15.10.2008
Great Fire of London
The financal crisis has blown a gaping big hole in the ideological cult of individualism, argues Steve Freeman
The Great Fire of London started in Pudding Lane in September 1666. It engulfed 13,200 houses, 87 parish churches, St Paul’s cathedral and most of the buildings of the City authorities. In September 1940 London was burning once more, as Hitler’s bombs rained down. During the Blitz over 43,000 civilians were killed and more than a million houses destroyed. Now in 2008 the third ‘great fire’ has engulfed the City.
We heard the screams and shouts of panic from the bankers. But this time it was a virtual fire. No smoke was seen rising from Canary Wharf. No fire engines were spotted racing to the scene. It was more like the impact of the infamous neutron bomb - the fiendish device intended to kill all the people, but leave buildings intact. Now a raging inferno has left buildings standing and people still going about their business as normal. It simply reduced digits by a number of noughts.
It was truly devastating. Some of those who owned everything now own nothing. But for most people life just carried on. Everything was still working. Resources, knowledge and effort continued to pump out wealth as before. But obscene City bonuses will be cut by 60% or £5 billion. Sir Fred Godwin, the boss of Royal Bank of Scotland, lost his £4.2 million a year job. Known as ‘Fred the Shred’ for his reputation for buying banks and then sacking the staff, he still walks away with a pension of £8.4 million.
The Evening Standard reported: “London tycoons lose billions in meltdown” (October 9). Property owner Robert Tchenguiz and Newcastle United owner Mike Ashley have lost £1 billion each. David Ross saw his pile fall by a mere £392 million. Steel boss Lakshhmi Mittal saw his fortune shrink by an estimated £21.4 billion. Over the last few months he has lost £180 million a day - the equivalent of £7 million every hour. Tory Party treasurer Michael Spencer lost a cool £483 million. This may have helped David Cameron and the Tories see the good sense of state support.
Then, somewhat bizarrely, Gordon Brown seemed to declare war on Iceland. Brown told Sky News that Britain had “taken action to seize the assets of Icelandic banks”. The British government used the anti-terrorist laws to grab £4 billion of their bank assets. The meltdown in Iceland sparked a diplomatic dispute. Iceland’s prime minister, Geir Haarde, said this was “not very pleasant”. Brown claimed the behaviour of the Icelandic banks and their government was “totally unacceptable” and “effectively illegal” (The Independent October 9). He continued: “We will take further action against the Icelandic authorities wherever that is necessary to recover the money.” I was half expecting the royal navy would be sent in to seize their fishing boats and sell them on eBay!
Of course, this picture is not entirely true as far as ordinary people are concerned. There are 7.2 million workers in pension schemes in the private sector. These have been promoted by the bosses, whose own pensions are gold-plated, because they are cheaper. But worker pension schemes have now lost £150 billion, according to The London Paper (October 13). About 100,000 people about to retire could find their pensions reduced by 20%. It is also predicted that the City will shed 60,000 jobs by the end of next year.
Neither should we forget that before the present crisis many on low incomes, including pensioners, were being hit hard by the rise in food, energy and petrol prices. Real inflation for low-income families is way above official inflation. Nevertheless, the main point is that an asset price bubble has burst. It is largely a crisis for the rich part of society. The politicians have been rushing hither and thither trying to work out how the rich can best be supported in their hour of need. Most people are not yet feeling the pain. But they are angry that the rich are being supported by the state and the taxpayer.
Social economy
We have heard the description of the US economy divided into two sectors, known in popular culture as Wall Street and Main Street. In Britain it is ‘the City’ and ‘the high street’. The City is a ‘paper’ economy, buying and selling assets, futures and derivatives, transferring ownership and recycling surpluses. In contrast, in the real economy, the productive sector, social wealth is being generated by adding value through producing goods and services.
At the heart of the crisis is the contradiction between social production and the private, or privatised, system of distribution. Capitalism has built an extensive division of labour on which our standard of living depends. In America, for example, 200,000 people provide all the coal, while 60,000 people fly all the aeroplanes. How many lorry drivers and service workers get the food from the farm to the supermarket shelf? Every one of us survives because there is a huge army of people out there doing their stuff - producing our cars, building our houses, making our shirts and dresses, growing our food.
We survive and maintain our living standards because the world army of labour is hundreds of millions strong. Many of us are enrolled as soldiers in its various regiments - as nurses, teachers, factory workers and train drivers, etc. Students are in training before joining up. Pensioners have retired, having done a long stint in the trenches. And of course the field marshals and generals who have screwed up are miles behind the front line, living in guaranteed luxury, sipping the champagne we produce and enjoying the best of everything we make.
Social production becomes truly ‘socialised’ in money and credit. Freed from its earthly form, the wealth produced by the world army of labour is able to move around the globe at the touch of a button. The contradiction between social production and private expropriation reaches its zenith in the financial sector.
On the one hand, we have a vital social service, like health or education, which provides the oil for the smooth working of the productive engine. This life support machine enables the whole economy to keep breathing. Surely we should no more leave this to the tender mercies of private profit than we would the health service?
On the other hand, it is the means of financial speculation, of pyramid selling schemes, massive salaries and bonuses for relatively few people - the ‘fat cats’ stigmatised by the popular press. John Maynard Keynes rightly referred to the stock exchange as a casino. Speculators gamble on the values of companies and other financial assets. Finance has the right to manufacture its own money and sell it to us. Now this has dried up because they do not trust each other. The paper is not worth the paper it is written on.
Finance rules
So-called globalisation has transformed the social economy. Since the 1980s a revolution in finance, communications and transport has changed the world. There has been a massive expansion in global financial markets. Capital, linked through global computer networks to banks and capital markets, has moved more rapidly from country to country. Cheap money and credit has become a growing tidal wave threatening to engulf the world.
