers into low-wage retail employment, it was often the families of skilled male workers, who had lost jobs in mining, steel production, shipbuilding, car production and engineering, that filled these jobs, and not the skilled workers themselves.

The second part of the service industry that developed, and as I forecast, was the development of high value service production. It was ushered in by the Financial Big Bang that deregulated financial services, and saw the City of London turn into an even bigger financial hub for the global economy, than it had already been. A similar growth was seen in New York, and in the financial centres of western Europe. Alongside the growth of financial services, went the growth of a series of related professional services. In addition, a series of other, high value, service industries developed, such as high quality private healthcare, to provide for the needs of the global elite. 

When, between 1983-5, I forecast these developments, the idea was rejected. Martin Thomas wrote at the time,

“… it would take well into the 21st century for anything like the picture he paints to emerge. To extrapolate trends that far is unsound; all such trends are relative to a given basic social/international framework, and it is unscientific to suppose that the basic framework could continue unchanged through such a process.” 

In fact, just a decade later, by the mid 1990's, the process, by then termed “globalisation” was not only discernible, but was, if anything, more pronounced than I had originally conceived. That process also played into the background discussed in the first part of this series, looking at the banks.

Part of the thesis put forward in 1983 was that the only reason that Britain had been able to be the most competitive economy in the 19th century, was that its workers were far more productive, because they were backed by much more, and much better fixed capital.

In Capital I, Marx describes the situation whereby wages, in Europe, for textile workers, were only 50% of those for British textile workers. Yet, British textiles were cheaper, and British textile producers made both a higher rate of profit and a higher mass of profit. The reason was easy to see from the tables Marx provides on the average number of spindles used in British textile factories compared to those on the continent.

AVERAGE NUMBER OF SPINDLES PER FACTORY
England, average of spindles per factory	12,600
France, average of spindles per factory	1,500
Prussia, average of spindles per factory	1,500
Belgium, average of spindles per factory	4,000
Saxony, average of spindles per factory	4,500
Austria, average of spindles per factory	7,000
Switzerland, average of spindles per factory	8,000
AVERAGE NUMBER OF PERSONS EMPLOYED TO SPINDLES
France	one person to 14 spindles
Russia	one person to 28 spindles
Prussia	one person to 37 spindles
Bavaria	one person to 46 spindles
Austria	one person to 49 spindles
Belgium	one person to 50 spindles
Saxony	one person to 50 spindles
Switzerland	one person to 55 spindles
Smaller States of Germany	one person to 55 spindles
Great Britain	one person to 74 spindles

But, its not just a question of more and better machines. For it to be even worth investing in such equipment, an economy needs also to be able to have all of the necessary linkages that enable production to take place on a large scale. There is no point having the most technically advanced car factory in the world, if you can't efficiently get energy, steel, and components to it. Its not just productive efficiency that counts, but the existence of effective infrastructure, so that inputs are available and output can be shipped to markets.

Once a situation arises whereby this infrastructure exists, and where plants are developed that are at least as technologically advanced and efficient as those in the developed economy, and where the labour that is required in these plants is only unskilled generic, factory labour, the advantage of the developed economy disappears. It becomes more profitable then to use this low-wage labour, and to relocate production into those areas.

The development of a series of newly industrialising economies, mostly in Asia, in the 1980's, created exactly these conditions. The process of combined and uneven development even meant that not only were they able to establish large scale industrial production, of a range of mature commodities, using the same advanced technologies as available in the developed economies, but they were often able to skip over them, to introduce the latest, most advanced technologies, and to do so into new greenfield sites, with all of the necessary infrastructure also in place, and with the added benefit of large supplies of low-wage labour-power.

There was an obvious advantage for developed economies here too. As Marx explains, it is not the amount of concrete labour expended which determines value, but the amount of abstract labour that a commodity represents. An unskilled machine minder may work for 10 hours and thereby produce a value of 10 hours of abstract labour. A doctor may work for 10 hours, and because their labour is complex labour, this may create a value equal to 20 hours of abstract labour.

This difference has nothing to do with the value of the labour-power of the machine minder as compared with the value of the labour-power of the doctor. In this particular case, the value of the labour-power of the doctor, i.e. the labour-time required for its production, may well be higher than that of the machine minder, because the doctor requires more education and so on. But, that is completely different from the question of whether the labour provided is itself simple or complex labour. Ultimately, that is determined, Marx says, in the market, by what consumers of the product of that labour are prepared to pay for it.

