"People of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." (Adam Smith, The Wealth of Nations)
So, after all the talk of an economic revival in the USA, the headlines are now dominated by an epidemic of financial scandals, steep falls on the stock markets, waning confidence and increasing uncertainty. The nervousness on the stock markets is just a surface manifestation of a far deeper crisis that expresses itself on a global plane in extreme instability at every level - economic, social, political and military.
Last Wednesday there was a massive 282-point fall on Wall Street, which triggered slumps on Asian and European markets before continuing with fresh falls in New York. The FTSE 100 index of leading UK shares slumped more than 4 percent the next day - its worst one-day fall since the 6 percent it lost after the terrorist attacks on New York and Washington. In one day, more than £45 billion was wiped off the value of shares.
The immediate cause of the panic was that the wave of accounting scandals and grim corporate news dealt a hard blow to investors' confidence around the world and by the end of the week, the FTSE 100 index stood at a five-year low.
US investors were dumping stocks amid reports of a federal investigation into accounting practices at the pharmaceuticals giant Bristol-Myers Squibb and a second downgrade in as many days for General Motors' shares. By lunchtime, the Dow Jones industrial index had slumped by as much as 200 points, which the Guardian described as a "dizzying nosedive". The panic on the floor of the stock exchange was palpable: "When is this going to stop?" asked Brian Belski, market strategist for US Bancorp Piper Jaffray, an investment bank. "It's anyone's guess. No one knows."
The financial authorities moved to calm the market as investors showed signs of panic. The French Finance Minister, Francis Mer, described the falls as "extreme, even excessive" as he pledged to tighten the regulation of markets. In London a spokesman for the Treasury said that Britain was "better placed to withstand the ups and downs of the financial markets" than in the past. He continued to sing the same old song: "The fundamentals of the economy remain sound and we remain cautiously optimistic about the prospects of the UK economy both this year and next."
On Thursday Bristol-Myers shares sank 13.6 per cent, down $3.15 at $20, after the Securities and Exchange Commission revealed it had launched an investigation into whether the company had inflated its revenues last year by $1 billion. Efforts by President George Bush to pledge tough new reforms for corporate leaders did nothing to allay the fears. The influential Nasdaq technology market ended on Wednesday lower than at any time since May 1997.
What is the reason for this sudden attack of nerves? Wall Street has been hammered by continuing worries about future profits. But the underlying crisis is far deeper than that. The violent swings on the world's stock markets are a graphic expression of the violent mood swings of the bourgeoisie. Ten years after the fall of the USSR, capitalism is gripped by a mood of pessimism and fear of the future. Gone is the old boastful confidence. Gone are the times when the great majority of economists expressed blind faith in the so-called New Economic Paradigm. The truth has at last dawned on even the most obtuse defenders of "market economics" - that the ship is leaking badly, and has entered rudderless into uncharted and stormy seas.
The bourgeoisie and its strategists really have no idea where they are going. In place of a strategy, they have resorted to a series of improvised expedients. Alan Greenspan pushed through eleven increases in interest rates in as many months. This unprecedented behaviour on the part of a supposedly conservative and responsible banker is fairly typical of the general conduct of corporate America. They were drunk with success. The party seemed to have no end. The sky was the limit!
Now they have woken up the morning after with a bad head. The profits of the big corporations have collapsed. And as everyone knows, profits are the lifeblood of the capitalist system. No profits, no investments. That is such an elementary statement that a child should be able to grasp it. Unless and until there is a recovery in profitability, no real economic recovery is conceivable.
Yes, it is all so obvious. And yet, and yet…as the poet wrote: "Hope springs eternal in the human breast." People often prefer to cling to an outdated illusion rather than face the facts. This especially applies to investors, who are a very superstitious breed. Look! The recession is all over! The US economy is booming again! What was all the fuss about?
Old Heraclitus, a wonderfully profound philosopher, once wrote: "Eyes and ears are bad witnesses for men who understand not their language." On the basis of statistics of one or two months, people who should know better concluded that the recession in America was over. This kind of superficial empiricism is quite unable to see the woods for the trees.