Deregulation removed barriers to the free movement of wealth. With the so-called ‘big bang’ in October 1986 the City of London reinvigorated itself as one of the premier centres of world finance alongside New York. Many foreign banks, especially American ones such as Goldman Sachs, arrived in London. The value of traded shares increased by 1,500% - from £161 billion in 1986 to £2,496 billion in 2006. Banking sector assets increased seven times to £5,500 billion (G Gold, P Feldman House of cards London 2007, p37).
In the 1980s the world’s financial assets were worth the equivalent of 108% of the world’s annual output (ie, its gross domestic product). By 2005 the IMF estimates that total global financial assets (banking, stock and bond market capitalisation) was $165 trillion - four times the value of global GDP, which stood at $45 trillion (ibid p35). In the foreign exchange market in 2006 the buying and selling of currencies averaged $2.9 trillion a day. This is about 60 times the annual value of the world’s GDP and about 10 times the turnover in the world’s equity markets.
Back in March, Phillip Bond wrote in The Independent: “Before 1973 the ratio of investment to speculative capital was 9:1; since 1973, these proportions have reversed. So huge have the numbers in leveraged and derivative instruments become that their value now far exceeds the total economic value of the planet” (March 23). Hence by 2003 the value of all derivative trading was $85 trillion. But the world economy was said to be worth only $49 trillion.
These kinds of ratios show the increasing grip of financial speculation. In more recent estimates the value of all traded paper instruments exceeds the underlying value of the assets on which they are written by three to one. But the underlying assets have themselves been losing value. For example, in the US, house prices had fallen by 25% over two years. This meant that “the overall ratio of global paper value to its leveraged base may indeed double” (ibid).
Marx foresaw all this long ago. He wrote prophetically about the “financial aristocracy”, describing them as a “new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, stock insurance and stock speculation” (K Marx Capital Vol 3, chapter 27).
Marx pointed to the contradiction at the heart of the credit system. It “accelerates the material development of the productive forces and the establishment of the world market … at the same time credit accelerates the violent eruptions of the contradiction - crises - and thereby the elements of disintegration of the old mode of production” (ibid).
The expansion of cheap credit and financial speculation has been significantly aided by the huge concentration of wealth since the 1970s. Smaller and smaller groups have gained more control over larger amounts of assets. Bond shows that “the richest 10% of the UK population increased their share of the nation’s marketable wealth (excluding housing) from 57% in 1976 to 71% in 2003” (The Independent March 23).
Socialism for the rich
Private expropriation is ‘socialism for the rich’. It is called the law of the market, but it is nothing of the sort. Relatively few people are living in conditions of superabundance. But this ‘socialism’ is nothing to do with individualism. The wealth generated by social production is controlled by the few and shared amongst them on condition they all stick together and do not tell anybody the real secrets of their success.
‘Socialism for the rich’ depends on society being ignorant enough to let them get away with daylight robbery and disorganised enough not to be able to do anything about it. Those drunk on the euphoria of greed are, of course, prone to panic. The situation has turned into one of fear. This is now the herd instinct of the market.
Individualism is not for the rich. They have always known the importance of the collective, the value of class solidarity, as did the early working class cooperative and trade union movement. Individualism is preached as a virtue to the workers and the poor.
The crash of ideology
Workers are cooperating with others not only in our workplaces, but across the world. We all depend on this worldwide cooperative effort. This is not how it looks, though. In the ideology of free-market capitalism we are all on our own, surviving or failing by our own efforts. On this the capitalist press and politicians have been united. You get what you deserve and you deserve what you get.
Workers do not see themselves as soldiers in the world army of labour. We have been sold the ideology of individualism. I am seeking my own job, working for myself, succeeding by my own efforts. My survival is down to me and me alone. We are all prisoners of this idea. With such nonsense in our heads we are all living in cloud cuckoo land.
Occasionally we get a glimpse of the truth. Normally it does not dawn on us how much we depend on others and their efforts. Of course, when one of the regiments of labour mutinies and refuses to work we get a timely reminder. A strike brings home to all of us how we depend on tube drivers, nurses, telecommunication workers, etc.
A financial crash has a similar, more general effect. It is as if money has gone on strike. It simply refuses to budge. We are all connected and depend on money. If something goes wrong with this magical and mysterious commodity, we are brought face to face with our own dependence on others. The chickens come home to roost with a vengeance. This is on the horizon for all.
We wake up from our ideological paralysis when we hear politicians like George Bush telling us we are, after all, in the same boat. The hole in the bottom of the boat will affect everybody. We are all going down together. According to the false god of the market, if a bank goes bankrupt, then tough on them. It serves them right. Their punishment is liquidation. But in the highly interdependent social economy such collapse spreads across the globe like a contagion.
The present crisis has blown a gaping big hole in the ideology of individualism. Bush had to decide whether to save the rich or save free market ideology. It was really no contest. Anything and everything necessary must be done to save their system. Real dollar bills and pound notes are worth more than false ideology. ‘Socialism for the rich’ is shown to be a giant fraud.
Stalin built ‘palaces of culture’ in the capitals of eastern Europe as a gift from the Russian people. Higher than all the other buildings, they were seen by the locals as a reminder of who ruled the roost. In Canary Wharf our finance capitalists have built their own towers to the sky. They are modern equivalents of great cathedrals, but dedicated to the worship of money. Now these towers of stone and steel have splintered as if made of matchwood. The question for socialists is, what happens next and what should we do about it? I will attempt to answer these questions in a future article.
