Digging Big Holes

I've set out before why HS2 is a bad idea, because its real intention is to suck labour and resources into London at an even greater pace. In so doing it sucks labour and resources out of the rest of the country, exacerbating the North-South divide, not reducing it. If the real intention were to restore some balance to the UK economy, then investment in infrastructure in the rest of the country would be a better means of achieving it, creating far more East-West lines of communication, not just between towns and cities, but also within those towns and cities, would be the way to go.

North Staffordshire is a good example of that. Its lines of communication are almost entirely North-South (A500, M6, A34, A50, West Coast Mainline, Trent and Mersey Canal), which run through the middle of the conurbation, and, in so doing cut off the Western side of the conurbation from the Eastern side. The old A roads running East-West are continually jammed, as single carriageways trying to take traffic to and from the dual carriageways of the A500 and A34, and the M6. Trying to traverse the various roundabouts that connect these roads to the main arterial routes is a nightmare. That applies to many conurbation across the country, because all lines of communication have historically been developed on a North South basis to cater for the needs of London and its hinterland.

If there were any real intention of developing the country North of Watford Gap, then the resources would go into developing these East-West connections in the rest of the country, not on HS2. And, if the Brexiters were really serious about trying to build a globally connected Britain, then instead of trying to funnel all traffic into London and the South-East, before it can gain access to the wider world, they would build many more airport, and transport hubs in the North, Midlands, Scotland and Wales, as well as massively enlarging existing airports in those areas, so that they can have direct links to the rest of the globe.

But, in this post, I want to look more specifically at the economics of the kind of large scale infrastructure projects that HS2 represents. If we are to believe Boris Johnson and his government, which in itself requires a huge dose of suspension of disbelief, then we are to see a lot more of these large scale infrastructure programmes, in coming years, including 40 new hospitals, and a £20 billion bridge between Scotland and Northern Ireland. Given the experience of HS2, we could expect the actual cost of such a bridge to rise closer to £60 billion were it ever to be built. This question is one faced by developing countries, and was faced by the USSR in the 1920's, known as the industrialisation debate.

In that debate, initially, the alliance between Stalin and the Right-wing of the Communist Party, represented by Bukharin, argued against rapid industrialisation, which was being advocated by Trotsky, Preobrazhensky, and the Left Opposition. Stalin had argued for a slow development of the economy on the basis of the New Economic Policy, which accepted the need for the return of the market. Bukharin argued that the need to develop agricultural production, via the market, meant that they had to accept that, in this process, the rich peasants or kulaks would get richer, and this would be part of the process of them accumulating capital, required to increase agricultural productivity, and thereby output, which was necessary to increase the size of the surplus product, which was, in turn, required to be able then to devote additional resources to industrial development. Bukharin said that the kulaks should get rich.

The Left Opposition accepted the need for NEP, but they also argued that the path to higher agricultural efficiency and production came from a more rapid introduction of machinery into agriculture. In order to raise agricultural productivity, it was also necessary to increase the voluntary creation, by the peasants, of cooperatives and collective farms (kolkhoz), and an incentive for that was to be able to provide the peasants with tractors and other such equipment, as well as to be able to provide them with much more in the way of manufactured consumer goods. There was no point encouraging the peasants to form collective farms, if the main advantage of such farms, large scale production, and the ability, thereby, to use machines and equipment, could not be obtained, because of the lack of machines. Moreover, if industrial production lagged agricultural production, the prices of industrial goods, be it agricultural machines or consumer goods, would rise relative to agricultural products, and the peasants would find that the industrial goods they required became more and more out of their reach.

That is, in fact, what happened with the so called Scissors Crisis. The Left Opposition argued that it was necessary to devote more resources to industrial production, to raise the production of things like electrical energy production, to meet the needs of factories, so that factories could increase their output of things like steel, and thereby of tractors and so on that the peasants required. Producing more tractors and farm equipment, which peasants could then acquire, by coming together in cooperatives, and collective farms, would then be a means of encouraging such cooperation, on a voluntary basis, which would then undermine the power of the kulaks, who the Left Opposition saw as a potential threat. The kulaks represented the potential for the restoration of a new rural bourgeoisie, who could threaten the revolution.