The alleged recovery in the USA was based entirely on two factors: a continuing spending boom and the continued influx of foreign capital. But this provides no stable basis for a recovery. Is it really necessary to remind ourselves that the economy is based ultimately not on consumption but production? The consumer boom in America was based on credit, which extends the market beyond its natural limits. The result is an extraordinary expansion of debt, which cannot be sustained.
The whole structure is fundamentally unsound. America is currently defying the laws of economic gravity. On top of its current account deficit and its colossal levels of private and corporate indebtedness, there is now a huge and growing budget deficit. This is a concrete reminder of the seriousness of the crisis. It is basically the result of falling tax revenues in a recession, but it is being compounded by the decision of George W. Bush to cut taxes while increasing public spending on such things as military expenditure and subsidies to American farmers.
If any other economy in the world conducted itself in this way, it would come under the harsh scrutiny of the IMF, money would flow out by the billion, and its currency would immediately be a target for predatory speculation. Only the special situation of the USA as the world's biggest economy and only superpower enables it to get away with this. But this situation is completely artificial and cannot last. The US economy is balancing precariously on a mountain of debt. Mountains sooner or later experience avalanches. The recent falls on the stock exchanges are reminiscent of the small avalanches that are an early warning of greater falls to come.
A crisis of overproduction
Falls on the stock exchanges are spectacular events that grab the headlines. Some superficial observers even imagine that the cause of the crisis is in the stock markets. This, however, is only an optical illusion. The panic on the stock markets is only a symptom of the underlying crisis, not the cause. The fact that present share values bear absolutely no relation either to company profits or future prospects has been clear for a long time. We explained this when the boom was at its height and there is no need to repeat it.
Marx explained that the final cause of all real capitalist crises is overproduction. The capitalist system is an anarchic system, where individual capitalists, driven by the greed for surplus value, produce for the market irrespective of whether the market can absorb their products or not. In a period of boom they all pile into the market, sales and profits soar, demand increases constantly, driving up investment and production, until the point is reached where the market is saturated. At this point the whole spiral is thrown into reverse, with falling sales, prices and profits. The capitalists are no longer able to realise the surplus value, and cease investing, creating a crisis. This is precisely what has happened over the last two years.
This is how Marx describes the phenomenon: "The market can absorb a mass of commodities at falling prices, prices that have fallen below their prices of production, which it could not absorb at their former market prices. The excess of commodities is always relative, that is, it is an excess at certain prices. The prices at which the commodities are then absorbed are ruinous for the producer or merchant." (Theories of Surplus Value, C, ii, 4d)
This is precisely what has happened. Let us give just one example, which is entirely typical. In January Global Crossing - which until then was considered to be one of the hottest telecoms companies - filed for bankruptcy after being brought down by a massive strategic gamble that went wrong. The company thought that it could make a fortune by borrowing billions of dollars to lay fibre-optic cable and selling its signal-carrying capacity to corporations. Unfortunately, many other manufacturers had exactly the same idea. Result: the market for fibre-optic cable is saturated. There is huge overproduction and prices have slumped.
During booms, credit is plentiful and cheap, and investors are willing to take the most absurd risks. This last boom was no exception. Money was no object. With a booming stock exchange, the system was awash with surplus capital. Any hare-brained scheme with "dot.com" attached to it could raise millions overnight with no questions asked. Apparently reputable banks and investment companies joined in the spending spree with wild abandon, asking no questions.
Now everything has changed. The new technology sector was the first to go under. Investors suddenly realised that they were unlikely to get their money back, let alone make a profit. The stampede out of shares is an expression of this belated realisation. In such circumstances, a little creative accountancy was necessary to prove to the shareholders that there was no need to panic, that their money was still in the bank, and that everything in the garden would be lovely…
Not long ago, at the time of the Asian collapse, American commentators were writing smug articles about the evils of "crony capitalism" in Asia. Now it is plain to all that the same sickness affects the USA - and every other capitalist state. As long as the boom continued, with its "irrational exuberance" and merry carnival of money-making, nobody was inclined to probe too deeply into the workings of the boardrooms. But now, when the cold winds of recession begin to blow, things appear in a very different light. It is now official: corruption, greed and criminality are deeply embedded in the heart of corporate America.
