These notes start from Alan Thornett’s characterisation of the crisis in his document, Capitalism’s Crisis and Our Response. What this note hopes to do is to go into a bit more detail about the way the crisis is likely to develop and to look at some of the possible strategies that capital might adopt to try to resolve the crisis. This can then lead into our later discussions about the position of the working class and a socialist response.
Alan makes three very important points in his section on the character of the crisis. Firstly, that this is not simply, or even mainly, a banking crisis. Secondly, that the financial aspects of the crisis interact both with the changing nature of the international economy (the level of globalisation and the rise of countries such as China and India) and with the ecological crisis (both the end of the era of cheap commodities and the onset of global warming) with the ecological crisis being a more serious development in the medium and long term than the financial turmoil. Thirdly, that because of the multiple aspects of the crisis it cannot simply be seen as a cyclical phenomenon but has a deeper, more structural character.
These points provide a good starting point for assessing the nature of what is happening. In my view, as I argued in the discussion at the ISG conference a year ago, what we are now seeing is the breakdown of the set of institutional arrangements which have co-ordinated global capitalism since the mid-1980s and which have provided the economic basis for neo-liberalism. Key to these arrangements has been the combination of debt-fuelled consumption, large international capital flows backed up by exchange rate stability and the availability of cheap commodities (in particular food and energy) allowing for low inflation and interest rates in the industrialised world. All of this has now been put in question. In addition the underlying threat of global warming acts as a qualitatively more serious backdrop to this breakdown.
Marxist Theories of Crisis and Current Developments
There are a variety of Marxist theories of crisis and a lively debate is currently taking place amongst Marxist economists about their application to what is currently taking place. But all the various approaches see crises as resulting from an over-accumulation of capital.
For Marx crises are centrally about dealing with such an over-accumulation through the destruction (devalorisation) of a portion of existing capital. Only through such devalorisation, generally accompanied by a capitalist offensive against the position of the working class, can the conditions for future profitable accumulation be created. Crises eliminate the weakest or least profitable elements of capital in order to raise the profitability of what remains. As a result, crises for Marx are not lengthy continuing periods of stagnation as in the Keynesian tradition; they have to be resolved either on terms favourable to capital or to labour in order to allow renewed growth which will in turn carry the seeds of future crises.
This view has been complicated by the way in which through the 20th century and into this century both capital and the state have developed means of temporarily staving off cyclical crises and prolonging periods of expansion (the expansion of debt is a central example of this). The result of this has been that when such methods break down and crises do occur, as in the 1930s and the 1970s, they are much more prolonged and serious in their effects than were the cyclical crises of the 19th century. As Alan argues, this is what is happening today. However, while such crises are deeper than cyclical crises they are still fundamentally characterised by the need for devalorisation of capital. This is turn raises the question both of who will bear the cost of such devalorisation and of how it is to be carried out.
There is no doubt that the current crisis involves a massive destruction of capital values. In a recent article in the Financial Times of March 11, Martin Wolf quotes a study for the Asian Development Bank which estimates the losses of wealth caused by the current crisis as close to a year’s global output. Clearly, only a small part of this has directly been caused by falling housing prices in the USA and elsewhere. The vast majority consists of capital which has been invested in the expectation of being able to extract profits from production which now appears unviable (for example because such investment was based on projections of demand which depended on the availability of borrowed funds which are now no longer on offer). This capital consists both of actual productive capital and also of `fictitious’ capital – shares and other assets which have been bought on the basis of expected future profits. This vast overhang of unprofitable capital represents the central barrier to renewed accumulation and growth.
What has become increasingly notable here (and which I for one did not fully appreciate a year ago) is that much, perhaps most, of this capital is not located in the USA or UK or any of the countries which have relied on debt to boost consumption. It is located in countries like China, Japan and Germany who have expected to be able to continue exporting to the US and similar economies indefinitely. The investment which has created such capital, reliant as it was on debt-fuelled consumption elsewhere, was in an important sense just as speculative as the lending which took place in the housing market in the USA, UK, Spain, Ireland etc.
The Strategies of Capital
The fundamental problem faced by the capitalist class internationally is to find a way of eliminating the unprofitable accumulated capital which will shift the costs of doing this from capital on to labour. So far they have signally failed either to agree on a common strategy for doing this or to put individual strategies into practice with any effectiveness. The opinion and analysis pieces in newspapers and magazines like The Economist and the Financial Times over the last six months have exhibited a tone of increasing frustration, bordering on desperation, as governments and central banks have failed adequately to address the crisis. The following approaches are the main ones that have been discussed (the order of presentation is not significant):
- • Inflation. One possible resolution of the crisis is through inflation. Inflation would achieve the devalorisation of capital by eroding the value of all capital equally through a generalised loss of purchasing power. It could also shift the burden of the crisis onto workers through cuts in real wages (it is worth noting here that Ernest Mandel saw `creeping inflation’ as one of the main ways in which capital maintained profitability through the long boom of the 1950s and 1960s). But it has two central disadvantages. It favours debtors as opposed to creditors (by lowering the real burden of debts) and so is bitterly opposed by creditors. It is also ideologically very difficult to implement as a resolution of the crisis given the role of anti-inflationary policies in justifying neo-liberalism over the last two decades.
- • The free market solution. The free-market right in the USA has favoured simply allowing debtors and banks which have lent to them to go bankrupt. This was the basis (as noted by Alan) for the decision to let Lehman Brothers fail. This would achieve devalorisation through the bankruptcy of a large section of capital which would simply be removed from the scene. This approach has now been abandoned because it is too risky – the interlocking nature of the system means that such an approach could have catastrophic consequences. It also does not provide a clear way to shift the burden of the crisis onto workers – capital would bear many of the consequences.
