22.08.2001

Downturn or meltdown?

For the first time in nearly 70 years the capitalist system would appear to be confronted by the threat of a genuinely global recession.

It may be that this phenomenon will turn out to be no more than a steep and generalised cyclical downturn. Astute management of monetary policy by central banks, appropriate fiscal stimulus from governments and other traditional panaceas will ensure that the problem is contained. That, at least, is what many orthodox economists and commentators in the bourgeois press are telling us and themselves, though it will be small comfort to the multitude of workers - tens of thousands of them in Britain - who are already experiencing the reality of sudden redundancy and unemployment.

On the other hand, if the fundamental contradictions and irrationalities of the system combine to make the process self-reinforcing, there must at least be the possibility of a much more profound systemic crisis of confidence, whose effects can only be guessed at, but which could be comparable to the global depression of the 1930s.

Certainly, compared with the events of the last decade, the current situation is qualitatively different. In the Asian crisis of 1997-98, for example, and during the period of acute instability in world markets caused by Russia?s debt default in 1998, the US economy was still basking in a dream scenario of steady growth and low inflation. True, many billions of dollars of finance capital - much of it chasing speculative gains through manipulation of currencies and derivatives - were wiped out, but the relative stability of the majority of metropolitan economies meant that most of the real pain was confined to the periphery.

Against this background, the paradigm of the ?new economy?, in which the business cycle had effectively been banished and recession was something to read about in history books, became orthodox ideology. This hubris was, no doubt, in part a reflection of the implosion of the USSR and the apparent victory of ?liberal democracy?, portrayed, absurdly, by the likes of Fukuyama as signifying the ?end of history?.

Now the situation is radically different, for it is the rapidly faltering US economy itself that is at the centre of the problem. On August 21 the Federal Reserve made its seventh cut in interest rates this year. At 3.5%, a full three points down from January?s levels, the federal funds rate is now lower than it has been since April 1994, and chairman Greenspan is indicating that rates may have to fall even further to stave off recessionary pressures. Not since 1982, when the US was afflicted by its worst recession since the great depression, have interest rates fallen so quickly in so little time.

The rationale is not difficult to work out. Company profits in nearly every sector are in steep decline and business investment in new means of production shows its biggest fall for more than 20 years. Corporate and individual indebtedness are at historically high levels. Judging by recently released revised figures, it turns out that both the productivity gains and the rising profits that characterised the boom years of the ?new economy? - gains that led many enterprises to over-invest by acquiring cheap capital on the basis of ramped up stock valuations, and led to such phenomena as the mania for dotcom shares and tech stocks in general - were somewhat overstated. By historical standards, the revised growth rate of around 2.5% in the second half of the decade was healthy enough, but not sufficient to justify the ?new economy? euphoria, which saw in the information technology revolution an epochal source of almost inexhaustible profit.

That bubble has now definitively burst, with the worldwide collapse in asset values and profits of companies producing semi-conductors, computers and telecoms equipment - with all their related infrastructures - spreading the contagion to broader sectors of the economy. The general surplus of commodities resulting from growing inventories of unsold goods, combined with a surplus of capital caused by the lack of investment outlets brought about by contracting industrial investment in new means of production, holds within it the possibility of great volatility and a deflationary spiral.

And then there is the dollar. Some are getting excited by recent falls. Given that the US current account deficit of around $450 billion last year is held by even the International Monetary Fund to be ?unsustainable in the long term?, and given the fact that funding this deficit soaks up nearly 65% of the world?s net capital flows, this is perhaps understandable, with a shrinking US economy making dollar-denominated assets rather less attractive to international capital. But that capital must find a home somewhere. There is no doubt that steady inflows of foreign capital have played a significant role in underpinning the whole US economy over the last decade. One should not forget that as recently as July the currency reached a 16-year high and that some depreciation must be expected in current circumstances. Nor would a fall in the dollar necessarily spell entirely bad news for most of the metropolitan economies - with the obvious exception of Japan.

The question is, as always, how far and how fast? It is noticeable that the ?strong dollar? policy, advocated by successive treasury secretaries under Clinton, has not been specifically endorsed by Paul O?Neill, the current incumbent, but this may be a question of nuance rather than a specific change in policy direction. Given the present outlook, the US no longer needs to export demand in order to stave off domestic inflation; exports would also obviously benefit, but a rapid and steep depreciation would obviously add to the general instability that threatens to turn a recession into a depression and perhaps a crisis

For those of a catastrophist turn of mind, Japan clearly offers some fertile ground. Here we have an economy that is on the verge of entering its fourth recession in 10 years and presided over by no less than eight prime ministers in the same period. The Japanese financial system is an impenetrable morass. Much of the banking sector, for example, is effectively bust, burdened by enormous bad debts and with a capitalisation artificially sustained by vast portfolios of dwindling assets in major companies whose profits are either shrinking rapidly or are non-existent. Large unrealised and undeclared losses in derivatives positions, taken out to try and cover their exposure, represent a ticking time bomb under the whole financial edifice.

Four months into his premiership, Junichiro Koizumi has embarked on a series of measures that are bound to encounter stiff resistance from within his ruling Liberal Democratic Party and the state bureaucracy; plans that, if implemented, can only make matters worse, at least in the short to medium term. Cleaning up the banking system by eradicating mountains of bad debts must inevitably lead to bankruptcies and rising unemployment. Stringent fiscal austerity and scaling back the discredited system of pork-barrel public works projects that characterised the failed policy of fiscal pump-priming over the last decade and more will only add to the woes of an economy that, despite the chicanery of the Bank of Japan with its official statistics, is facing what the Financial Times calls a ?deflationary vortex?. The house journal of international capital warns that ?with output forecast to contract this year, consumer demand flat and exports falling, the dangers are hard to exaggerate? (August 15).