During the boom years, executive fat cats at giant companies were quietly cooking the books and rewarding themselves richly from the proceeds. These are the very same corporate dictators who have mercilessly squeezed the workforce, demanding - and getting - ever greater productivity, sackings, downsizing, bullying, exerting relentless pressure on the nerves and muscles of their employees to extract the last ounce of surplus value. They have become fabulously rich at the expense of their workers. Yet now they stand exposed as corrupt criminals who have driven their companies to the point of bankruptcy. Such is the character of the "captains of industry" in modern America. How ironical that the same people used to pontificate about the corruption and inefficiency of the bureaucrats in the Soviet Union!
The present revelations are damaging in more ways than one. From an economic point of view, the fact that people now know that some of the biggest and most celebrated companies have falsified their balance-sheets to over-state profitability will undermine confidence still further. If investors feel that they are being cheated, and that they stand to lose their money, it will make it harder for firms to raise money for investment. The nervousness of investors will create further instability, preparing the way for further falls.
An epidemic of corruption
The dismal litany of corporate corruption continues without any let up: Qwest Communications, the biggest local-telephone company in 14 American states, has joined the growing list of firms whose affairs are being investigated, along with those highly respectable auditing firms that were their partners in crime. Prestigious accountancy firms failed to warn of financial problems at nearly half the companies that filed for bankruptcy protection during the past 18 months, according to a study by Weiss Ratings, a Florida data-processing company.
The giant energy group Enron filed for bankruptcy protection last December after admitting that its profits over the previous few years had been nearly $600 million lower than what had been claimed. This was America's biggest corporate collapse. It emerged that the company had used "special purpose vehicles", or off-balance sheet entities, to enhance its earnings and reduce its debt. Worse still it was revealed that Andrew Fastow had a role in running one of the off-balance sheet partnerships in conflict with his role as Enron's chief financial officer. He made the trifling sum of $30 million from that partnership. In scenes reminiscent of old mafia movies, both Mr Fastow and Kenneth Lay, Enron's chief executive, pleaded the Fifth Amendment to avoid self-incrimination when asked to testify in front of a Senate committee. A Senate committee in July then found that directors had "missed several warning signs" that something was wrong with the accounts.
After Enron it was the turn of Andersen - Enron's auditors. They were destroyed as a firm, even before being found guilty of obstruction of justice in June. Andersen's chief executive, Joe Berardino, initially admitted only to a few misjudgements, but the firm collapsed when it admitted that an "expedited" shredding of Enron-related documents had taken place in its Houston office after the Securities and Exchange Commission (SEC) had launched an investigation into Enron's accounting. The partner who led the Enron account, David Duncan, has admitted that he is guilty of obstruction of justice, but he is expected to be "treated leniently" (of course!) after agreeing to turn state's evidence.
Tyco, a healthcare-to-telecoms conglomerate built up from a small New England electronics maker by Dennis Kozlowski, was a typical example of the kind of company held up as a glowing example during the boom years of the nineties. In June, Kozlowski was indicted on charges that he had evaded $1 million of New York sales tax on art purchases.
Next on the list was Global Crossing, the star-performing fibre-optic company already mentioned. Only five years old, it is being investigated for swapping capacity with other operators in an attempt to boost revenues.
In July another telco, Qwest Communications, announced that it was facing a criminal investigation. In June, Qwest's chief executive, Joe Nacchio, was forced out by the board, having sold more than $300 million of stock during his tenure. The company is desperately trying to sell assets before the year-end to avoid defaulting on repayments of its $26.6 billion of debt.
WorldCom, which was dealt with by Michael Roberts last week, is another big telecoms group. It admitted in June that it had "mistakenly" booked $3.8 billion of costs as capital expenditure, and that the profits it recorded over five quarters from the beginning of 2001 should have been losses. A trifling error indeed!
