The economic crisis and the crisis in economics

Further to the publication of the Introduction to debate between AG and MB on The tendency of the rate of profit to fall and post-war capitalism and A reply to AG by Mick Brooks, we are publishing this piece by Mick Brooks which puts that debate into the context of the decline of British capitalism after the Second World War. It highlights the crisis of bourgeois economic theory and also the limitations in the method of AG.

 

Unexpected by everyone, the era after the Second World War proved to be the most successful in the history of world capitalism – a belated Golden Age in the system's development.

Angus Maddison points out in his book 'Phases of capitalist development' (Oxford, 1982) that between 500 and 1500 AD the world's income grew by 0.1% a year. Over that millennium 'world' Gross Domestic Production went up by 2 ½ - 3 times over. The world economy grew just as fast in only twenty years from 1950 to1970 – and from a higher base.

The protracted postwar boom had incalculable effects on politics as well as economic developments. In a context of inexorably rising living standards, virtually full employment was guaranteed, at least in advanced capitalist countries. Working class living standards went up year on year. Reforms were affordable, and were conceded by the boss class so as not to derail what was a gravy train for them. For the first time reformists could claim they were delivering the goods – a welfare state, adequate health care and basic education for all. The achievements of Stalinism during and after the War also gave Stalinists a huge accession of self-confidence in the working class movement.

Where did this leave the forces of genuine Marxism? Naturally they remained in a handful, apparently marginalized by events, their theories seeming outdated. Who needed revolutionary socialism? They reconciled themselves to, and explained the processes that were taking place. They spent most of their activity defending basic ideas in preparation for better times.

As for the official economists, they had no useful role to play. By the end of the War, the major part of the economic establishment had been won over to the ideas of Keynes. Contrary to the myth that has grown up since, the boom was not based on conscious Keynesian ideas of stimulating economic activity by means of state spending, including running a deficit if necessary. So the economists were tolerated as apologists, but played no role in determining policy for the economy. In the case of Britain, the state's economic aspirations mainly lay in the direction of sloughing off the huge debts they had incurred during the War. R.C.O. Matthews commented in the 'Economic Journal' in 1968, "Throughout the post-war period the government, so far from injecting demand into the system, has persistently had a large surplus."

This economic boom reversed itself in the 1970s. Economic crisis, already impending in the late 1960s, broke out in the most serious downturns since the War in 1973-74 and 1979. Though the trigger for both downturns was an interruption in the world supply of oil, they had been long in the making. They showed crisis was inherent in the system. Permanent full employment was no longer a fact of life. But the demand for more and more labour to make money from had provided the basis for a favourable bargaining context to the labour movement in their struggles with capital. Living standards had gone up without serious struggle. All this was gone. The bosses could now use the whip of mass unemployment against the employed workers. They engaged in aggressive conflicts to restore their rate of profit. But the movement had built up layers of strength over the boom, and was not prepared to be walked all over.

Strike figures climbed. Conflict now had a harder edge than the mainly unofficial, short-lived 'wildcat' strikes that were characteristic of the great postwar boom. Workers looked to their official organizations for answers.

The average number of strike days lost over the three decades that defined the new epoch were as follows:

· 1960-69 3,555,000 (annualized average in all cases)

· 1970-79 12,870,000

· 1980-89 7,213,000 (this figure is dominated by the miners' strike of 1984-85. (27 million days were lost in 1984)

During the 1970s, Britain dipped in and out of a pre-Revolutionary situation, with virtual general strikes on more than one occasion. At the end of the decade trade union membership peaked at 13 million. By way of comparison, membership has painfully been pushed up to 7 million today after nearly two decades of setbacks and stagnation on the industrial arena.

What about the economists? For the most part, they were irrelevant – incapable of analyzing the crisis or pointing a way out. It is true that there had been some recognition of failure. From the early 1960s there had been a discussion on the relative decline of British capitalism from its early pre-eminence. Later this debate extended into a recognition of de-industrialisation that was taking place in Britain. The Marxists had been aware of these developments for decades (an early text is Trotsky's 'Where is Britain going?' 1925). AG quotes from economic historians who had been mining the same theme. (See The tendency of the rate of profit to fall and post-war capitalism A critique by AG). This was one of the early points of agreement between AG and the Marxists.