If a peasant farmer is prepared to work for 2 hours, in the field of the blacksmith, in return for the blacksmith expending 1 hour of labour shoeing the peasant's horse, then the blacksmith's labour produces twice as much value as that of the peasant farmer in an hour. Similarly, then, a more developed society, that has a higher proportion of such workers, whose labour is complex, is able to obtain a large quantity of commodities in return for the expenditure of its labour. If the blacksmith worked on the field for an hour, they would produce no more value than the peasant farmer, but, by working as a blacksmith, for an hour, they produce twice as much value.

The same is true in relation to the trade between a developed economy that produces high value products, using complex labour, and a newly industrialising economy that produces low-value commodities that uses simple labour.

A computer programmer, who produces computer games, may work for say 100 hours, and produces a computer game that has a value of £1 million. In other words, one hour of the programmer's labour produces £10,000 of value. Let's assume that the programmer could live on grain, or that grain here represents all of the commodities required to reproduce their labour-power. In that case, one hour of the programmer's labour, with a value of £10,000 may be the equivalent of 1 million kilos of grain. But, it may require 1,000 hours of labour, of a grain producer in Angola, to produce that 1 million kilos of grain.

Put another way, it would require 100 grain farmers, each working 1,000 hours, to produce as much value as is produced by the computer programmer in 100 hours. In other words, the developed economy, by concentrating on this high value production, gains the benefit of comparative advantage, and is able to import a much larger quantity of the commodities it requires in exchange for its own output than if it used its resources to produce these low value commodities itself.

That doesn't necessarily mean that developed economies, like the UK, should forget about producing steel, use their resources to produce computer games, or financial services, and then just import all the steel it needs from low cost producers, like China. For one thing, as the 1980's demonstrated, skilled workers employed in steel production, or other such industries, cannot simply be transformed into programmers, financial futures traders, or consultant surgeons.

A socialist society would deal with that by planning out the transition from one type of production to another, well in advance, so that it could be undertaken smoothly, over a significantly long period to avoid dislocation. And, indeed, social democracy also seeks to bring about such a transition in a more planned and regulated manner than would be the case if things were simply left to the market.

Already, by the latter part of the 19th century, various forms of economic regulation were being introduced by the state; whether it was regulation of supplies of labour-power, via the welfare state, or the regulation of nominal price levels by the creation of central banks with control over money printing. It saw further development of regulation in the 1930's with the New Deal policies of Roosevelt, in the US, and of Beveridge in the UK. In the 1930's, there were other forms of regulation introduced, such as the Milk Marketing Board, which regulated milk prices and production. Other prices were, in fact, already regulated, at that time, via Retail Price Maintenance, whereby manufacturers were able to dictate to retailers what selling prices of products would be, so as to prevent retailers competing against each other, and thereby driving down market prices.

In the post-war period, it was this drive towards social-democratic structures, and the need for regulation and planning that led to the creation of the European Coal and Steel Community, which itself was one of the forerunners of the EEC, and then the EU. Planning and regulation of the economy had always been a feature of the economies of France and Germany, because both industrialised in the 19th century, on the basis of a large degree of state involvement by Bonapartist regimes – Bismark in Germany and Louis Napoleon in France. But, such planning and regulation began to be seen as necessary in Britain too.

It was openly stated in the 1960's, with the creation of NEDC, matching the French Economic, Social and Environmental Council. It was a centrepiece of Wilson's modernisation strategy of “the white heat of technology”. It was also apparent in the corporatist ideas of the 1970's, in their various guises, whether it was the right-wing social democratic variant of the Social Contract, to regulate wages and prices, or the left-wing variant of the AES, and the proposals for Enterprise Boards, Planning Agreements and Worker Directors.

In the development of the EEC, there was a recognition, not only of the need for such long-term planning and regulation, but a recognition also that such control and regulation could only be practical on a large scale. European economies faced a huge US economy on one side, and the USSR on the other. Both had the significant advantage of being able to organise production, within their borders, on a large enough scale as to obtain the advantages of the economies of scale.

One of the industries that benefited, from the development of the EEC, in that regard, was the Atomic Energy Industry, which required a large minimum size before the huge amounts of capital, required for its development, became viable. 

Even if all import duties and restrictions are set aside, economies that exist outside a large, single market face significant additional costs and barriers. There are the costs of currency conversion and risk, of complying with regulations and standards and so on. The EEC was designed to set capital operating within its borders, on the same kind of level, therefore, as existed for capital operating in the US.

What was recognised was that not only had capital grown beyond the fetters that were imposed on it by the private ownership of capital, but it had grown beyond the fetters imposed upon it, by national borders.

The current crisis in the steel industry is a good example of that, because even a solution at the level of the EU looks barely adequate for what is a global overproduction.

