The perfect circle of success

Capitalism in the advanced capitalist countries is becoming ever more based on finances and services. The idea is that the actual production of real goods can be done in less developed countries where labour costs are much cheaper. For this to work, the consumer boom in the West must be maintained permanently, otherwise who will buy the goods? Can this be maintained in the long run?

It works like this. The economies of the advanced world, as represented by what is called the G7 countries (the US, Japan, Germany, the UK, France, Italy and Canada – in that order), no longer need to make things. Increasingly, they just need to invent, design and market things. They can leave the making of things to the less developed world – in particular, China and other parts of Asia, Mexico and Brazil.

Also the G7 countries (and other smaller advanced economies like Switzerland) can concentrate on financing the investment in the making of things in the less developed world. The banks and financial institutions based in New York, London and Geneva, along with Paris and Frankfurt can suck up the huge savings generated in China, Japan, Korea and the oil-rich economies of the Middle East and Russia. These savings, in the hands of the global financial sector, are used to buy the bonds of the G7 governments, the bonds of the big corporations and mortgage banks and the shares of the major G7 corporations.

Looking down the telescope from the other end, this means that the G7 governments and the big corporations and the average households on the G7 countries can borrow huge amounts of money to finance their purchases of houses, pay for government spending on arms, education etc., and finance the building of factories in the so-called Third World.

It’s perfect. The US now runs a huge trade deficit equivalent to 7% of its annual national income. It also has built up net debts with the rest of the world equivalent to 25% of its annual output and rising. But no problem. It has this deficit because it is buying truckloads of ‘things’ from China at very cheap prices to fill its shops. It does not need to make these things at home any more when they are so cheap from China, Mexico or the rest of Asia. And these things are being made in China by American, Japanese and European corporations who have transferred their factories to China and other cheap-wage, plentiful labour locations.

It all works because the export revenues generated by Chinese sales to the US and the rest of the G7 are put in the Chinese banks by the foreign-owned corporations, which promptly use the money to buy US bonds and other financial assets. Indeed, in 2005, the US ran up a trade deficit of nearly $700bn, but it received back over $900bn in credit as foreigners bought US government bonds, corporation bonds and mortgage bonds.

As a result, the US financial system is flush with cash. It can lend money at historically very low rates of interest to Americans to buy ever more expensive houses or purchase ever more quantities of Chinese goods, or ever more clever hi-tech services from India and techno gadgets from Korea, Taiwan and Japan.

Such is the perfect circle of success. So perfect is it that some strategists of capital are now convinced that this has guaranteed a prosperous capitalist world for some time ahead. They have called it Our Brave New World. In this world, G7 capitalist companies are ‘platform companies’. They won’t make anything. “The new business model is to produce nowhere, but sell everywhere… platform companies then simply organise the ordering by the clients and delivery by the producers…they keep the high value-added parts of the research, development and marketing in-house and farm out all the rest to external producers”.

Think of the Brave New World as a new stage of capitalism. First, there was the development of agricultural capitalism in the 17th and 18th centuries in Europe and in the 19th century in the US and Japan. Then came industrial capitalism, pioneered by the UK at first and then adopted by the US, Europe and later Japan. The rest of the world was reduced to providing the raw materials and food that enabled industrial capitalist countries to make the things everybody wanted.

But now has come finance capitalism (more broadly defined to include what Marx called the unproductive sectors of capitalism, namely, finance, marketing, legal services, property ‘development’ etc). This is how the G7 economies increase their wealth. They take the savings of the newly industrialised world and invest or spend it for them!

Indeed, if you take the argument further, China would have no market to sell its TVs, toys, textiles, bras and every other item you can think of, if American households did not have the money or credit to buy them. What is important in this view of capitalism is not production, but consumption.