Much more important was agreement on what was happening before their eyes. From first principles (Marx's tendency for the rate of profit to fall) the Marxists had anticipated a crisis of profitability. AG provided the documentation.

In their remarkable book 'British capitalism, workers and the profit squeeze' (AG and Bob Sutcliffe, Penguin 1972) AG announced the crisis and its cause to the official economists, who seem to have been sleeping on the job. The preface declared, "Our argument in this book is that British capitalism has suffered such a dramatic decline in profitability that it is now literally fighting for survival. This crisis has developed because mounting demands from the working class for a faster growth in living standards has coincided with growing competition between capitalist countries."

The British crisis was set in the context of a turbulent new period in the world economy. And it was a crisis of profitability, no doubt about it.

So AG saw phenomena such as class struggle, the stuff of Marxist theory, as central in explaining the conjuncture. It was greatly to his credit that he offered his services to the labour movement. But AG had not come to this understanding from a background in classical Marxism. The 'facts' as he saw them led him to the theory. This is the method of empiricism.

"The seventeenth century economists, for example, always took as their starting point the living organism, the population, the state, several states, etc., but analysis led them always in the end to the discovery of a few abstract, general relations, such as the division of labour, money and value. When these separate factors were more or less clearly deduced and established, economic systems were evolved which from simple concepts, such as labour, division of labour, demand, exchange value advanced to categories like state, international exchange and world market. The latter is obviously the correct scientific method. The concrete concept is concrete because it is a synthesis of many definitions, thus representing the unity of diverse aspects… The first procedure accentuates meaningful images to abstract definitions. The second leads from abstract definitions by way of reasoning to the reproduction of the concrete situation." (Marx 'Introduction to Contribution to Critique of Political Economy' p.206. This text also appears as part of 'Grundrisse')

We can see now that AG adhered to the first method criticized by Marx, the grasping of important surface phenomena of the capitalist economy to derive a theoretical explanation. The Marxist analysis of capitalism was theory-driven from the outset. They tried to derive the perceived profits crisis from the mechanisms explained by Marx.

The explanation offered by AG seemed very relevant to the capitalist class. Wages were seen as 'the problem'. The 1964-70 Labour government tried voluntary 'incomes policy' (actually wage restraint) at first. Later they moved to a full scale attempt to legally limit the power of trade unions. This was called 'In place of strife', but Wilson failed to implement it before losing the 1970 election to the Tories. The Tories in 1970-74 alternated between confrontation and further attempts to draw the trade union tops into policing their members into further wage restraint. The 1974-79 Labour government went through nearly four years of incomes policy (actually remarkably successful in cutting working class standards of living for a time) before the policy collapsed completely in 1978-79, and Labour lost the election to Margaret Thatcher and the Tories.

We have had occasion to point out elsewhere that policies inevitably pursued by the boss class in the teeth of crisis are not necessarily solutions to the problems of capitalism. They are rather attempts to dump the burden of slump onto the working class. Driving down wages on its own would not have paved the way for profitable accumulation. Both sides to the debate understood this. The economic policy of monetarism, which we shall discuss later, is another example of a class struggle policy rather than a rational solution to the problems of capitalism.

But certainly AG's analysis chimed in well with the perceptions of the bourgeoisie. He had come from outside the inner circles of economic orthodoxy. And the economic crisis provoked a crisis in economic theory. For the first time in the 1970s the right wing ascendancy in the Labour Party came under serious challenge. Revolutionary Marxism was making headway. But more important was the Alternative Economic Strategy (AES) outlined in books such as Stuart Holland's 'Strategy for socialism' and 'Socialist challenge'. This provided a coherent programme of left reformism. Since these ideas have almost completely disappeared, we shall not deal with them here. But this was typical of the starburst of questioning that characterized the decade.

On the other side, the ruling class was rearming intellectually. Monetarism was one of their new weapons. The conversion is usually dated to the election of Thatcher in 1979, but actually the process was more drawn out and convoluted. Prime Minister Jim Callaghan had pronounced the death knell of the former Keynesian orthodoxy at the Labour Party conference in 1976. "We used to think you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists. It only worked on each occasion since the War by injecting a bigger dose of inflation into the economy."