With interest rates already around zero, the Bank of Japan has no room for manoeuvre. Even were they not confronted by export-led failure and a mountain of unsold commodities, companies will not or cannot invest because of their straitened financial circumstances. Consumers will not buy when they see prices falling every day, and savers have to withhold ever larger sums from their disposable incomes to cover the lack of any meaningful return on their nest eggs. Japan?s particular and seemingly intractable local difficulties have obviously been exacerbated by the contraction in US and European demand for IT-related products.

Much the same can be said for Asia as a whole, where we find the same phenomena of excess capacity, feeble, deeply indebted financial and banking systems and an absence of domestic demand. Hence, Singapore, where electronic goods account for more than half of all exports, and Taiwan, which produces more than 50% of the world?s lap-top computers, are already feeling acute pain, with a growing surplus of commodities unable to find a market. With its population of only four million, Singapore cannot hope to dispose of surplus inventories through domestic demand. Hence, we find prime minister Goh Chok Tong urging the Singaporean working class ?not to be ?fussy? if they are laid off and find themselves temporarily having to take up more menial jobs normally filled by migrant workers? (Financial Times August 10).

At home, the consequences of a global downturn for the British economy are already becoming apparent in the closure or downsizing of enterprises, particularly those foreign companies involved in information technology and related industries. Manufacturing, along with a raft of other sectors, has already entered technical recession and the prospects of attaining the government?s stated growth targets must be seen as poor. Politically, this must surely impact on the claims by chancellor Gordon ?prudence? Brown that the era of boom and bust has been relegated to the past.

It cannot be long, one would think, before the unemployment statistics, however ?massaged?, begin to register a steep rise. Signs of an unsustainable hike in property prices, mirrored in the unprecedented level of mortgage borrowing and personal indebtedness, again point to the imminent bursting of a bubble comparable to that of the late 1980s. As usual, consumer confidence, traditionally a lagging indicator, gives the government some ground for unreasonable hope that the storm can be weathered. Given Brown?s neo-Thatcherite determination not to run a deficit in order to finance Labour?s much vaunted plans for public expenditure on health, education and other public services, any significant downturn in the UK economy will leave the government with big problems as it faces the task of winning a third term.

The necessarily brief and cursory panorama set out above indicates clearly enough that at this juncture international capital faces some serious problems; whether these problems are soluble by applying the nostrums of orthodox capitalist economics remains an open question, but it is clearly time for communists and revolutionary socialists to review their orientation towards the possibility of a serious crisis, a task that demands intense theoretical analysis and empirical investigation.

To be sure, among some sections of the left, the catastrophists will gleefully be dusting off their doomsday scenarios and eagerly anticipating the ?final? and ?inevitable? apocalyptic cataclysm that will, like a deus ex machina, bring about not just the collapse of the whole edifice of capitalism but somehow spontaneously lead to the development of socialist consciousness on the part of the working class. The theoretical poverty of this mechanical approach, not to mention its historical myopia and its rotten political passivity, are self-evident. In essence, it rests on the illusion that it will not be the historical self-activity and self-emancipation of the working class - as a class not just in, but for itself - but rather ?history? and the capitalist system itself (viewed abstractly) that will bring about the revolutionary transformation of society.

Leaving aside the period before 1857, when Marx and Engels themselves were enthused by the apparent possibility that commercial crises could by themselves create the preconditions for a revolutionary uprising of the proletariat, the catastrophists have not a theoretical peg on which to hang their faith in crisis in and of itself moving the working class in the direction of revolutionary socialism.

Others will see in current developments the proof of some particular theoretical postulate about overproduction, underconsumption, disproportionality or the declining rate of profit. All of these are not the causes but rather the effects, the symptoms, of a fundamentally contradictory and irrational system.

Clearly, where the falling rate of profit is concerned, it is true that adherence to the labour theory of value does oblige Marxists to accept the tendency of the rate of profit to fall as something inherent in the capitalist mode of production. But what Marx himself saw as merely a tendency - against which a multitude of countervailing tendencies, particularly improvements in productivity arising out of new technologies and new means of production, could prevail - they are content mechanically to erect into an iron law, with, once again, its own comfortingly ?inevitablist? implications for the class struggle.

Rather than seeing crisis as a specific empirical historical event, we would argue that it is intrinsic to and inherent in the system as a whole and that it lies at the heart of Marx?s critique of political economy in the fundamental contradiction between use value and exchange value, between the production of goods to satisfy human need and their production as commodities, as values. Commodity production per se and the existence of a competitive market for commodities, are, however, not what distinguishes capitalism from other modes of production.

Capitalism?s distinguishing facet, the ultimate source of crisis, is its subordination of production to the extraction and accumulation of surplus value: ie, in the whole system of abstract labour, the very essence of the system. In this sense, therefore, crisis is not an event but an intrinsic, perennial condition. As Schumpeter memorably remarked, ?This process of creative destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has to live in.? This is surely what Marx and Engels meant when they referred to the fact that, ?Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones? (K Marx and F Engels, ?The Communist manifesto? Collected Works Vol 6, p487).

To theorise and fully understand this process is clearly a vital task, but theory by itself is not enough. As communists we must primarily be concerned with transforming this knowledge from theory into practice, equipping ourselves and the working class with the tools necessary to break the chains of a contradictory and irrational system that alienates us from one another and prevents us fulfilling our potential as human and therefore social beings. Foremost among those tools must be a revolutionary programme and a revolutionary party. Only thus can we transform the capitalists? crisis into a means of our own self-liberation.

Michael Malkin