Financial turmoil heralds return to Keynesianism

What lies behind the current financial crisis? Hillel Ticktin, editor of Critique, spoke to Peter Manson

You have described the current situation as a “turning point”. Can you explain what you mean?

The question at the moment is not really whether there is a downturn. It is clear that is the case. The question is whether there is a depression - and I think there is. If you read the Financial Times you will see that this has become common ground amongst the right. It ought to be common ground on the left as well.

The right is citing the fact that the government has had to intervene. For the last 20 years the mantra has been that the market will solve everything through self-regulation and the government does not intervene. That whole argument has collapsed and clearly policy will have to change.

We must examine why this is so. What is happening now is not the same as the recurring post-war cycle. One must make a distinction between a cycle and a crisis. The left has been wrong to refer to every downturn in this way. A crisis can only be that of the system, in which the ruling class cannot rule in the old way and is actually threatened by the working class - that is the meaning of it. At the moment there is no actual threat from the working class, but the potential is certainly there.

Traditionally when Marxists have talked about a crisis of capitalism that has not necessarily been connected with a movement from the working class, has it?

People have used it in that way - wrongly - although I do not think that was true for Marx, Lenin or Trotsky. How can any system be in crisis unless it is under threat? The term has been used so loosely by the left, it has been unclear what it has actually meant.

So are you saying that the current situation cannot be described as a crisis, with the absence of the working class from the political stage?

Yes, in that sense it is not a crisis, but the question is whether it is leading in that direction: whether it is leading to a situation where the ruling class cannot rule in the old way and comes under threat. That can happen even when the working class does not enter onto the stage, in the sense that the system itself could disintegrate, which would produce the possibility that the working class might act spontaneously and attempt to take things into their hands.

Clearly, however, it is not yet a crisis of the system, in that the working class has not entered onto the stage. It does not follow that it will, of course, although I think it likely in view of current conditions.

In the past economic difficulties have also led to support for the fascists and extreme right.

I would rule out fascist power, which in the past arose in a particular period under particular conditions. Nor am I certain that a revival of the extreme right will occur, but what is likely is an increase in authoritarian government - which in fact is already happening as part of an underlying process. As the working class begins to act, it is possible that this will intensify.

Recently a major bank has collapsed on both sides of the Atlantic. Could any financial institution be hit in this way?

It is clear from the fact that financial institutions are not lending to each other that they are all afraid their competitors or they themselves may not be solvent. But it is also clear that the government will step in if any large institution is threatened, so it is very unlikely that any major bank will actually go under. It is probable that more will get into trouble and have to be bailed out.

In the past when this has happened in Britain, the Bank of England has usually intervened behind the scenes and most people would not even be aware of it. Even now it is possible that the Bank of England or the Federal Reserve is preparing to help a number of banks.

The essential background to all this is the fact that in the last period, particularly since 2001-02, there has been a huge growth in derivatives, or debts that are sold on in a complicated way, which amount now to $585 trillion. That is such a huge sum that there is no way that any one central bank can actually control it - in fact it is dubious whether the world banks combined could do so. Part of the difficulty is the diversification involved, so that no-one can be certain exactly who owns what.

The authorities have, of course, been well aware of this and over the past year or so have been involved in exercises in how to control it. It has been entirely predictable that they have not been able to do so. In fact what has occurred was not accidental - it was bound to happen. It was quite obvious that it would. The base number - that is to say, the real number - of outstanding derivatives is now equal to or greater than the US GDP.

There are two figures involved. Since derivatives are loans that are sold on several times, there is a lot of ‘double’ counting involved. In 2006 the total value of derivatives was officially given as $416 trillion. However, the underlying debt amounts to a much smaller figure - roughly $10 trillion. This has hardly changed over a number of years.

One of the interesting factors is how quickly the figure for total derivatives grows - by 50% in the last 18 months, for example. Yet the question as to why this huge growth has taken place is not asked - in fact it is seldom mentioned. The answer is that there is an enormous surplus of capital, which historically has been directed into industry, but today has been turned in on itself, as it were. In other words, finance capital using itself as an outlet.

It is obvious to Marxists that unproductive capital cannot serve this purpose. It is simply feeding on itself.

You have described it as cannibalism.

Exactly. Looking back over the previous 20-year period, surplus capital sought many outlets, but none proved reliable or permanent. It was exported to east Asia and was directed into the dot-com boom. Both crashed. This was most certainly not occurring before 1987. There was no wall of surplus capital unable to find an outlet and no enormous growth in derivatives. Marx described what we are seeing as the overaccumulation of capital.

This was caused by two fundamental changes. Firstly, a deliberate switch away from industry to finance capital in the middle to late 70s. Although to some extent industry was relocated (very largely to China), it was unable to maintain the necessary balance between productive and unproductive labour. The consequence is that the surplus value created cannot find an automatic outlet. Whereas previously there had been no problem, today capital has constantly had to seek out new ways of investing.

By itself this did not cause the huge surplus of capital, however. What caused it was the end of the cold war and the associated end of the old way of controlling labour. The consequence was that the role of government in overseeing the economy and the workforce was reduced - the percentage of US GDP accounted for by government spending went down from approximately 8.5% in 1986 to 3% in 1997.

Even with the Iraq war, it has only gone up to around 4%. The increase in state spending on arms as a result of Iraq explains why the downturn in March 2001 came to an end. A substitute for the cold war was sought in the ‘war on terror’, which only worked for a short time and to a small extent.

What proportion of GDP would arms spending have to account for, in your opinion, in order to suck up surplus capital?