Xerox, the world famous company that made its name in the field of office equipment, restated its accounts in June because the office-equipment company said that a so-called "misapplication of GAAP" (generally accepted accounting standards) overstated its profits by $1.4 billion over five years. Xerox had already settled SEC charges by paying a $10 million fine, and has seen several senior executives quit. However, investors are still nervous and its shares have fallen.
Merck, a giant pharmaceutical company, has admitted in early July that it had overstated its revenues -and its costs - by some $14 billion over three years. And that it had included as revenues money that was paid to retail pharmacies and that it never touched.
Nor are these problems confined to the other side of the Atlantic. The French conglomerate Vivendi recently sacked its chief executive Jean-Marie Messier in July, after its two main banks refused to extend it any more money. The French company is now burdened with around €33 billion of debt having bought Universal Music, Universal Studios and USA Networks. It has denied allegations that it tried to overstate its accounts.
Elan, an Irish pharmaceutical company, is also in trouble. Its share price came under pressure in January after newspaper speculation about its accounting policies. The company has admitted to using off-balance sheet vehicles, and is under investigation.
A regime in crisis
The significance of the present crisis goes far beyond economics. It has profound political and psychological implications. Even before the present wave of scandals, many people in the USA were beginning to question the validity of the present system. The unprecedented level of abstentions at the last presidential election showed just how far ordinary Americans are alienated from the political establishment. Last September we had the spectacle of a President "elected" by fraud, declaring war against all and sundry. The events of September 11 had the effect of temporarily boosting Bush, but this process, as we predicted, was bound to turn into its opposite. It may be that this has already begun.
In the past, Americans regarded the world of "private enterprise" rather as the Jews of the Old Testament regarded the Holy of Holies. But now the whole mood of society is beginning to change. There is a growing suspicion, even outright hostility towards big business. Now this is extending to the political establishment and the Presidency itself. This is the reason for the unprecedentedly harsh attacks of both Republican and Democrat politicians against corporate America. They have understood that if something is not done (or, at least, the impression given that something will not be done) the present scandals could lead to a crisis of the regime itself.
As a result of these scandals serious questions are being asked: "America rewarded hard work and smart people. But now Americans are asking just how much of the great boom the country has gone through was real, or the result of corrupt executives enriching themselves at shareholders' expense with the help of complicit accountants and greedy bankers." (The Economist, July 11, 2002)
All this is more than just an inconvenience. It is dangerous, because the doubts and questioning in America are not confined to the business sector. People do not believe that it is a question of just a few isolated cases. That might have been believable after the Enron scandal, but not now. There are too many scandals involving too many companies for that to be the case.
The crisis in America has already spread far beyond the boardrooms of Wall Street. Like a shameful and highly contagious disease it has spread through the body politic, reaching the uppermost echelons of the state. With mid-term elections for Congress due in November, politicians in Washington DC are falling over themselves, trying to see who can talk the toughest over corporate wrongdoing.
In a speech to Wall Street on July 9, Mr Bush proposed creating a new financial crimes "SWAT team" to catch and prosecute corporate wrongdoers. But this is mere window-dressing. A number of the plans proposed by Bush would require self-policing by companies and accountants. Needless to say, none of them tackle the underlying problems.
Not to be outdone, the very next day, the US Senate proposed harsher penalties. The result? Immediately the panic on the stock markets provoked further falls. On Wednesday July 10, America's S&P index of leading stocks fell to its lowest level in four years. The slump was infectious, and on Thursday July 11 stocks experienced sharp falls across Asia and Europe.
The Democrats, with one eye on the elections, point the finger at the Bush administration's close links to business. Both Mr Bush and his vice-president, Dick Cheney, are having to defend themselves against allegations of irregular dealings during their time as businessmen. The dirty water is slopping against the walls of the White House itself. Halliburton is an oil company that used to be chaired by Dick Cheney. The SEC is looking into how this company handled cost overruns on construction jobs. Judicial Watch, a conservative group, is suing both Halliburton and Mr Cheney for allegedly deceiving investors.