We have had occasion to point out earlier that during the great postwar boom it had been quite unnecessary to pump government money into the economy to stimulate demand. To that extent, Keynesianism had never been put into practice and found wanting. But it is true that some of the assumptions from the theory had been falsified. For a Keynesian economist the economy can run too slow, leading to unemployment, or too fast, causing inflation. But Britain in 1976, together with the other capitalist economies, was suffering mass unemployment and inflation of up to 20% (stagflation). Callaghan was already stating the central proposition of monetarism – that the sole effect of increasing the money supply in the long term is to cause inflation without affecting the level of economic activity. This appeared to offer some sort of explanation for the facts. This theory also conveniently excused the authorities from even trying to do something about unemployment. A Treasury Memorandum of 1980 (under the Tories) reaffirmed that "it has been abundantly clear in the period that governments themselves cannot ensure high employment." And two economists, Matthews and Sargent, commenting on behalf of the CLARE group in 1983 commented "it would certainly be hard to guess from the statistics alone whether there had been a change of government, and if so when."

The Keynesians were not actually defeated in intellectual combat by the monetarist economists. They were just ignored, swept aside. A rearguard action was mounted, sometimes in the most surprising places. Lord Kaldor's speeches in the House of Lords were published in a book 'The scourge of monetarism'. To the argument that an increase in the money supply always led to inflation he mentioned that the government increases the money supply in November in preparation for the Christmas rush. Does this increase in the money supply cause Christmas, he mused? The correct answer, of course, is that the authorities are accommodating the money supply to what they know will be an increase in the demand for money. But if the supply of money is demand determined, then monetarism is nonsense. And indeed not a single member of the Monetary Policy Committee, the body charged with conducting monetary policy by the Bank of England today, believes it is useful or even possible to target the money supply. Instead they debate the appropriate rate of interest for the economy, an instrument of control that operates upon the demand for money. You are more likely to borrow if interest rates are low.

But if monetarism was a 'moment of madness' for the economics profession, that madness had a purpose. It legitimized a new era of mass unemployment with the excuse that 'there was no alternative'. And it justified attacks on working class living standards as part of the 'fight against inflation.'

There was worse to come. A new layer of blue meanies poured out of the economics faculties. They called themselves supply side economists because, they said, both Keynesianism and monetarism addressed the demand side of the economy. They believed a permanently higher level of employment could be achieved by 'labour market reforms' to bring about more flexibility. This of course meant putting workers under the cosh. First they proposed anti-union legislation. As we have seen with the postal workers' dispute anti-union laws can hamstring trade unions, but cannot destroy the resolve of workers to fight.

The supply siders opposed a minimum wage as it would price workers out of jobs. Michael Howard, the new Tory leader, denounced Labour's modest proposal for a minimum wage as a 'proposition of staggering economic illiteracy'. He predicted that two million jobs would go. He was only two million out!

They demanded reductions in social security benefits. In their view much unemployment was 'voluntary'. Workers preferred to scrounge off the dole rather than finding a job. They were unable to explain why millions of workers all over the capitalist system all took simultaneous decisions to scrounge. They ignored the fact that these workers had lost jobs in workplaces that were closed because of recession. In government Thatcher slashed the 'replacement ratio' – the amount you would get on the dole compared with at work. It didn't hit unemployment – but it did hurt the unemployed.

Supply side economists were hostile to 'red tape' that curbed the entrepreneurial instincts of the bosses. This included such 'bureaucratic' measures as basic health and safety protection.

As the reader can see, supply side economics is just right wing prejudice dressed up as economic theory. The reader will also notice that New Labour (apart from its commitment to a minimum wage) continues to implement a Thatcherite agenda. Blair boasts to foreign leaders that "British law (is) the most restrictive on trade unions in the western world." Gordon Brown's 'new deal' is basically about driving the unemployed back to work by threatening to cut off their benefits. And the refusal to implement the European Union directive on a maximum 48 hour week is literally a killer policy.

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