The overproduction of steel is getting a lot of attention, in the UK, because it threatens large numbers of jobs in the country. But, no such concern was shown over the earlier overproduction of iron ore, which actually provided steel producers, in Britain, and elsewhere, with the advantage of cheaper raw material. 

Little concern has been shown for all of the workers in Latin America and Africa who have lost their jobs, as a result of that overproduction, and similar gluts for copper and other industrial metals. There are also sizeable job losses in the oil industry, as overproduction has slashed prices, and led to the closing down of rigs. 

I set out the basis of this overproduction some time ago in discussing the long wave cycle. During the 1980's and 1990's, as global growth was restrained, the demand for additional primary products was also restrained. New technologies introduced during that period meant that primary products were used more efficiently, limiting the growth in demand for them further. That was notable in relation to oil use, which rose by only a seventh the rise in global GDP.

But, as the new long wave boom started in 1999, the demand for these primary products rose sharply, along with the demand for food, as the global working class grew and wages rose. The supply of those primary products could not be increased rapidly, and so global prices for them rose steeply. The chart for copper illustrates that, but also illustrates that its price movement this time, is no different to what it was in the last post-war boom period. 

As the graph shows, in relation to that previous cycle, however, the consequence is then a large amount of new investment in discovering new supplies, and then establishing new mines. It takes around 12-13 years for this process to complete, but at the end of it, the result is a large scale overproduction and fall in prices, as all of this new output hits the market. That can be seen in copper, iron ore, milk and other food products and in steel.

The media present the steel crisis as though it has been caused by a fall in steel demand. Similar comments are made in respect of oil, but the sharp fall in prices is not due to a fall in demand – for most of these products, demand has continued to rise – but is due to the huge rise in supply. 

The other argument put forward is that the crisis is due to dumping of steel by China. That is the selling of steel below its cost of production. But, whenever there is a crisis of overproduction, of any commodity, it gets sold below its cost of production. That is what makes it a crisis of overproduction, i.e. that the capital consumed in its production cannot be reproduced in the market price. There is nothing unusual or peculiarly unfair in that. It is the way capitalism works, and in the process, those producers who can produce at the lowest cost might suffer the smallest losses, or even still make small profits, whilst those with the highest costs make the biggest losses, and go out of business. Their capital and their market share is then taken over on the cheap by the survivors.

It may be that the reason China is able to sell steel more cheaply is because of support from the Chinese state, but it is far more likely that it is due to the fact that Chinese steel producers produce on a gigantic scale that the production, therefore, has all the benefits of the economies of scale, that Chinese production comes from relatively new, purpose built plants, in purpose built industrial zones, and uses the latest technology, and that it has the benefit of still comparatively low-wage Chinese labour.  China's steel production capacity in 2014 was 823 million metric tons, or half total global capacity.  By comparison, UK capacity was just 12 million metric tons!

Blaming the current crisis, therefore, either on a drop in demand, or Chinese dumping is then a diversion. It is an excuse for the real cause of this crisis, which is capitalism. But, even more immediately than that its cause is a failure of social democracy to push forward its interests and the interests of socialised industrial capital consistently.

That is manifest in a number of ways. Firstly, the EU, under the tutelage of conservative politicians, and ideologists, failed to press forward and consolidate those structures for planning and regulation, which the Coal and Steel Community presaged. Instead of a planned and regulated European steel industry, rationalised and capitalised in the way the Japanese state, and other Asian countries had done with strategic industries, it was allowed to fragment, and where reliance was not placed on cheap imports from outside the EU, European steel production itself fell into the ownership of companies based elsewhere, like Tata, free to move at a moment's notice.

What the steel crisis highlights is the dissonance between appearance and reality, between the objective requirements of modern industrial capital, and the failure of social democratic politicians to pursue the political programme required to meet those needs. It is what leads to repeated bureaucratic fudges, such as exists with the EU itself, whereby the needs of that industrial capital are implemented by state bodies, almost covertly, and under cover of conservative phraseology, whilst conservative politicians, parties and governments attempt to limit such developments, because they counter the interests of the class fractions they represent.

In a recent interview on Bloomberg, former Italian Prime Minister, Mario Monti, said that the EU would move forward to greater integration, despite these politicians, and that the reason progress was slow was because politicians had delayed it, not even by arguing for separate national interests, but by arguing for their own narrow individual and party political interests. Yanis Varoufakis has made similar comments about the significant difference between what such politicians say in public, and what they say in the closed meetings of the EU Council of Ministers.

The current potential crisis that may result from Brexit is an indication of that dissonance.

Next, The EU.