It is a repeat of the ironic story first raised by the great Dutch economist, Bernard Mandeville way back in 1705 of the Fable of the Bees. As he explained in his brilliant doggerel verse, it is not the bees (workers) that are important. Without the drones (the do-nothing members of the community who just consume the honey), there would be no point to the worker bees. Without somebody ready to eat you out of house and home, there would be no need to make any food or the shopping – it’s logical isn’t it? So without Americans spending like there was no tomorrow, China would not be able to sell and it would have no place to lend its money. The US spender/debtor keeps the capitalist world going round, not the Chinese saver/lender.

There must be something wrong with this! And there is. This whole view of capitalism assumes that profits are irrelevant. What is important is that the price of stocks and shares keep rising, the price of property keeps rising and that interest rates keep low, not making profits. If the value of your house keeps going up you can borrow more to spend more, if the value of shares keeps rising you can borrow more to invest in factories in China and design new things for the Chinese to make. If interest rates stay low, the government and others can borrow more to build more armaments while keeping taxes relatively low.

This is the view of capitalism as seen by the banker or the rich consumer. It is not the reality of capitalism. That’s because the prices of property, shares and government debt won’t go up forever because they depend on something else: profits of capitalists. This is the lifeblood of capitalism. If the profits of the big corporations start to wane, then all bets are off. Investment into China will fall off, share prices will fall and fewer goods will be purchased. G7 economies will slow.

And profits do not come from bankers lending money, rich people buying luxury goods, governments selling arms or people buying houses. The profits have already been made. These economic actors are merely redistributing profit made by others –namely the producers of things in the US and China. This is one of the fundamental discoveries of Marxist economics.

Profits are the unpaid labour of the working class, but also they only arise from the sale of things made that people want. The marketing, advertising and distribution of goods add nothing to profit; but are just a necessary (under capitalism) cost of making a profit for individual capitalists in competition with each other.

Similarly, workers in public services are necessary to capitalism to keep the workforce healthy, educated and functioning. But they don’t produce profits for capitalists. In that sense, they are ‘unproductive’ for capitalism. Bankers, mortgage and insurance brokers, real estate agents and financial analysts may get paid huge sums but they do not make profits for the capitalist system, even if they do for the companies they work for. In that sense too, they are unproductive.

Yet the Brave New World of capitalism now suggests that it is precisely these unproductive sectors of capitalism that keep the whole system going. Buying a house in America keeps the whole world going round. What will prove this wrong is when the profitability of the capitalist system starts to fall. At present, US profitability in the whole economy is around 8.5% of annual output. That’s very near the historic peak of the last 25 years of 9%. But it is now beginning to decline.

There are three indicators of whether the Brave New World will end in tears. First, are US housing prices falling? If they start to do so, then the profit of investing US mortgage bonds for foreigners will decline and they will stop buying them. That will force up interest rates in the US and make it more difficult to finance the huge trade deficit. As of now, US house prices are shooting along at near 15% a year. But they have just started to slow.

The second indicator will be how much the US and other G7 companies keep investing in China to boost profitability. If that starts to decline, then it means that G7 corporations have less to spend or they are worried about not getting enough profit out of the workers in China. In 2005, foreign capitalists invested $58bn in China. That’s very high, but it is slightly less than in 2004. Just the first signs.

Finally, there are the figures for Chinese exports to the rest of the world. If they start to decline, it means that G7 consumers have less money to spend on goods in the shops and/or foreign manufacturers are experiencing a slowdown or fall in the profits they are making from their exports. In 2005, exports from China were at record levels.

So far then, the Brave New World of capitalism is still holding together. It still seems that the bankers, property developers and arms manufacturers of the G7 economies are successful and profitable. But there are signs of fraying at the edges.

Let’s go back to Mandeville’s fable. In the natural world, of course, the drones do have a role. They may do nothing and do not even guard the Queen bee. But they are the only males of the bee community and so they mate with the queen, thus providing a role in procreation. The worker bees are all female. Once mating is over, the drones are driven out of the hive by the worker bees and left to die. In the human world, worker bees are both male and female and do their own mating. So they have no need of drones at all!

January 2006