Was our analysis of the world economy right?

Two years ago, at the time of the collapse of the Southeast Asian economies, we published a document called "The first tremors of the coming slump". Jonathan Clyne, editor of the Swedish Marxist magazine Socialisten looks at what we said at the time and concludes that "our basic analysis of the epoch is still correct". Translated from Socialisten 43, September 1999.

Just over two years ago the Tai baht collapsed. This set off a chain reaction which rapidly brought the whole of the Southeast Asian economy to its knees. Stock markets throughout the world plunged. In December 1997 we published a special supplement to Socialisten entitled: "The first tremors". There we explained that events in Southeast Asia and on the stock market were no accident, but reflected deeper problems within the capitalist system itself. The post-war boom had exhausted itself by the mid-seventies. Since then capitalism has moved into an epoch of increasingly sharp downturns, interrupted by only weak upturns.

We predicted that "We are heading for a new slump worldwide. The only questions are when? and how deep? To the first question it is impossible to give a definite answer, except that to say that, after seven years of expansion in the USA, it is probable that the present boom will not continue for more than one or two years, and possibly will end far sooner." Furthermore we wrote that the coming recession would probably would be "a deep slump, probably the deepest since 1945". Barely a year later our perspectives seemed to be born. Russia followed Southeast Asia into the deep blue sea. Brazil was on its way, Britain was in decline and once again the stock markets of the world fell dramatically. In 1998 the sum total of GNP growth of the world economy was down to 1.9%. This is one of the lowest figures since the thirties, even if the advanced countries weren't affected particularly strongly.

However, since then things seemed to have turned around. In the USA the economy chugs along at a fairly high speed. In Sweden and some other industrialised countries the economy is growing rapidly. Southeast Asia seems to be recuperating. Even Russia has stopped falling. Was that it? Have we passed through the lowest point of the downturn? Have we misjudged the character of the epoch? Has IT really laid the basis for a longer period of economic growth, as Alan Greenspan and chorus of economists claim, and the IT-countries only suffer mild recessions?

A few years ago Robert Solow, Nobel laureate in economics, pointed out that "you can see the computer age almost everywhere these days, except in productivity statistics." And that is still the case. This is decisive. If computerisation, or anything else for that matter, does not decisively raise productivity none of capitalism's basic problems can be solved. Higher productivity (output per worker per hour) means that there is more to go round for everybody. That's how it was during the post-war boom. Between 1947 and 1973 productivity increased with an average of 3% annually in the OECD countries. Since then productivity has increased at a much lower rate. From 1974 to 1991 productivity grew with a mere 1%! Since then it has picked up slightly to 1.3% annually. Most likely though this is the result of a remarkable increase in the pace and intensity of work, rather than the application of new technology. At a Scania factory, a manager was praised for improving productivity. However, as a worker there told us, the truth of the matter was that all he had done was to turn up the pace of the conveyor belt! Stress and burnouts are becoming one of the most common form of illnesses, not to mention that work-related accidents have also risen during the nineties.

Really it is not so surprising that computerisation has not had such dramatic effects. Industry was computerised during the seventies, offices during the eighties and during the nineties computerisation extended into the homes. Of course being connected to internet in the home can rationalise distribution, but even a revolution in the distribution of books and CDs (products with a standard quality and where one often knows exactly what one wants to buy) cannot effect the productivity in industry and services. So even after years of living in an "information-based society" most of the visions of a new society remain just that - visions.

Productivity

If one digs even deeper into the productivity statistics one sees an even more negative tendency. The American economist Robert Gordon has broken down the American figures to see exactly where improvements have been. He found that improvements in productivity are concentrated to a tiny sector of the economy: computer-manufacturing. There productivity has increased with an incredible 42% annually since the fourth quarter 1995 and the first quarter 1999. Computer-manufacturing only accounts for 1.2% of US manufacturing. Despite that it lifted the productivity for the entire economy. What we see is something completely traditional. Large-scale industry leads to an increased division of labour, specialisation, scale-economies, investment in expensive machinery and hence more effective production. As PCs (note personal computers as opposed to the previous industrial computers) became a mass-product, production simply moved out of garages and into billion dollar factories, which can spit out cheap computers at faster rate. So all the hohaa about information technology transforming the economy boils down to that. Meanwhile the rest of the American economy is in a dire strait. Robert Gordon says the following: "the productivity performance in the manufacturing sector of the United States economy since 1995 has been abysmal rather than admirable. Not only has productivity growth in non-durable manufacturing decelerated in 1995-1999 compared to 1972-95, but productivity growth in non-durable manufacturing, stripped of computers has decelerated even more."

Under capitalism there are always technical innovations which serve to improve the economy and develop new industries, even in periods of crisis. The inter-war years saw the development of radio (the IT of the time), mass production of cars and the application of the electric motor to industry. None of this prevented the depression of the thirties.

In fact, if one looks at a number of other factors things look a lot more like twenties than the sixties. Or even worse than the twenties. Take speculation as the first example. The American stock market is valued at 150% of GNP, which is almost double the previous record set in 1929 and far beyond the average of about 50% of GNP. In 1929 stocks were selling at 50 times profits, now they are selling at 50 times sales. The value of shares loses more and more contact with the real value of companies, especially in the IT sector. It doesn't even seem to matter that a number of IT companies have made losses for years, as long as the hope of future profits remains or at least the belief that the price of their shares will continue to rise.