In fact, it didn't take long for that threat to manifest itself. As industrial prices rose relative to agricultural prices in the Scissors Crisis, the kulaks, who accounted for a large part of marketed agricultural output, threatened to cut off supplies to the towns unless the government agreed to pay them much higher prices. Stalin responded in typically bureaucratic manner. Troops were sent into the villages to seize foods supplies; peasants responded by killing off livestock, and destroying crops, and so on. But, also, Stalin responded by swinging violently from his previous position, in support of Bukharin's policy of industrialisation at a snail's pace, to a policy of hyper-industrialisation.

On the one hand, the kulaks were now to be liquidated as a class. Instead of the peasants being encouraged to voluntarily come together in cooperatives and collective farms, as the Left had argued, they were to be forced into collective farms and state farms (sovkhoz). The new five year plan set ridiculously high targets for industrial development and production. Any accumulation of capital or means of production can only come from a social surplus product, and the main source of such a surplus product, in Russia, remained the countryside, where the majority of the population were still employed. In order to increase the size of this social surplus product, therefore, Stalin imposed draconian conditions on the peasants, which is hardly the kind of social relations that a “socialist” state should be seeking to foster.

This swing to super-industrialisation not only created these social tensions, which themselves were economically damaging, but they also created a significant distortion in the economic structure of the USSR itself. There is no doubt that, in the 1930's, the USSR achieved phenomenal feats of industrial development and growth. Russia went from a country where, in large spheres of life, it was still mired in medieval conditions, though in its cities it had seen large scale economic development, during the latter half of he 19th century, largely as a result of the investments of foreign capital, to being one of the world's largest industrialised economies. It is what enabled it to outproduce, and defeat Nazi Germany, in the 1940's, and, despite the massive devastation it suffered, during that war, by the late 1950's, it was already rapidly creeping up on the US, which had suffered no such destruction, during WWII.

The trouble with the economy of the USSR which this created, however, was that it continued to rely on this investment of resources into heavy industry, and production of means of production, at the expense of the production of consumer goods. Its top down planning model was good at setting quantitative targets for steel production, energy production, and so on, which served it well during the war, but it was poor at setting qualitative targets, or responding to changing consumer preferences, which requires either the operation of the market, or requires a high degree of knowledge about those changing consumer tastes, which, in turn, requires a high degree of democratic involvement in decision making. That was the last thing that Stalin and his heirs intended to introduce.

The question comes down to one of balance. Stalin's regime was unable to achieve any such balance, swinging wildly from one extreme to another. Its not that Bukharin was wrong to point to the dangers of industrialising too fast, but that his analysis of what “too fast” was, was wrong. Its not that the problems of Russia could have been resolved had they not entered into NEP, and had they engaged in super-industrialisation, immediately after the civil war, but that to avoid the problems shown by the Scissors Crisis, and to create the conditions under which the peasantry could have been encouraged to come together, voluntarily, to form collective farms, it required a higher pace of industrialisation, to produce the means of production, and consumer goods that the peasants required.

The problem can be set out by a simple example.

Suppose we take an economy comprising two people working in agriculture. They produce enough food in six months to feed them for a year. They could work for just half a year. Instead, they decide that one of them will work producing food for both of them. That frees the other to work producing something else, say clothes. After six months, the food producer hands over half of their production to the clothes producer, who reciprocates. The total value of their output has not changed, it amounts to a year's labour-time, in total. However, their welfare has risen, because now, in addition to having the use value food to consume, they also have the use value clothing. In the next six months they repeat this process.

In reality, they would obtain a further benefit to their welfare from this process, because, as both specialise in their particular form of production they would become more productive. The fact of having better clothing might also raise their level of productivity, so that they produce both more clothing and food in the given amount of time. It doesn't have to be clothing that is produced to be exchanged with food. The second producer might instead have specialised in building shelter, or in providing entertainment, for example. As Marx describes in Theories of Surplus Value, for many consumer goods, it is, in fact, the producer of these goods who must provide for the needs of the farmer during the year, because its only with the annual harvest that the farmer has the products to exchange.

