Prediction 6 has already been referred to in relation to global growth in Part 5. Prediction 6 said,
“The three-year cyclical slow-down sets in again in the fourth quarter of 2017, but, for the reasons set out in 5), it will be manifest in relative rather than absolute terms, i.e. growth in general will be strengthening, whilst the period Q4 2017 – Q4 2018 will be just slower than this quickening trend. Specific economies, such as the UK, may suffer greater effects, because of particular conditions, such as Brexit.”
As I have discussed, for several years, in various posts, for at least the last thirty years, a distinct three year cycle is discernible, during which growth slows for about a year, starting in the third quarter. It was visible in 2002, 2005, 2008, 2011, 2014, and I expect it to be visible in 2017, though, as described above, that will only become apparent in later years, as it will appear as a small kink in the upward trend I expect now is entrenching itself.
In previous posts, I have suggested that this three year cycle may be due to the role of technology within the economy. In Capital II, Marx discusses the wear and tear of fixed capital, and its replacement. Marx notes that, because some fixed capital remains in operation for several years, it transfers a portion of its value in wear and tear to the commodities in whose production it takes part. The capitals that produce these commodities, thereby, take value out of the economy equal to the value of this wear and tear. However, they do not need to throw this value back into the economy, to replace that fixed capital, which can continue to operate unhindered. They hoard the money equivalent of this value, ready to be used to purchase replacement fixed capital, when it is worn out.
But, the consequence of this is that a necessary imbalance arises. The producers of consumer goods in Department II, take this value out of the economy in the form of the value of the wear and tear of their fixed capital. This value is provided to them by the capitalists and workers of Department I, which produces means of production, as those workers and capitalists buy consumer goods from Department II. But, Department II, then does not pass this value back to Department I, instead hoarding the money equivalent, for several years, until it is required to replace the fixed capital. Department I, therefore, cannot replace the value of the wear and tear of the fixed capital it has produced and sold to Department II. As Marx puts in Capital II, it results inevitably in overproduction by Department I, even if it has simply continued to produce at the same level.
Similarly, when the fixed capital employed by Department II, does wear out, it will need to replace it all, which will cause a large rise in the demand for fixed capital from Department I. It will buy this fixed capital with the money equivalent of the value of wear and tear, it has hoarded from previous years. Department II, will thereby transfer a large amount of value to Department I, for the purchase of this fixed capital, but will not recoup this, in the value of wear and tear for the current year, in the value of the consumer commodities it sells to Department I workers and capitalists. It means a necessary instability is established within the system between Department I and II, as a disproportion in production is created, one year too little means of production being produced, and in other years too much means of production. Orthodox economics also recognises this idea in the Accelerator Effect.
Marx notes, in Capital II, Chapter 20,
“This illustration of fixed capital, on the basis of an unchanged scale of reproduction, is striking. A disproportion of the production of fixed and circulating capital is one of the favourite arguments of the economists in explaining crises. That such a disproportion can and must arise even when the fixed capital is merely preserved, that it can and must do so on the assumption of ideal normal production on the basis of simple reproduction of the already functioning social capital is something new to them.”
And, he notes that this disproportion, must also occur even under socialist production.
“Once the capitalist form of reproduction is abolished, it is only a matter of the volume of the expiring portion — expiring and therefore to be reproduced in kind — of fixed capital (the capital which in our illustration functions in the production of articles of consumption) varying in various successive years. If it is very large in a certain year (in excess of the average mortality, as is the case with human beings), then it is certainly so much smaller in the next year. The quantity of raw materials, semi-finished products, and auxiliary materials required for the annual production of the articles of consumption — provided other things remain equal — does not decrease in consequence. Hence the aggregate production of means of production would have to increase in the one case and decrease in the other. This can be remedied only by a continuous relative over-production. There must be on the one hand a certain quantity of fixed capital produced in excess of that which is directly required; on the other hand, and particularly, there must be a supply of raw materials, etc., in excess of the direct annual requirements (this applies especially to means of subsistence). This sort of over-production is tantamount to control by society over the material means of its own reproduction. But within capitalist society it is an element of anarchy.” (ibid)
This disproportion, in fact, Marx says, is averaged out under capitalism, because of several factors. Firstly, businesses in the same sphere, come into existence at different times, so that as each new business starts, it creates a demand for fixed capital from Department I, so Department I is continually supplying fixed capital to firms in Department II, in a phased manner. Assuming this fixed capital all has the same lifespan, of say 10 years, it will all then wear out at similarly phased intervals. Also, Department II firms are engaged in a range of spheres of production, and so they will use different types of fixed capital. These different types of fixed capital, will have different lifespans, so although Department I may not be producing a given amount of fixed capital for Department II firms involved in confectionery production, they might instead be producing fixed capital for firms involved in car production. Moreover, on the basis of capital accumulation, at any one time, firms may use the funds they have built up for the replacement of fixed capital, to add to the fund of surplus value they have built up, so as to increase their accumulation of capital, which thereby creates additional demand for fixed capital, and other means of production from Department I.
However, as Marx also points out, in Capital I, whenever some revolutionary new technology or machine is introduced, existing firms are led to have to scrap their installed machines even if they are not worn out, and even if they are relatively new, and to replace them with this new technology. If they do not do so, they will be unable to compete with any new firms entering that production, who start off with the new technology from day one, or with any existing firms who are in the process of replacing their existing machines with the new versions. This creates an inevitable tendency towards synchronised upgrade cycles, whereby all firms in a particular sphere, are led to need to replace their fixed capital, of a particular type, at or around the same time, and this thereby reintroduces the tendency towards disproportion and overproduction.