The last year's stock market crashes seem only to have wetted the speculators appetites. They point to the fact that there has been a recovery. Now they claim that crashes donut matter: "Stocks always recover, you can never lose as long as you have strong nerves". And the banks chip when one wants to open a normal bank account telling you that it is a bad idea, as "investment in the stock market is always a better thing in the long term". Which has never been true in the past. It was this mentality which made the crash which began in 1929, when the Times Industrial Index stood at 542, and ended in 1932, when the index dropped to 58, inevitable. The immense increase in share prices this year has laid the basis for an even more substantial crash.

Speculation

Speculation works in about the same manner as when water seeped into The Estonia ferry's car deck. The ships movements were exaggerated as more and more water sloshed from one side to another, until the whole thing tipped over and sunk. Underwriting dramatic developments on the stock exchange lies the expansion of credit. While in Sweden credit so far has not passed the record levels that were achieved in 1990, in the USA even 1929 levels have been surpassed.

Now something like 40% of the average American household financial assets (that's savings outside the house they own) is invested in Wall Street. 30 million people own shares as opposed to 3 million. Obviously the consequences of a crash on Wall St. are going to be big.

Speculation is also worse than 1929 in another sense. Before 1929 most currencies were on the gold standard. Up until Nixon broke the link in 73 we had a similar situation. The dollar was world currency. All currency had a fixed exchange rate against it and the dollar was directly linked to gold. Once the anchor of the international money system disappeared, everything started to float unpredictably. Capitalists had to spend time and money to keep an eye on exchange rates and currency speculation was born. This has now grown into grotesque proportions, pumping more water onto capitalism's car deck. As we witnessed recently when Southeast Asia collapsed.

The effects of speculation will be multiplied by a deepening of trade conflicts in the coming recession. The world has been divided up into three main blocks, which already now are at loggerheads with each other and have been for years. Previously the conflict was mainly one of words, threats, hidden subsidies and the introduction of non-tariff barriers to trade. This year, almost unnoticed, a qualitative change occurred. Because of the EU's insistence of not allowing American hormone treated beef to be imported, the US has slapped tariffs on a number of products including Swedish ginger biscuits and Husquarna sewing machines. Admittedly the tariffs only effect a small proportion of trade, but in the sidelines remain unresolved conflicts about steel, mobile telephones and of course bananas among other things. Even the Swedish government subsidy plan to the Swedish film industry, hardly a competitor to Hollywood, has been delayed because of the interference of the American government. And all this at the peak of a boom!

The EU countries fight between themselves about everything. Germany with France. The poor EU countries with the rich, and Britain with everybody. But one thing they can all agree on: Keep the USA and Japan out! This slogan is more and more developing into the glue which keeps the EU together. That's why the EU doesn't back down despite the fact that the WTO, whose rules they have pledged to respect, has decided against them. The ground has been prepared for a thirties style downward spiral in world trade. Tariffs and competitive devaluation's meant that 2/3 of world trade disappeared between 1929 and 1933. This was the main reason why the depression lasted so long and was so deep.

Globalisation

Globalisation does not counteract this development, on the contrary it exasperates it. Lets not forget that foreign trade and direct investments, as a proportion of the total economy, was more or less as large for the advanced economies in 1914 as today. It was this that led to the First World War. The global struggle over markets was expressed through military means. This has already happened to a certain extent. Wars are being fought in Africa - in Sudan, Zaire, Congo - with the USA and France on opposite sides. The division of Yugoslavia and the following wars was the first result of German imperialism having different interests than the Americans in the area. Imperialist proxy wars will tend to increase during an economic downturn. However, a direct military confrontation is not on the cards today. Mutual Assured Destruction (MAD) and the strength of the working class will make the capitalists hesitate before they unleash another world war. However, trade wars will all the more intense because of that in a recession.

The whole world economy is basically unsound and unstable. Bourgeois economists try to reassure us. When they don't refer to IT or globalisation it is low inflation, low interest rates, the rapid recovery since the stock market crash, the long boom in the USA and the merger and buy-out mania. This is supposed to be basis for the 'new economy' or at least an economy which is relatively free of crisis. But all this existed in the twenties. So it is cold comfort indeed which they offer.

The mid-seventies was the decisive turning point for the world economy. During the post-war upswing most advanced countries experienced rabid, stable and broad-based booms, interrupted only by short periods in which growth slowed. Since then the economy has developed on a considerably narrower and more unstable path, interrupted by slumps from which one barely recovered. For most workers, even in the USA, the last 20-25 years has not meant anything other than cuts in the public sector, unemployment, lower real wages and last, but not least, greater exploitation. Stress at work is probably more intense now than ever.

Our basic analysis of the epoch is still correct. The downturn and stock market crash last year and in the Autumn of 1997 was not the recession. The system is now so unstable that it can be thoroughly shaken by events in one small part of the economy, in this case the problems in Southeast Asia and subsequently Russia, even during a general boom in the advanced economies. A deep recession is on its way. Why it has been delayed will be discussed in an article in the next issue of Socialisten.