Even more damaging is the issue of Harken Energy, a company in which George W. Bush was a director. In 1990 he sold shares in the Texan firm just eight days before it unveiled sharply-increased losses. As an insider, he ought to have told the SEC immediately, but notice of his sales was not filed for nine months. Mr Bush has blamed this on a "mix-up" by his lawyers. The SEC investigated at the time, but - naturally enough - never took any action.
Bush himself is therefore in a highly vulnerable position. He has been forced to defend himself over his own links to big business and allegations of improper dealings. In the present climate, close links with big business is the kiss of death, as the Economist points out:
"As the first American president with a masters degree in business administration, Mr Bush was always expected to be more than a little friendly towards corporate America and Wall Street. Unfortunately for him and other members of his administration, friendliness to boardrooms and financiers has become something of a political liability following the wave of accounting scandals. Mr Bush is giving his support to the chairman of the SEC, Harvey Pitt, who has come under fire from politicians on both sides of Congress. A number of leading senators have called for Mr Pitt's resignation as America's chief markets regulator. Ten months after being appointed to the job by Mr Bush, he has been attacked for dragging his feet. Mr Pitt, a former securities lawyer, is accused by his critics of conflicts of interest which have led him to put his former private clients - especially big accountancy firms - before the public interest." (The Economist, July 11, 2002)
At present, financial crimes can be so difficult to prosecute that criminal charges may never be filed. Wealthy businessmen with slick lawyers can usually wriggle out of awkward situations. Patrick Leahy, a leading Democrat and the chairman of the Senate Judiciary Committee, pointed out that: "If you steal a $500 television set, you can go to jail. Apparently if you steal $500 million from your corporation and your pension holders and everyone else, then nothing happens."
This is only saying what everyone already knows. Long ago Anatole France wrote about the "the majestic egalitarianism of the law, which forbids rich and poor alike to sleep under bridges, to beg in the streets, and to steal bread." Everybody knows that there is one law for the rich and another law for the poor. However, the spectacular nature of the recent revelations must have brought home to many millions of ordinary Americans the close links between big business and the political and legal establishments.
One blow after another
On a world scale, capitalism is being shaken by one blow after another. New crises and convulsions break out even before the previous ones have been resolved. Slowly, a growing number of people are beginning to realise that something is fundamentally wrong. Old beliefs are being called into question. Old and deeply rooted faiths are being shaken. Old leaders are being weighed in the balance and found wanting.
Those who conclude that the present crisis is merely of a transient nature are mistaken. They have not understood the real nature of the present epoch. It is asserted (even by people who have read at least a little Marx) that the crisis we see before our eyes is merely cyclical in character, and moreover, is superficial in character.
What is superficial is an analysis that cannot distinguish between a cyclical economic crisis of capitalism and the organic sickness of a system that has entered into a long-term decline. In itself, it is true, the present crisis of the world economy is cyclical in character. But merely to state this does not carry us very far. It is necessary to put the crisis in its historical context.
The nature of capitalist crisis, its depth, duration and above all the effects that it produces in the psychology of the different classes - all these are variables that differ according to the historical context in which they unfold. The cyclical crises of the period of capitalist upswing from 1948 to 1974 were so shallow that they were scarcely noticed. But the present situation is very different.
The present crisis, which is far from over, has not yet expressed itself in massive unemployment. The measures adopted by Greenspan, which amounted to an increase in credit, and other measures (discount selling, the rundown of inventories, etc) plus the inevitable rebound of the economy after the sharp fall that followed September 11, had the effect of buoying up demand in the USA. This temporarily shored up the stock markets. But all this does not amount to a serious recovery. That will not happen unless and until corporate profitability is restored, and that is nowhere in sight.
Many bourgeois economists have pointed out that recent recessions have usually followed the pattern of a "double-dip", where a temporary rally is followed after a certain delay by an even steeper fall in production, employment and share prices. That is quite a likely scenario at the present time.