- • Bail-Outs. One dominant part of the strategy of capital has been to try to bail-out the banks through a variety of means – the government taking capital stakes in them, guaranteeing loans or purchasing `toxic’ assets. This shifts the burden of the crisis from capital to labour (assuming that the taxes which fund this activity mainly fall on workers). But it does not achieve the objective of devalorising capital and allowing a resumption of profitable accumulation. This is the reason for the increasing support in the financial press for the nationalisation of banks and the creation of a `bad bank’ which would contain the bad debts within the financial system. This would effectively write-off those debts, at the taxpayers’ expense, and eliminate some of the capital overhang. But it would not solve the problem of the capital which has been accumulated outside the financial system in the expectation of debt-based consumption.
- • Stimulus Packages. Fiscal policy (government spending) and monetary policy (low interest rates and now an expansion of the money supply – so-called `quantitative easing’) have been a central part of the response to the crisis. Again, government budget deficits can shift the burden of the crisis on to workers (to the extent that the future taxes which will pay for the deficits mainly fall on labour rather than capital). But this does nothing to solve the issue of devalorisation of capital. This is the central problem with arguments such as those put forward by Martin Wolf in the Financial Times which focus on greatly increasing such packages. Such Keynesian approaches treat the crisis as a problem of exchange, expressed as a lack of demand for goods, and neglect the underlying roots of this in production – rooted in low profitability. Much the same applies to monetary policy `solutions’ to the crisis, except that here the costs of the crisis are shifted onto workers not through taxation but through low returns on savings, especially pensions contributions.
- • Rebalancing the Global Economy. This approach attempts to shift the economies in surplus countries such as China, Japan and Germany towards a greater reliance on domestic consumption. The aim is to avoid the devalorisation of capital in those countries by providing an alternative outlet for the goods and services which would previously have been exported to the USA, UK and others. In addition, expanded consumption in such countries could provide markets for American and British exports to replace debt-based spending. Such an approach could resolve the crisis if (as is argued for example by the French Marxist Gerard Dumenil) the crisis is mainly one of disproportionality. It would involve serious costs for American and British workers as the dollar and sterling would have to fall in value, but in theory workers in surplus countries would gain as their currencies strengthened. But it faces two big difficulties. Firstly, it is by no means clear that disproportionality is at the root of the crisis. If global imbalances are not the cause of the crisis but a symptom of the over-accumulation of capital and low profitability then rebalancing demand will not solve the problem. This will be the case if the rises in purchasing power for workers in surplus countries necessary to support increased consumption make production in those countries unviable. This will then simply pose the issue of devalorisation in another form. Secondly, even if rebalancing could solve the problem of the crisis in theory such rebalancing is immensely hard to achieve in practice. We do not live in a global planned economy where imbalances in demand between countries can simply be rectified in a smooth and unproblematic way – in the anarchic world of capitalist competition such changes are very difficult to bring about.
Prospects for the Future
The most likely development over the next six months to a year is that the money that has been pumped into both the OECD economies and into China through government spending, tax cuts, low interest rates and expansion of the money supply will have some effect. But any upturn in the global economy as a result of this will rapidly run into a number of fundamental barriers
• As Alan points out the pressures for rising commodity prices (both fuel and food) remain. Two recent reports (one by the Royal Institute of International Affairs and one by the US Department of Agriculture) have confirmed this view. Currently, the decreases in prices that have taken place are simply due to the sharpness of the recession. Any rise in economic activity is likely to increase inflation and lower profitability as input prices rise.
• Global imbalances remain (again as highlighted by Alan). In the medium-run a continuation of the massive capital flows into the USA and UK from China, Japan and elsewhere which we have seen in the last two decades will be bound to lead to a resumption of risky lending by the banks (the money will not just remain under peoples’ beds!). But the imbalances will only be halted by a decline in the value of the dollar and at present the reverse is happening as investors panic about other currencies.
• The main immediate reason for the rise in debt in the UK, USA and similar economies has not gone away – namely income inequality. There is simply no longer a stable consumption base in these countries without a substantial amount of debt because of the low level of incomes for a large section of the working class.
• Most importantly, as argued above, the stimulus packages have not solved the problem of low profitability and the over-accumulation of capital
In the medium-term of course, again as highlighted by Alan’s document, all of this will be shaped and influenced by the growing vulnerability of the planet as a result of global warming.
The situation now appears in many ways to be analogous to that in around 1976. The first response of capital to the crisis of 1974-75 was to attempt to restore the economic conditions which underlay the long boom of 1948-73. This was unsuccessful because the nature of the crisis was such as to make such conditions no longer attainable. The period from 1976-79 was one of continuing instability and struggle over the resolution of the crisis that had opened up a few years before. This led to a further crisis from 1979-82 which laid the foundations for the neo-liberalism which followed (though of course this was not fully established until some years later in the mid-1980s).
In a similar way, the initial response of Gordon Brown, Angela Merkel and others to the crisis which opened in 2007 has been to try to restore the neo-liberal framework of 2006. This appears no more likely to be successful than was the attempt in the mid-1970s to preserve the long boom. The likelihood then is for a period of turmoil and instability for some years followed by an even more severe crisis. It will be the terms on which that crisis is resolved and the extent to which they favour capital or labour that will determine whether what is currently happening will mean the end of neo-liberalism or not. In turn, the nature of the resolution of the crisis will depend centrally on the response of the working class and the activity of socialists.
‘The Nature of the Crisis’ was written by Andy Kilmister as the basis of his presentation to the revolutionary regroupment national aggregate in March 2009.