Well, it reached its highest percentage in 1986 in response to a downturn. So 8%-8.5% would probably work, but it is under half that at the moment. However, there is a limit to the ability of the war industry to put off crisis.

In a certain sense one could actually say that capitalism has used war as its mode of existence for a century. In fact it is impossible to avoid such a conclusion if one looks at the history of capital, and most particularly the last 50 years.

The reason why war works so well as a means of reinvigorating capitalism is that war and the deployment of arms is a nationalised industry, although this is not stated - no-one ever says that we have a nationalised army. From the point of view of capitalism it is an acceptable nationalised form, unlike the nationalisation of industry in general.

Huge sums are spent on arms, which are then declared obsolescent after a short time. The arms industry is effectively based on use-value, but the quantity demanded never ceases to grow. What is more, the use-values do not actually have to be used, which makes it ideal. There is an insatiable demand. Consequently the war industry plays an enormous role in stabilising capitalism.

The second aspect is that it helps deal with the problem of disproportionality by mopping up excess supply in industry and thirdly aids the problem of the rate of profit. It is fairly easy to see that the war industry, because it is nationalised and not market-controlled in the normal way, will often pay more for its supplies than would otherwise be the case - there are reports of $1,500 being charged for a screwdriver! In Iraq one firm supposedly charged for three million meals which were never supplied. The point is that the war industry undoubtedly helps raise the rate of profit.

So the war industry has been vital in helping capitalism put off crisis. Its role has long been the subject of debate between various Marxist economists. But it is not only Marxists who have recognised the importance of war for capitalism - you do not have to be a Marxist to see the connection.

However, the reason I say a turning point has been reached is that capitalism can no longer use war in this way. There are limits, however long they take to come into effect. They appear to have been reached only as the cold war was coming to an end. As I say, 1986 represented the high point of arms spending as a proportion of GDP.

The limit arises because the level of taxation increases to such an extent that the capitalist class or working class (or both) cannot accept it. For the capitalists the effect would be to lower the rate of profit. In time of real war the population can be won to accept a lower standard of living and a reduction in welfare state provision, but this cannot usually be maintained in the absence of war.

In this regard the question of the power of ideology is also relevant. During the cold war anti-communist ideology was in fact accepted by the majority of the population. But since the fall of the Soviet Union the ruling class has been deprived of this weapon and the ‘war on terror’ has not been able to replace it. Consequently a return to 8% is probably impossible - as we know, there are constant attempts to lower taxation.

The other problem with war is that people actually have to fight in it and they will not be prepared to do so indefinitely. That limit has also probably been reached in the United States.

In other words, it looks as though in that sense too a turning point has been reached. War can no longer be used either as a means of control or as a means of stabilising capitalism. That is most clearly seen in the failure of the ‘war on terror’. So the stability of capitalism that was induced and maintained most particularly through two features - the cold war and the welfare state - has come to an end. This finds reflection in the current political reality.

What has come to an end is Stalinism, associated with the cold war, and social democracy, associated with the welfare state. The welfare state was less significant in the United States than in Europe. In Britain, France, Germany and so forth, although the cold war played a major role, the stability of capitalism was also ensured through the welfare state. We have seen how it has been dismantled, as social democracy has come to an end.

So there is a turning point not only in that war can no longer be used as before, that the role of finance capital has reached its limits, but also in that both Stalinism and social democracy are redundant as political forms of control.

Can the state be used in other ways to help mop up surplus capital?

The present recession, which is taking the form of a financial crisis, is in fact not caused by finance itself, but by a real downturn in the economy as a whole. That has become very clear in the US, where profits are beginning to fall. That was happening before the financial crisis, which is now far bigger than anyone had predicted and consequently is taking a long time to actually play out. The underlying crisis is real and is clearly going to deepen quite considerably.

So how will they attempt to deal with it? Well, the state will certainly step in. In 2001 the Federal Reserve Bank had a meeting where nationalisation was discussed. It was agreed that this could well be used in the case of crucial industries and so forth. Levels of unemployment seen in 1929 will not be permitted, otherwise capitalism itself would be in real trouble.

We are beginning to see a rise in working class militancy in any case. We can expect that in view of the breakdown in the old ideology and the holding down of people’s standard of living. The working class will have no alternative but to act.

In turn the state will have no alternative but to intervene and at some point there will be an upturn, however, brief - we are not looking at the end of capitalism. To a certain extent the upturn will arise because the state has stepped in and taken over companies as necessary to avoid bankruptcies and a chain reaction which would almost certainly occur otherwise.

Wouldn’t such a policy change require increased taxation?

The government would have higher levels of expenditure, but it does not necessarily follow that it would have to raise taxes - that would depend on what doctrine it follows. One of the features of modern capitalism is the flexibility of its ideology. It is true that at present there is a belief in the need to balance the budget, and therefore nationalisation would logically produce an increase in taxation.

However, the dominant paradigm in economics is already under challenge and a return to Keynesianism is on the cards. I do not see any alternative. In circumstances where the levels of unemployment are quite high, as at present, and would be rising, higher spending would not automatically produce inflation, which has been the concern.

In other words, we can expect a larger level of government debt and budget deficit, as Keynesian solutions are sought. In fact to a limited extent there were signs of this in the recent budget. It is true that the European Union has imposed a limit of 3% of GDP for budget deficits, but this will have to be relaxed. After the 2000 downturn, the German government was warned by the EU commission after it exceeded the 3% limit, but this was simply ignored. The same would happen again - that or the EU itself would agree a relaxation.

The alternative would be enormous levels of unemployment, which would threaten the capitalist system itself.