However, that is not the point. The point is that even at the present time, the recession has been the signal for an unprecedented crisis of confidence, doubts, questioning and global instability, which, as we have pointed out, is by no means confined to the economy.
Bush's military policy is an expression of the fact that America has had the misfortune to have inherited the role of world hegemony at a time of general crisis of capitalism. On a world scale, there are clear symptoms that the capitalist system is suffering from an incurable sickness. The lives of millions of people are being turned into a living hell. Beginning with the weakest economies, which used to be called "emerging countries" there are signs of disintegration and social and economic collapse. This has nothing to do with the economic cycle!
The so-called War on Terror is a cloak that is meant to disguise America's ambitions to tighten its grip on every continent. Yet despite all America's power, it has yielded no positive results. Victory in Afghanistan remains as elusive as ever. Instead of pacifying Afghanistan the USA has stirred up a hornet's nest everywhere. Instead of eradicating terrorism, it is creating the conditions for new and even worse monstrosities than September 11. New shocks are inevitable. The world crisis will have important repercussions in the USA. The very things that helped Bush to gain an aura of credibility will turn into their opposite.
Everywhere we look we see only instability, crises and convulsions. Only the lack of the subjective factor is holding back the movement in the direction of a decisive showdown between the classes. The existing leadership everywhere is acting like a gigantic brake. But this cannot continue indefinitely. The working class will move into struggle again and again, in search of a way out of an impasse that has become intolerable.
In Latin America there is a deep crisis from Tierra del Fuego to the Rio Grande. The mighty Brazilian economy is poised to follow Argentina into the abyss. The revolutionary developments in Argentina have been followed by social and political turbulence in Venezuela, Peru and other Latin American countries, in which the working class is coming to the fore.
In Europe, after a period of quiescence, the workers are on the move in Spain, France, Germany, Portugal, Greece and Italy. Once they move into struggle, the new generation will learn quickly. Lenin said that for the masses an ounce of practice is worth a ton of theory. The new layers of workers and youth will be free of the scepticism and routinism of the old generation. They will be open to the ideas of revolutionary Marxism. Great events will provide them with a hard but effective school. Our task is to help them to draw the necessary conclusions.
A decade ago the ruling class and its ideologists were full of confidence. Now they look to the future with dread. The present crisis is just a little warning of what the future holds. Those in the labour movement who, under the pressure of bourgeois ideology, drew pessimistic conclusions have been shown to be wrong. Far from the rosy picture of peace and plenty promised ten years ago, we have now entered into the most turbulent period in human history.
The only thing that has saved capitalism, and which continues to save it, is the extreme weakness of the subjective factor. As Leon Trotsky pointed out on the eve of the second world war: "The world political situation as a whole is chiefly characterised by a historical crisis of the leadership of the proletariat." For a whole series of reasons, the forces of genuine Marxism have been thrown back a long way. This is the decisive element in the equation on a world scale.
The contradiction between the maturity of the objective situation and the lag in consciousness has assumed an extreme character. It is the main reason why the crisis of capitalism is assuming a long drawn-out character. But this prolongation of the crisis does not mean that it will have a less violent character, but the very opposite. To the degree that an outworn and senile system still clings to life, it poses a deadly threat to human culture and civilisation.
Despite everything, the new generation will learn. The youth is already beginning to draw revolutionary and anti-capitalist conclusions. If a real Leninist party and leadership existed, the process would be far quicker. The absolute priority is therefore to build a strong Marxist tendency that is able to give a conscious expression to the unconscious or semi-conscious strivings of the workers and youth.
For a whole historical period the forces of Marxism were small and isolated, battling against the stream. But now the tide of history has begun to turn. In the coming period we will be swimming with the flow of history, not against it. It is necessary to redouble our efforts to build the Marxist tendency, to strengthen it, to educate the cadres and to build bridges to the working class and its organisations everywhere.
In the next period, the mass organisations of the working class will be shaken from top to bottom. Ideas that today are listened to by tiny handfuls will be eagerly sought by thousands and millions. The stage is being prepared for the greatest class battles in history. Upon the outcome of this conflict the destiny of humanity depends.