The upgrade cycle for ICT equipment is fairly well known, as the power of microchips doubles approximately every 18 months, and this leads to the development of new computer software and hardware, able to take advantage of the increased computing power, approximately every three years. Most large businesses, have thereby come to have an upgrade cycle for their installed ICT base of around three years. Given that it is not now just in offices and other administrative functions that the microchip plays a central role in personal computers, and so on, but the microchip is now central to more or less every piece of fixed capital, and every consumer durable, it is easy to see the technological basis of this three year cycle.
For, the last 15 years, I have been arguing that the global economy had entered a new long wave upswing. That phase lasts on average for around 25 years, and so this upswing starting in 1999, should last until 2025, or thereabouts, before entering a new plateau, or crisis phase. The indication of that new upswing after 1999 was fairly clear, and I have described it in many posts, as the global working class, increased by a third in the first decade of this century, output increased massively, global trade increased significantly compared with the previous period, and the sharp rise in demand for primary products saw the prices of copper, oil, iron oil, and food rise sharply. The rise in inflation, and the rise in interest rates in 2007, acted to burst the huge speculative financial bubbles that had been inflated over the previous thirty years, and led to the financial meltdown of 2008.
Whilst, initially, in order to overcome the shock to the economic system itself, that resulted from the credit crunch, as banks collapsed, states introduced large fiscal stimulii, alongside the liquidity required to ensure that commodity circulation could continue, and this led to a sharp “V” shaped recovery, everywhere it was applied, this fiscal stimulus was quickly withdrawn in 2010, when stability had been restored, as populist conservative governments were elected on policies of introducing austerity, and balanced budgets. The effect in the UK, and in Europe, where such austerity was introduced, was marked, as the economic recovery was halted, and economies more or less flatlined, whilst in the weaker economies like Greece, Spain, Ireland, and Portugal weighed down by large amounts of debt, particularly debt related to a property bubble, the austerity sent them into severe recession. Even in the US, the action of Republicans was to undermine the fiscal stimulus policies that Obama sought to introduce.
It has not been easy since 2010, therefore, to argue that the global economy is in a period of long wave upswing. But, to conclude otherwise means to be blinded by superficialities, and to believe that long established material forces at work within the economy have somehow ceased to operate. It is a version of the repeated error of financial speculators who whenever they get caught up in a new speculative mania, proclaim that “this time it's different”, but when the crash happens, it simply shows that it wasn't.
It is the same here. The underlying nature of the conjuncture is indicated in the period up to 2008, not in the distorted conditions that have been created after 2008, and particularly after 2010. In the period after 2010, the political power of the owners of fictitious capital has exerted itself. If you watch the film, The Big Short, it gives some indication of the corrupted nature of the system that enables this distortion to occur. The film, however, only talks about the way the bankers and others involved in the financial services industry were bailed out, by states over the last ten years, but the real bail-out has gone to the global top 0.001% whose private wealth is now almost exclusively held in the form of fictitious capital, of shares, bonds, derivatives, and property, and who have seen vast amounts of liquidity produced by central banks, via QE, that was used to reflate the prices of those shares, bonds, and property, diverting money from the real economy, leading to deflation and disinflation in consumer product prices, and diverting potential money-capital away from productive investment into financial and property speculation, thereby reducing economic growth.
Yet, the reality is that global growth has continued since 2008, despite all of the claims about there being a long depression, a great recession, or secular stagnation. The slower growth in the UK, EU, and in part in the US, is a direct result of self-inflicted austerity wounds. But, those wounds themselves were not accidental. Not only in order to provide the taxes used to bail out the banks, was a corresponding reduction in government spending inflicted, but these states set out to limit economic growth, and to impose austerity directly in order to keep interest rates at low levels, which is vital in order to keep bond, stock and property prices inflated. They learned the lesson of the period into 2007, when rapid economic growth led to rising interest rates, which crashed the capitalised prices of revenue producing assets.
Trump's tax plan is aimed at a similar effect. It provides a large tax cut for corporations. The executives of those corporations have said publicly that they will use the tax cuts, not to invest in real capital, but to buy back stock, to increase dividends and so on, which will again act to boost share prices. Yet, as I have set out many times in previous posts, this approach has sowed the seeds of its own destruction. The crash of 2008 was the warning tremor of that destruction. The actual earthquake is growing closer by the day, as I set out in my book - Marx and Engels' Theories of Crisis - Understanding The Coming Storm.
Between 1980 and 2000, the Dow Jones rose by 1300%, whereas GDP rose by 257%, so that the stock market rose by around 5 times the growth of the economy. This is in stark contrast to the period between 1950 and 1980, where the economy grew by about twice the rise in the Dow Jones. In the financial meltdown of 2008, the Dow Jones dropped dramatically to around 7500 in early 2009, but, today, it stands at around 24,600! Yet, although there has been growth in the US economy, during that period, there certainly has not been the kind of 300% growth seen in the stock market. Growth during that period has been only around 20%. In other words, we have the same set of conditions that existed prior to the 2008 crash, but now on an even more extended basis.
The attempt to keep asset prices high by diverting money into such speculation, and away from the real economy is self-defeating, and the extent to which that is the case, is likely to be manifest in the near future.
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