But, they might also produce means of production. Suppose they produce agricultural implements. Now, the food producer still produces enough food for two in six months, but it takes the tool maker a year to produce a spade. The food producer, must now provide the toolmaker with the food they need, but cannot get anything back in exchange for it. In effect, the toolmaker has to give the food producer, an IOU, saying they will pay them in spades, at the end of another six months. Now, the food producer might be prepared to do that, because they know that, once they have a spade, they will be able to work more effectively. They may increase their output by 25%, so that, instead of having to work for 6 months, to produce the required amount of food, they can work for just 4.5 months. Put another way, if they work for as long as they work now, they will increase their output by 25%

But, suppose, instead of it taking a year to produce the spade, it takes two years. Now, the food producer must work for two years, and provide for the needs of the toolmaker during all that time, before they can get the required amount of value back in exchange. During all that time, they can also get no improvement in their own level of productivity. The longer it takes for the toolmaker to produce the implements to be exchanged, the longer the food producer must provide them with use values, whilst getting nothing back in exchange; the longer it will be before they obtain any benefit in their own level of productivity, and so the less incentive there is for the food producer to provide for the needs of the toolmaker.

This is the problem that Bukharin identifies in his Economics of the Transition Period, and which stood behind his argument in the industrialisation debate. It was, in fact, a problem that Marx had also earlier identified. And, suppose the food producer, in the intervening period, suffers some problem. For example, suppose there is a bad harvest. Because, they can only produce just enough to provide the food required by themselves and the toolmaker, now, any drop in output means that one or the other, or both, must get insufficient food. The farmer will meet their own needs first, leading the toolmaker to go short/starve, in the town.

But, when we extend this principle to an entire real economy, the problem is even more severe. If too much of an economy's resources are put into the production of commodities that require very long times to produce, then, unless the economy produces a large surplus product, all of this surplus product gets used up simply financing the production of those commodities, without those commodities being thrown back into circulation, and thereby adding to the value being circulated. Instead of the economy expanding, and being able to accumulate capital/means of production, it contracts.

Now, consider HS2, or Boris's Bridge, and all of the hospitals, HS3, Crossrail and so on. During all the time these long-term projects are being built, those involved in these projects (the workers building them, the capitalists drawing profits from the construction, the landlords getting rent from the leasing of land, the money-lenders getting interest on loans and dividends on shares) are consuming commodities, but essentially giving the equivalent of an IOU in exchange for them. In reality, as with the farmer and the toolmaker, when the railway is completed, those that have, in the intervening period, provided the materials used in its construction, who have produced the food consumed by its workers, and capitalists, as well as who have produced all of the other consumer goods they have consumed, now take the IOU's they have been given, and exchange them for use of the railway, just as the farmer exchanges their IOU for a spade.

Of course, in practice, its not individual suppliers of commodities that are given IOU's by HS2. Instead, the state intercedes. It is the state that provides HS2 with the IOU's that it uses, these IOU's now taking the form of bank notes and credit. HS2 then uses them to pay its suppliers, to pay its workers' wages, its landlords rent, and its shareholders dividends, etc. But, the underlying value relations remain the same.

But, HS2 will not be completed for more than 20 years, even if it remained on schedule, which such projects never do, let alone within budget. The same applies to HS3 and 4 and so on. In other words, that is 20-30 years plus, during which these IOU's are going to be issued, during which value is being sucked out of the economy, without any equivalent value being thrown into circulation, without any effect in raising social productivity to compensate. Indeed, during the construction process, social productivity may be reduced, because of all of the disruption that construction itself imposes on local communities.

As with the industrialisation debate in the USSR in the 1920's, this is not to say that such infrastructure spending should not be undertaken, but it is a question of whether the scale of the spending is sustainable, given the size of the social surplus, and the likely improvement in social productivity that would be derived from it, a long way down the road.